Beneficial Owner: Ukrainian Approach ~ U-Tax Blog

Monday, July 13, 2015

Beneficial Owner: Ukrainian Approach


It is well known that the application of tax reliefs and exemptions under double tax treaties is contingent on the concept of beneficial owner. In order to qualify for such a relief or an exemption, say, a reduced withholding tax rate on interest payment, the recipient of the interest payment must be its beneficial owner. Otherwise, the recipient will be liable to a full rate of source-country withholding tax.

Ukrainian tax law does contain the definition of beneficial owner. Under the Tax Code of Ukraine (para 103.3) a beneficial owner of interest and other income is defined as a person entitled to such income. It is also provided for in this para that a person that is even entitled to certain income cannot count as its beneficial owner where it acts merely as an agent, nominee or intermediary with regard to this income.

This article looks at how the concept of beneficial owner is understood and applied by Ukrainian judicial and tax authorities.

Formal approach

As the jurisprudence of Ukrainian courts shows, the courts and the tax authorities have so far been much concerned with the technical side of the definition of beneficial owner.

On the one hand, the tax authorities tried to challenge arrangements where a recipient of Ukrainian-sourced income was in a certain sense an agent or an intermediary. They were just trying to invoke the direct provision of the above para 103.3 of the Tax Code of Ukraine excluding agents and intermediaries from the scope of the definition of beneficial owner. This was by and large done in respect of sublicense arrangements. The tax authorities were attempting to equate foreign lessees sublicensing intellectual property rights to Ukrainian taxpayers to agents or intermediaries.

On the other hand, the courts, as usual, rejected the tax authorities’ claims on the following grounds:

1) Sublicense arrangements are intellectual property-related contracts under Ukrainian civil law. They do confirm the recipients’ entitlement to Ukrainian-sourced income, thereby rendering such recipients the beneficial owners of the income;

2) The reference made by the tax authorities to para 103.3 of the Tax Code of Ukraine is ill-founded, as the sublicense arrangements are not those governing the activity of an agent or an intermediary under Ukrainian civil law.

The judgment of the Highest Administrative Court of Ukraine (the “HACU”) dated 21 May 2013 in the so-called “Semki Case” is a classic example of such a formal approach to the understanding of the concept of beneficial owner.

For those who may be interested the full text judgment in this case is available at (in Ukrainian).

Economic-based approach

In May 2014 the HACU ruled on the Donbass Aero Case that completely changed the approach to the understanding of beneficial owner. The full text judgment in this is available at (in Ukrainian).

The case revolted around a sublease arrangement. A taxpayer which is a Ukrainian airline leased two aircrafts from two different foreign companies. The companies that provided the aircrafts into the lease of the Ukrainian airline were not legal owners of such aircrafts. They leased the aircrafts from other foreign companies and accordingly subleased them to the Ukrainian airline.

The airline did not deduct any withholding taxes from the lease payments made in favour of the foreign lessors by relying on relevant double tax treaties exempting such income from withholding taxation in Ukraine.

The tax authorities argued that the exempting provisions of the double tax treaties should not have been invoked by the airlines, as the foreign lessors could not qualify as the beneficial owners of the lease payments. The tax authorities pointed out to the sublease nature of the concerned arrangements making, to their way of thinking, the foreign lessors in question agents or intermediaries falling outside the scope of the beneficial ownership concept under para 103.3 of the Tax Code of Ukraine.

The court ruled in favour of the airline. It held that:

1) The term “beneficial owner” of income should not be construed in a narrow and technical sense. It should be understood in light of the object and purposes of double taxation treaties. In particular, as follows from international practice of the application of double taxation treaties, a beneficial owner is a person that does not only receive income, but also determine its further economic destiny;

2) The tax authorities failed to satisfy the court that the lessors were restricted in their ability to dispose of the leased payments received from the airline. That is, the tax authorities failed to substantiate that the lessors were unable to determine the further economic destiny of the Ukrainian-sourced income received.

Following the solution of the Donbass Aero Case on 31 October 2014 the State Fiscal Service of Ukraine (the “SFSU”) published its letter No 9033/7/99-99-10-02-02-17 on the application of the concept of beneficial owner.

In this letter, the SFSU guided itself by the judgment of the HACU in the Donbass Aero Case. It committed itself to a wide economic approach to the determination of beneficial owner set forth in the above judgment. In particular, pursuant to the SFSU’s letter the term “beneficial owner” should not be interpreted in a narrow technical meaning. To be considered a beneficial owner, a recipient of Ukrainian-sourced income must be a person who determines the subsequent economic destiny of the received income.

OECD Commentaries

It is noteworthy that the aforesaid wide economic approach to the understanding of beneficial owner appears to be in full accord with the 2014 OECD Commentaries to Model Tax Convention on Income and on Capital (the “Commentaries”).

The Commentaries, namely, state as follows:

1) The “beneficial owner” term is not used in a narrow technical sense and should be understood in its context in light of the object and purposes of double tax treaties;

2) No relief or exemption under a double tax treaty can be granted to a conduit company. A conduit company, though the formal owner, it has, as a practical matter, very narrow powers which render it, in relation to the income concerned, a mere fiduciary or administrator acting on account of the interested parties;

3) A direct recipient of the income is not considered the beneficial owner of this income if that recipient’s right to use and enjoy the income is constrained by a contractual or legal obligation to pass on the payment received to another person.


The shift from formal to economic-based approach in the understanding of beneficial owner is sure-fire step ahead for Ukrainian court jurisprudence and administrative practice. It aligns Ukraine with the countries of the developed world in this respect of the application of double tax treaties.

At the same time, the economic-based approach requires much greater efforts from the tax authorities. The mere interpretation of the Tax Code of Ukraine will no more work for them. They must resort to an international exchange of tax information and an economic analysis. Yes, it is time-consuming and difficult, but there is no other way out for the tax authorities should they really want to protect the Ukrainian tax base.


  1. I like your approach on the topic. Your article is as interesting as your previous writings. Keep up the good work, thanks a lot.

  2. What you're saying is completely true. I know that everybody must say the same thing, but I just think that you put it in a way that everyone can understand. I'm sure you'll reach so many people with what you've got to say.