Double taxation in Ukrainian style: how the state complicates the work of businesses in international markets

Ukrainian companies operating in international markets are increasingly facing a complex array of tax barriers that not only complicate their operations but also create risks of double taxation. Despite the existence of international conventions designed to prevent such situations, in practice, businesses are forced either to defend themselves in courts or to restructure their activities through foreign jurisdictions, writes UNN.

Systemic problem: taxes, currency, and distrust of jurisdiction

The key problem for Ukrainian businesses abroad is much broader than just taxation. It lies in the realm of currency regulation, financial system stability, and contracting risks.

As Dmytro Mykhailenko, president of the Association of Tax Consultants, explains, Ukrainian companies are forced to operate in conditions of constant instability, including those related to the war.

Ukraine is a risky country, and here, every hour, due to a crisis, the possibilities for settlements from abroad can decrease. Currency instability, country instability, contracting, risks, and all that.

In response to these risks, businesses are seeking institutional solutions, for example, opening operational companies in other jurisdictions.

And this, in turn, brings new questions. In which country to start up so that there is moderate taxation. They mostly choose Estonia, Malta, Cyprus, if we are talking about Europe. If the countries are non-European, then the UAE, Singapore, Hong Kong. And secondly, when you already have a company abroad, these are new requirements of Ukrainian legislation, reporting on a controlled foreign company. The possibility of recognizing it as having a permanent establishment in Ukraine.

This approach, according to the expert, significantly complicates the work of businesses abroad.

Anti-offshore trap: CFCs, permanent establishments, and new fiscal aggression

Tax experts note that the creation of foreign structures automatically triggers the mechanisms of Ukrainian anti-offshore legislation.

However, this triggers a mechanism of significant challenges for businesses. In particular, the rules for controlled foreign companies (CFCs) begin to operate, which significantly complicate business administration.

There is also a risk of recognizing a permanent establishment in Ukraine, and transfer pricing begins to operate.

In addition, problems arise with the application of international conventions that provide for the avoidance of double taxation.

According to Vyacheslav Cherkashyn, senior tax analyst at the Institute for Socio-Economic Transformation, CFCs are currently the number one problem.

CFC regulation is very burdensome for us, and perhaps it is number 1.

Separately, the tax analyst draws attention to the change in the tax authorities' approaches to working with businesses operating in international markets.

The tax authorities have become very interested in reduced rates under conventions (on the avoidance of double taxation – ed.), especially in the Netherlands, Cyprus, where it is 5%, while the general tax rate for residents is 15%. Therefore, tension will only increase over time.

In fact, it is about revising the very idea of double taxation avoidance agreements.

And the third point is the 2 draft laws that the Ministry of Finance submitted on February 4 (for consideration by the Verkhovna Rada – ed.), that is, they are tightening the screws on transfer pricing, and there will be a very unpleasant story with permanent establishments.

This refers to the draft Law of Ukraine "On Amendments to the Tax Code of Ukraine Regarding Further Improvement of Transfer Pricing Rules."

Conventions exist, but do not work

Ukraine has a wide network of double taxation avoidance conventions with a number of foreign countries. These include, in particular, a reduction in repatriation tax rates (a tax that Ukraine withholds when paying income to a non-resident (foreign company or individual) with a source of origin from Ukraine, including dividends, royalties, and lease payments) or a complete exemption of certain income from taxation. In addition, the documents provide for the delimitation of tax jurisdiction between countries.

This approach should facilitate the work of Ukrainian businesses abroad.

However, in practice, these mechanisms are increasingly being questioned by regulatory authorities.

As tax experts note, the problem lies in the arbitrary interpretation of convention norms, attempts to ignore the status of the beneficial owner, and re-evaluation of the economic substance of transactions.

As a result, even classic cross-border payments, such as dividends, royalties, and leasing, become the subject of lawsuits and criminal proceedings.

The problem of double taxation for Ukrainian companies operating abroad today is not just a legal conflict or a misinterpretation of international conventions, but, obviously, a systemic crisis of interaction between the state and business.

Ignoring international conventions, fiscal pressure through re-evaluation of operations, criminalization of tax disputes, all this only complicates business operations. 

In fact, the state is now trying to tax income that has already been taxed abroad and has no economic connection with Ukraine, as, for example, with the "repatriation tax."

Without a systemic review of approaches to international taxation, Ukraine risks losing the competitiveness of its own business in global markets, which will stimulate a further outflow of companies to more predictable jurisdictions.