Main provisions of the amending protocol to the Ukraine-Switzerland DTT and impact of its ratification

Main provisions of the amending protocol

In 2019, Switzerland not only negotiated the protocol amending Ukraine-Switzerland DTT, but also initiated the long awaited tax reform. Both the tax reform and the protocol to the DD are expected to have significant impact on impact on Ukrainian businesses operating in Switzerland.


Source: The Ukrainian Journal of Business Law

On 19 May 2019 the Swiss population voted in favour of the Swiss tax reform, under which the federal and cantonal tax regimes for holding, domicile and mixed companies as well as the principal company taxation and the financial branch regime will be abolished as of 1 January 2020. Such measures are expected to result in the increase of the tax burden on businesses structured through Switzerland.

In turn, the protocol to the DTT reduces maximum rates of WHT and provides for the following new conditions for the application of reduced WHT rates:

–       Dividends:

·       5% WHT will apply if the beneficial owner of the dividends is a company (other than a partnership) which holds directly at least 10% (currently – 20%) of the capital of the company paying the dividends;

·       0% WHT rate will apply if the beneficial owner is a pension fund, the central bank or the government;

–       Interest: 5% WHT (currently – 10% WHT), subject to exceptions;

–       Royalties: 5% WHT for  royalties for the use of, or right to useany copyright of literary or artist work (currently – 10% WHT) and any copyright of scientific work, any patent, trade mark, design, model, plan, secret formula or process, know-how (currently – 0% WHT).

As an additional measure to ensure tax attractiveness of Switzerland, the most favourable national clause (“MFN clause”) will apply in relation to dividend, interest and royalty payments sourced in Ukraine. It means that, if in any DTT between Ukraine and third state – member of OECD, Ukraine agrees to exempt from tax dividends, interests, royalties arising in Ukraine, or to limit the rate of WHT applicable to such payments to a rates lower than rates provided for under Ukraine-Switzerland DTT, such exemption or lower rate shall automatically apply to Ukraine-Switzerland DTT. Therefore, after the Ukraine-Switzerland DTT takes effect, it will provide one of the lowest WHT rates amongst other DDTs of Ukraine and it will also keep possibility to lower WHT rates further.

Also, the amending protocol implements a number of anti-BEPS related measures, primarily  aimed at preventing claiming treaty benefits in inappropriate circumstances. The MLI is the common way in which jurisdictions are implementing the treaty-shopping minimum standard. However, the MLI will not apply to Ukraine-Switzerland DTT. In turn, the amending protocol will ensure such minimum level of protection against treaty-shopping. The most important anti-BEPS related provision is the “Principal Purpose Test”.

Pursuant to PPT, a double tax treaty benefit shall not be granted, if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purpose of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit would be in accordance with the objective and purpose of the relevant provisions of DTT.

Also, the amending protocol implements an arbitration procedure provided for under BEPS Action 14, which will allow taxpayers to submit issues, that were not resolved through mutual agreement procedure within a period of 3 (three) years, to arbitration to be conducted by both contracting states and (if necessary) with the assistance of OECD’s highest ranking official.

Given the on-going Swiss tax reform and contemplated amendments to Ukraine-Switzerland DTT, business structured though Switzerland should analyze possible impact on taxation of passive income payments with due consideration of the “Principal Purpose Test”.

Alisa Yepanchyntseva,  Tax consultant, KPMG in Ukraine

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