Court confirmed controlling body’s position regarding illegality of applying preferential rate upon payment of income to non-resident

The Supreme Court as a part of panel of judges of the Cassation administrative court supported controlling body’s position regarding increase in the amount of monetary income tax liability of foreign legal entities in the amount of 175 million UAH due to the establishment of violation in terms of legality of 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 Government of the Republic of Cyprus on the avoidance of double taxation and prevention of tax evasion in relation to income taxes (hereinafter – Convention) and requirements of the Tax Code of Ukraine (hereinafter – Code) in the 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 controlling body’s argumentations that reduced rate of income taxation of non-resident who receives income should not be applied, since non-resident is not their actual owner and, as a result, is subject to taxation at the 15% rate (Paragraph 141.4. 2 Article 141 of the Code), noting that "tax benefits provided by international treaties cannot be applied in case when non-resident acts as an intermediary in interests of another individual who actually benefits from income.

In particular, exemption from paying tax or its preferential rates cannot be applied in case that income (within the framework of agreement or a series of agreements) with its source of origin in Ukraine is paid in such way that non-resident (intermediate link that has narrow, limited powers in relative to income), who claims to receive preferential rate of income tax in the form of, in particular, interest, pays all income (most of it) to another non-resident, who would not be able to apply preferential rate if such income were paid to the latter. Determining actual recipient of income, performance of functions and risks imposed on non-resident should also be taken into account.

Similar legal conclusions on the application of provisions of Paragraph 103.3 Article 103 of the Code are given in decisions of the Supreme Court as of 21.03.2018 in case № 803/1005/17, as of 24.01.2020 in case № 803/188/17, as of 17.02.2021 in case № 808/3837/16.

Court, having provided legal assessment of content of concluded credit agreements, letters from Her Majesty's tax authority, audit materials and, in general, circumstances established in the course of case in their entirety, taking into account specifics of the Company's activities, purpose of its creation, as well as indicators of published financial reporting, made a conclusion that the Company directly confirmed that interest it receives under the loan agreements actually goes to repay interest accrued on bonds, in turn, it was precisely at the expense of issued bonds that credit funds were provided to the plaintiff; as a result, came to conclusion about the "transit essence" of interest income, therefore the Company is not their actual recipient, does not determine economic fate of received income, but only performs function of a nominal holder (nominal owner), intermediary in relation to such income.

Court also confirmed the possibility for controlling bodies during audits to use information obtained from official websites, in particular from the Registration Chamber of Great Britain ("Companies House"), regarding activities of non-resident company, tax and financial reporting, registration data, etc.

"Courts, taking into account principles of administrative proceedings established by the procedural law, its principles, such as competition of parties and their freedom in providing their evidence and in proving their persuasiveness before the court, proceeded from the absence of any documents that would refute facts stated in the verification act and circumstances established during the consideration of case would testify to the opposite and confirm that the specified non-resident – recipient of income is indeed the beneficiary (actual) of its recipient (owner) within the meaning of Paragraphs 103.2, 103.3 Article 103 of the Tax Code of Ukraine under credit agreements, at the same time, recognizing that the Inspectorate proved its position before the court with proper and admissible instruments, presented information related to the subject of proof."

Controlling body’s position was also 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 the court proceedings.

Under these circumstances, decision of the Supreme Court as a part of panel of judges of the Cassation administrative court as of 05.12.2023 in case № 804/3765/16 dismissed the taxpayer's cassation appeal; decision of Dnipropetrovsk district administrative court as of 10.11.2016 and decision of Dnipropetrovsk Administrative court of appeal  as of 16.03.2017 were left unchanged. 

Link to the Court decision: https://reyestr.court.gov.ua/Review/115453856