Double taxation agreements (conventions)

International agreements for the elimination of double taxation help to distribute profit legally between companies and owners in different countries. The correct article of an agreement can reduce withholding tax on dividends, interest, royalties and other types of income. A practical plan starts with the jurisdictions of the transaction participants, the type of income and documents confirming the right to apply the relevant agreement.

How to apply a double taxation agreement

When income is paid to a non-resident, an international treaty may provide exemption from tax, a reduced rate or another method of allocating taxing rights between states. Work with the client starts by identifying the type of income: dividends, interest, royalties, service income, capital gains or another payment are considered under different articles of the agreement.

Next, determine the tax residence of the recipient and make sure that the relevant agreement actually applies on the payment date. Old consolidated rate tables quickly become outdated after new protocols, entry into force of new conventions or termination of individual treaties. Therefore, for a transaction we use the text of the agreement currently in force and the related protocols.

According to the State Tax Service of Ukraine, 72 bilateral agreements are used in international tax relations. This system includes agreements with Ukraine’s main European, North American and Asian trading partners. For business, this means a cross-border payment can be analysed under the specific treaty with the recipient’s state rather than a universal table.

Rates on dividends, interest and royalties often have several variants. They may depend on the ownership share, the nature of the recipient, the type of intellectual-property right or other conditions of the specific article and protocol. Therefore, a figure from an old table without checking the treaty conditions does not by itself provide a ready answer for a real payment.

To apply an international treaty, the taxpayer prepares documents confirming the non-resident’s status and the grounds for using the treaty provision. In practical work, we also compare the treaty with the corporate structure and banking documents: payment purpose, contract, invoice, tax classification of the income and recipient information should be consistent.

When planning an international structure, a double taxation agreement is considered together with the domestic legislation of both countries. For the business owner, the final cash flow is important: where profit arises, to whom income is paid, which withholding rate applies, how the income is treated by the recipient and which documents the bank will require.

This approach is especially useful for payment of dividends to a holding company, interest on financing, licence payments and remuneration for international services. First the transaction is modelled, then the current treaty is checked, and only after that is the documentation and payment procedure selected.

For holding companies and investment companies or funds, it is also important to compare the treaty with the ownership share and the actual role of the income recipient. In some treaties, these parameters determine which treaty-rate option may apply to dividends or interest. Therefore, when preparing a structure we look not only at the country but also at the real corporate relationship between payer and recipient.

If a company regularly works with several countries, it is convenient to prepare its own tax map of payments: type of income, recipient state, current agreement, proof of residence, treaty article and document package. This simplifies later payments and allows tax and banking documentation to be agreed in advance.