At the signing today of the Convention between the Government of the United States of America and the Government of Ukraine for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital, the undersigned have agreed upon the following provisions, which shall form an integral part of the Convention:
- With regard to Article 4
In the case of income derived by a partnership, trust, or estate, residence is determined in accordance with the residence of the person liable to tax with respect to such income.
- With regard to Article 7
(a) A Contracting State’s right to impose tax under Article 7 on a resident of the other Contracting State extends only to profits attributable to a permanent establishment in the first State. A resident of the other State may earn income from more than one investment or activity; under Article 7, income from any particular investment or activity, whether from a source in the first State or elsewhere, must be separately tested to determine whether it may be included in profit attributable to a permanent establishment in the first State.
Whether profits are attributable to a permanent establishment is determined on the basis of the actual facts to a permanent establishment only if the profits are derived from the assets employed by, or the activities engaged in by, the permanent establishment. Profits derived from other assets or activities are not attributable to the permanent establishment.
Example. A company resident in a Contracting State is engaged in oil and gas exploration, development and production activities on a worldwide basis. The company is producing oil and gas through wells located in the other Contracting State. The company is also engaged in exploration in the other State. The exploration activities are not carried on at the site of the wells, are not conducted by the employees of the well sites, do not use assets from the well site and are concluded within 6 months. The company also occasionally rents drilling equipment not currently being used in its exploration activities to third parties for use in the other State. Under subparagraph 2(f) of Article 5, the wells located in the other State constitute a permanent establishment; the profits attributable to that permanent establishment may be taxed by the other State under Article 7. Under paragraph 3 of Article 5, the exploration activities do not constitute a permanent establishment in the other State, and the expenses associated with such activities may not be deducted in determining the profits from the wells taxable in the other State. The rental of the drilling equipment does not constitute a permanent establishment in the other State, and the income from such rental is not derived from the assets or activities of the well site. The rental income is therefore not taxable in the other State.
(b) A resident of a Contracting State maintaining a permanent establishment in the other Contracting State may also maintain offices in other countries, including a home office in the first State and offices in third countries. In computing the profits of the permanent establishment, properly substantiated payments to third parties by the home office or by offices in third countries should be taken into account to the extent such payments relate to the assets or activities of the permanent establishment, or to the extent that such payments relate to the assets or activities of the resident as a whole and are reasonably allocable to the permanent establishment. It is not necessary that such payments actually be reimbursed by the permanent establishment to the home offices or the office in the third country.
- With regard to Article 10
In the case of dividends from a United States Regulated Investment Company, subparagraph (b), and not subparagraph (a), of paragraph 2 shall apply. In the case of dividends from United States Real Estate Investment Trust, the rate of tax applicable under domestic law shall apply.
- With regard to Article 11
Notwithstanding the provisions of paragraph 1, the United States may tax an excess inclusion with respect to a Real Estate Mortgage Investment Conduit (“REMIC”) in accordance with its domestic law.
- With regard to Article 14
Taxes withheld at the source in a Contracting State at the rates provided by domestic law will be refunded in a timely manner on application by the taxpayer if the right to collect the said taxes is limited by the provisions of the Convention, including Article 14.
- With regard to Article 22
The term “officially recognized securities exchange” means the NASDAQ System owned by the National Association of Securities Dealers, Inc., of the United States, any stock exchange registered with the US Securities Exchange Commission as a national securities exchange for purposes of the Securities Exchange Act of 1934, and any other exchanges agreed to by the competent authorities of both Contracting States.
- With regard to Article 24
(a) Ukraine agrees that:
(i) an entity that is a resident of Ukraine and at least 20% beneficially owned by residents of the United States and that has total corporate capital of at least $100,000 (or the equivalent in Ukrainian currency),
(ii) a permanent establishment in Ukraine of a United States resident, or
(iii) an individual who is a US citizen or resident and who carries on activities in Ukraine as an entrepreneur (other than as a juridical person), shall in computing the taxes covered in paragraph 1(b) of Article 2 (Taxes covered), be permitted deductions for interest (whether paid to a bank or another person and without regard to the term of the loan) and for actual wages and other remuneration for personal services (provided by persons other than an entrepreneur referred to in subparagraph (iii) above). Based on the above, the United States agrees that such taxes are income taxes for purposes of Article 24 (Relief from double taxation).
(b) The 20% beneficial ownership requirement referred to in subparagraph (a)(i) may be owned indirectly by residents of the United States but only if the indirect ownership is through residents of the United States or Ukraine.
(c) For purposes of this Article, the US recipient of a dividend, interest, or a royalty that may be taxed by Ukraine in accordance with Article 10 (Dividends), 11 (Interest) or 12 (Royalties) shall be deemed to be liable for such tax if such recipient elects to include in his (or its) gross income for the purposes of United States tax the amounts of such tax paid to Ukraine.
(d) Both sides agree that a “fictitious” or “tax sparing” credit shall not be required for taxes that were forgiven as part of an incentive program under which one Contracting State grants a tax holiday to a resident of the other Contracting State. However, the Convention shall be promptly amended to incorporate a tax sparing credit provision if the United States hereafter amends its laws to authorize the provision of such credits, or if the United States reaches agreement on the provision of a tax sparing credit with any other country. It is understood that such amendment would be subject to ratification by each Contracting State.