Supreme Court of Ukraine confirmed legality of additional accrual of 4.2 million UAH for payment of passive income to non-resident

Supreme Court of Ukraine in the case of an unjustified application of reduced tax rate in terms of payment of passive income to non-resident made a decision in favor of the controlling body, which confirmed legality of additional accrual of tax in the amount of 4.2 million UAH.

Disputed tax decision was formed as a result of planned audit for 2015-2019, during which violations of tax legislation were detected, in particular, when applying norms of the international agreement of Ukraine on the avoidance of double taxation.

Analysis of current legislation shows that tax agent has a right to independently apply, in particular, the reduced tax rate provided for by the relevant international agreement paying income to non-resident, if such non-resident is the beneficiary of income and a resident of the country with which Ukraine has concluded international agreement. At the same time, the application of specified norms is possible only if non-resident provides a certificate confirming that he / she is a resident of the country with which Ukraine has concluded international agreement. However, the certificate provided by the payer caused tax officials to doubt its legality.

A special request was sent to the competent authority of the Republic of Cyprus by the State Tax Service to resolve issue regarding legality of the company's application of reduced tax rate. Received answer shows that documents on the status of tax resident, which are the basis for applying provisions of the Tax Avoidance Convention, namely exemption from taxation, were not issued by the Cyprus tax authorities.

As a result, the company illegally took advantage of the non-resident's passive income tax exemption and understated the non-resident's income tax by 3.3 million UAH, as the tax rate was 2%, instead of the required 15%. Considering the circumstances of the case, 4.2 million UAH was additionally accrued to the payer along with fines.

Additional amount was paid to the state budget in full on June 7, 2022. Such actions of the tax payer testify to consciousness and decency, which in wartime is extremely important and necessary to ensure economic stability of the state.

Exchange of tax information with foreign countries is an important tool for checking and proving, including in court, legality of the application of agreements on the avoidance of double taxation.

The court also made a conclusion regarding the propriety and admissibility of evidence, legalization of letters from competent authorities, which are sent as a part of the information exchange on the basis of agreements of Ukraine on the avoidance of double taxation and the Convention on Mutual Administrative Assistance in Tax Matters.