Starting from January 1, 2017 Ukrainian tax legislation contains new (more favorable) rules on taxation of interest payable by Ukrainian borrowers under Eurobonds offerings relating to LPN structures.
It is common for Ukrainian corporates to make Eurobond offerings as a two-tier LPN structure, whereby funds received from the sale of notes, by an Issuer, (usually a foreign special purpose vehicle), are then on-lent to a Ukrainian Borrower under a loan agreement. The cash flow model of typical back-to-back LPN structure is depicted below.
For this kind of structure the new rules provide favorable withholding tax (WTH) treatment of loan interest payable by the Ukrainian Borrower to a foreign Issuer under a loan agreement.
Previously, loan interest payable by Ukrainian borrowers was taxed at a rate of 15% of WHT with the possibility of a reduction on the basis of the applicable tax treaty. Under most tax treaties a reduction is permissible to the extent a lender is deemed to be the "beneficial owner" of such an interest. In practice, however, Ukrainian tax authorities take a hardline approach as to the application of the reduced WHT rate, and usually consider that the foreign Issuer is not the "beneficial owner" of the interest in such back-to-back structures.
The new WHT rules eliminate the tax leakage and make the LPN structures with the foreign Issuer more predictable and tax efficient. WHT treatment of interest payments under new rules depends on the period of actual drawdown under facilities and works in the following manner:
The following conditions must be met for application of the new WHT rules on interest payments:
- The foreign Issuer places debt securities at the approved foreign exchange (it is expected that the Cabinet of Ministers will soon issue respective list of foreign exchanges)
- The foreign Issuer raises funds with the sole aim to on-lend them to Ukrainian borrower (directly or indirectly) by way of facility
- The foreign Issuer is not a resident of any of the "low-tax" jurisdictions as of the date of issue of debt securities