RE­COV­ERY OF OVER­PAID WITH­HOLD­ING TAX

Kyiv Post Legal Quarterly - - News - An­driy Reun Head of Tax, Evris Law Firm

Ac­cord­ing to the Tax Code of Ukraine (TCU), Ukrainian com­pa­nies pay­ing cer­tain types of in­come (in­clud­ing, div­i­dends, in­ter­est, roy­al­ties) to for­eign com­pa­nies are re­quired to with­hold Ukrainian with­hold­ing tax (WHT) from such in­come and re­mit it to the state bud­get. Con­trac­tual tax clauses en­vis­ag­ing gross­ing-up of in­come due to for­eign re­cip­i­ents for the amount of WHT are ex­plic­itly dis­al­lowed by the TCU.

The stan­dard WHT rate is 15%. WHT can be elim­i­nated or re­duced based on the ap­pli­ca­ble dou­ble tax treaty be­tween Ukraine and the coun­try of tax res­i­dence of in­come re­cip­i­ent.

Im­por­tantly, the TCU pro­vides that the re­duced WHT rate or WHT ex­emp­tion can only ap­ply if the re­cip­i­ent is a ben­e­fi­cial owner of in­come payable by a Ukrainian com­pany. This rule gives rise to tax dis­putes even in re­spect of ser­vice fees paid by Ukrainian cor­po­rate tax­pay­ers to for­eign com­pa­nies that do not own the as­sets nec­es­sary to pro­vide the rel­e­vant ser­vices.

The Ukrainian tax au­thor­i­ties usu­ally scru­ti­nize the trans­ac­tions of Ukrainian tax­pay­ers with for­eign com­pa­nies dur­ing tax au­dits. The tax penal­ties for fail­ure to pay the WHT due may be as high as 75%. Given this, Ukrainian busi­nesses tend to ap­ply a con­ser­va­tive ap­proach to­wards ap­pli­ca­tion of WHT to pay­ments due to for­eign com­pa­nies. In cer­tain cases, Ukrainian busi­nesses over­pay the WHT due re­sult­ing in re­ceipt of lower in­come by their for­eign busi­ness part­ners or par­ent com­pa­nies.

It ap­pears that only a lim­ited num­ber of for­eign com­pa­nies and in­vestors are aware that they can ef­fec­tively re­cover WHT ex­ces­sively with­held by their busi­ness part­ners or sub­sidiaries at source.

In this ar­ti­cle we will briefly cover the pro­ce­dure of WHT re­fund, as well as pro­vide our thoughts on how the Ukrainian com­pa­nies may use this pro­ce­dure to strengthen their po­si­tion in re­spect of WHT treat­ment of pay­ments to for­eign in­come re­cip­i­ents. PRO­CE­DURE TO RE­COVER OVER­PAID WHT

The TCU pro­vides for a spe­cific pro­ce­dure to re­cover over­paid WHT. This pro­ce­dure im­plies that the for­eign in­come re­cip­i­ent sub­mits a rel­e­vant ap­pli­ca­tion to the Ukrainian tax of­fice. Upon re­ceipt of such an ap­pli­ca­tion the tax of­fice is to per­form the nec­es­sary ver­i­fi­ca­tions and to con­firm or deny the fact that the WHT has been over­paid.

If the tax of­fice con­firms the WHT over­pay­ment, they are to pro­vide their de­ci­sion to the for­eign ap­pli­cant and the Ukrainian com­pany hav­ing over­paid WHT.

In ad­di­tion, the tax of­fice should pro­vide the rel­e­vant con­clu­sion to the Ukrainian trea­sury au­thor­i­ties. In turn, the trea­sury au­thor­i­ties are to re­fund the amount of WHT spec­i­fied in the con­clu­sion of the tax au­thor­i­ties. Im­por­tantly, the Ukrainian trea­sury au­thor­i­ties shall re­mit the amount of such WHT to the bank ac­count of the Ukrainian com­pany that has ex­ces­sively with­held such tax.

In­ter­est­ingly, the Ukrainian com­pany hav­ing re­ceived the de­ci­sion of the tax au­thor­i­ties con­firm­ing the WHT over­pay­ment may trans­fer the amount of ex­ces­sively with­held WHT to the for­eign in­come re­cip­i­ent be­fore or af­ter such a Ukrainian com­pany gets a re­fund of such WHT from the trea­sury.

The sim­pli­fied pro­ce­dure of WHT re­fund is il­lus­trated in the chart be­low.

Only a lim­ited num­ber of for­eign com­pa­nies and in­vestors are aware that they c an ef­fec­tively re­cover Ukrainian with­hold­ing tax ex­ces­sively paid by the Ukrainian com­pa­nies. The Ukrainian com­pa­nies can use the pro­ce­dure of re­cov­ery of over­paid WHT to support their po­si­tion in re­spect of WHT treat­ment of spe­cific trans­ac­tions.

Based on our ex­pe­ri­ence, the tax au­thor­i­ties may be re­luc­tant to con­firm the fact of WHT over­pay­ment and to seek for grounds to refuse grant­ing a re­fund. If the tax au­thor­i­ties do not con­firm that the WHT has been over­paid based on for­mal or ar­ti­fi­cial grounds, the for­eign in­come AL­TER­NA­TIVE AP­PLI­CA­TION OF THE PRO­CE­DURE OF WHT RE­FUND

Apart from the pur­pose of ac­tu­ally re­fund­ing the over­paid WHT to the for­eign in­come re­cip­i­ents, the Ukrainian com­pa­nies may use the pro­ce­dure of WHT re­fund to support their po­si­tion in re­spect of WHT ex­emp­tion or re­duced WHT rate ap­pli­ca­ble to pay­ments due to their for­eign busi­ness part­ners or par­ent com­pa­nies.

For in­stance, if the Ukrainian com­pany is un­sure whether the WHT should be with­held or whether the lower WHT

rate is ap­pli­ca­ble to the ma­te­rial in­come payable to the for­eign com­pany, such a Ukrainian com­pany can make an im­ma­te­rial pay­ment (e.g. EUR 100) to such a for­eign com­pany and with­hold WHT at the stan­dard 15% rate from the amount of in­come paid. Sub­se­quently, the for­eign in­come re­cip­i­ent ini­ti­ates the pro­ce­dure of WHT re­fund. If the tax au­thor­i­ties con­firm the WHT over­pay­ment, the Ukrainian com­pany may use the rel­e­vant de­ci­sion of the tax au­thor­i­ties to support WHT ex­emp­tion or re­duced WHT rate ap­pli­ca­ble to iden­ti­cal fu­ture ma­te­rial pay­ments due to such a for­eign in­come re­cip­i­ent. If the tax au­thor­i­ties do not con­firm the WHT over­pay­ment, but the for­eign in­come re­cip­i­ent suc­cess­fully chal­lenges the de­ci­sion re­ject­ing the WHT re­fund in the court of law, the rel­e­vant court rul­ing would be even a stronger ar­gu­ment sup­port­ing the fa­vor­able WHT treat­ment of the spe­cific trans­ac­tions.

To con­clude, the op­por­tu­ni­ties for re­cov­ery of over­paid WHT ap­pear to be largely un­der­uti­lized. Apart from the clear ben­e­fit of re­ceiv­ing ad­di­tional cash funds for the for­eign com­pa­nies, the pro­ce­dure for re­claim­ing the ex­ces­sively paid WHT may also pro­vide an ad­vance cer­tainty on WHT treat­ment of spe­cific trans­ac­tions with­out a risk of ma­te­rial penal­ties. re­cip­i­ent may chal­lenge the de­ci­sion of the tax au­thor­i­ties to the court of law.

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