Court confirmed legality of additional accrual of 114.6 million UAH in terms of income payment to non-resident

Sixth Appeal Administrative Court confirmed legality of tax notification-decision for the total amount of 114.6 million UAH issued by the Central Interregional Directorate of the State Tax Service for work with large taxpayers according to results of planned audit for 2016-2019, within which violation was established in terms of legality of the application of norms of the international treaty of Ukraine on the avoidance of double taxation.

Court confirmed that the taxpayer did not take into account provisions of Convention between the Government of Ukraine and the Government of the Republic of Cyprus on the avoidance of double taxation and prevention of tax evasion in relation to income tax (hereinafter - Convention) paying interest on loans to non-resident and requirements of the Tax Code of Ukraine (hereinafter - Code) in terms of application of reduced tax rate in connection with payment of income not in favor of the beneficial (actual) recipient (owner) of income.

Panel of judges agreed with the supervisory authority's argumentations that reduced income tax rate of non-resident who receives income should not be applicable, since the non-resident is not the beneficial owner of income and, as a result, is subject to the 15% tax rate (Sub-paragraph 141.4.2 Article 141 of the Code).

Right to apply reduced tax rate arises, in particular, but not exclusively, on the condition that the following requirements are simultaneously met: non-resident is a resident of country with which the international agreement has been concluded; non-resident has been provided with certificate confirming residency; non-resident is the beneficial owner of income.

Court emphasized that the supervisory authority pointed not only to the legal documents of members of the group of companies, financial reporting, which, when considered together, trace one common goal regarding the transfer along the chain of income with a source of origin from Ukraine, but also cited facts and circumstances that proved that the recipient of income shall not expressly use and benefit from it without restriction of contractual or statutory/legal obligations to transfer such income to another person.

It is also stated that the supervisory authority in audit materials legitimately came to the conclusion that non-resident does not meet parameters of the beneficial owner of income; company’s activities are carried out only in the form of investment and financing of group (holding) companies and interdependent (affiliated) companies, which does not indicate conduction of independent entrepreneurial activity. That is, non-resident is recognized as a "technical" company, as the company’s activities do not have signs of a separate part of the business, payments are of a transit nature, the company's activities are not associated with financial and other risks that are characteristic of entrepreneurial activity; company does not dispose received income and employees do not perform control and management function of the company.

Court also focused on the fact that the claimant’s reference to the fact that non-resident incurred risks related to entrepreneurial activity, the company’s management within the scope of independent entrepreneurial activity and the company’s determination of further economic fate of received income do not refute the above specified conclusions of the court.

Court referred to decision of the Supreme Court as part of the Cassation Administrative Court dated April 22, 2021 in case № 640/8578/19, which indicates signs that may indicate that non-resident is not the ultimate beneficial owner of income in the form of interest.

After processing case materials, the panel of judges concluded that origin of funds for providing a loan under the Credit Agreement to non-resident Ukrainian taxpayer are actually loan funds from the British Virgin Islands.

Therefore, the court emphasized that important fact of research of the beneficial owner of income is also analysis of circumstances of obtaining loans, on which interest is paid.

Position of the supervisory authority was strengthened by materials received from foreign competent authorities, which once again proves that the exchange of tax information with foreign countries is important tool for proving established violations, including in court proceedings.

As follows, the Sixth Appeal Administrative Court confirmed validity of conclusion that the Ukrainian taxpayer violated requirements of tax legislation and legality of issued tax notification-decision on the income tax of foreign legal entities in the amount of 114.6 million UAH.

Link to the Court Decision: https://reyestr.court.gov.ua/Review/105665340

Additional reference: In case that recipient of income is non-resident who is not the beneficial (actual) recipient (owner) of income, application of international treaty of Ukraine with the country of which the relevant beneficial (actual) recipient (owner) of such income is a resident is allowed, in terms of exemption from taxation or application of reduced tax rate, provided that the person (tax agent) is provided with documents specified in Article 103 of the Code.

Form of an attachment of tax invoice to income tax declaration provides for provision of information about non-resident who is the beneficiary (actual) recipient (owner) of income with a source of origin from Ukraine, in case of application, according to Article 103 of the Code, of provisions of international treaty between Ukraine and the country where relevant beneficial (actual) recipient (owner) of such income is a resident (Note 4 to attachment of tax invoice).