Court confirmed legality of additional accrual by the State Tax Service of more than 24 million UAH of the income tax of non-residentsChapter: News

The Sixth appellate administrative court confirmed legality of tax notification-decision issued by the Central Interregional Directorate of the State Tax Service for work with large taxpayers for the total amount of 24.1 million UAH based on the audit results for 2015-2016, within which it was established that the taxpayer did not fulfill obligation of a tax agent paying income in the form of interest in favor of a related person resident of the Republic of Cyprus.

Court confirmed that the taxpayer did not take into account Paragraph 2 Article 11 "Interest" of the Convention between the Government of Ukraine and the Government of the Republic of Cyprus on the avoidance of double taxation (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.

Based on results of the tax information exchange with competent authorities of the Republic of Cyprus and Kingdom of the Netherlands, information was received confirming that paying income in the form of interest for use of a credit line in favor of a related resident company of the Republic of Cyprus, the preferential tax rate provided for in Paragraph 2 Article 11 of the Convention was unlawfully applied.

Controlling body analyzed terms of the credit line agreements concluded between the taxpayer and related non-residents, as well as financial reporting of the specified non-residents received from the competent authorities of the Republic of Cyprus and Kingdom of the Netherlands. According to the analysis results, the controlling body established mechanism of the intra-group crediting of a group of companies, which provides for the transit origin of the income flow in the form of interest originating from Ukraine, and that exactly such payment mechanism was foreseen from the moment of concluding relevant credit agreements between the taxpayer and resident of the Republic of Cyprus.

Court noted that the concept of beneficial owner must be interpreted based on the goals and objectives of relevant international agreements. To recognize person as the actual recipient of income, such person must possess not only the right to receive income, but also, as can be seen from the international practice of applying agreements on the avoidance of double taxation, must determine its further economic fate.

And only when the recipient of interest has right to benefit and determine further economic fate of income and is not bound by contractual or legal obligations to transfer such income to another person, he / she is the beneficial owner of income in sense of the Convention and Article 103 of the Code.

Therefore, the Sixth appellate administrative court confirmed validity of conclusion that the Ukrainian taxpayer violated requirements of tax legislation and legality of issuing tax notification-decision on the income tax of non-residents in the amount of 24.1 million UAH. Link to the Court resolution: https://reyestr.court.gov.ua/Review/107514101

Additionally accrued amount was paid to the state budget in full amount. Such actions of the taxpayer testify to consciousness and decency, which in wartime is extremely important and necessary to ensure economic stability of the state.