Ukraine and Luxembourg sign a Protocol modifying their double tax treaty

On 30 September 2016 Ukraine signed a protocol (the “Protocol”) modifying the not-yet-in-force Convention between the Government of Ukraine and the Government of the Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital (the “Convention”).

The Convention was signed in 1997 but the Ukrainian parliament refused to ratify it because of the very low rates of dividends and interest taxation. The Protocol now modifies that part of the Convention.

According to the press-release of the Ukrainian Ministry of Finance, the Protocol provides for the following withholding tax rates that will apply to passive income:

• Dividends – 15% or 5%: the reduced tax rate applies if the dividend recipient owns at least 20% of the capital of the dividend paying company.
• Interest – 10% or 5%: the reduced tax rate applies to the interest paid (1) on the sale on credit of industrial, commercial or scientific equipment and (2) on bank loans.
• Royalties – 10% or 5%: the reduced tax rate applies to copyright royalties payable for scientific work, patent, trade mark, secret formula, process, or for information concerning industrial, commercial or scientific experience.

The Protocol has also addressed the issue of exchanging tax information. Its language now corresponds to the most recent OECD standards.

The signing of the Protocol is a step forward towards improving the investment climate in the country as Luxembourg gradually becomes a popular jurisdiction for international investors to structure their in-bound investments into Ukraine. It is expected that the Ukrainian parliament will now proceed with the ratification of the Convention.

On a separate note, Ukraine announced upcoming negotiations with the Netherlands, the United Kingdom, Belgium, Switzerland and Austria on amending its double-taxation conventions with those countries. The aim of those negotiations will be to align all of those conventions with the respective OECD standards.