On 23 July 2018, Ukraine signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the "MLI"), which is a significant step towards the implementation of the Inclusive Framework on BEPS. Ukraine joined the Inclusive Framework on BEPS back in November 2016 and undertook to implement four minimum standards of the BEPS Action Plan. The MLI implements two of these standards, namely:

(i) Preventing the Granting of Treaty Benefits in Inappropriate Circumstances (i.e. treaty abuse); and

(ii) Making Dispute Resolution Mechanisms More Effective.

The MLI modifies double tax treaties of Ukraine by introducing, in particular, the following provisions:

  • Principal Purpose Test, under which generally no tax treaty benefit should be granted if such benefit is one of the principal purposes of an arrangement or transaction;
  • Improved "real estate-rich company" clause, which will cover not only gains from the sale of shares, but also from comparable interests (e.g., interests in a partnership or trust). The state will have right to tax such gains if more than 50% of value of the shares or comparable interests at any moment within last year was directly or indirectly derived from the real estate located in that state;
  • Complex anti-abuse rules to tackle artificial avoidance of the permanent establishment, in particular, in cases when a Ukrainian entity pretends to be an independent agent, but in fact acts only for the benefit of a sole non-resident or a related group of non-residents; and
  • A more effective procedure for resolution of double tax treaty disputes. The updated mutual agreement procedure should allow the taxpayers to present their case not only to the state of their tax residence or nationality, but also to the state of source of income.

The MLI to be effective still needs to be ratified by the Ukrainian Parliament and by partner jurisdictions. Given that the MLI may have a significant impact on a tax position of Ukrainian businesses, it is advisable to review current structures and arrangements in light of the forthcoming changes.