Anna Lystopad Department of international business Institute of International Relations Taras Shevchenko’s Kiev National University Assistant

“The legal right of a taxpayer to decrease the amount of what would otherwise be his taxes or altogether to avoid them, by means which
the law permits cannot be doubted.”

“Everyone has a right to arrange his business affairs in such a way that brings appropriate tax payments to the minimum; no one must plan his expenses and income to the maximum convenience of the Ministry of Finance; for a citizen there is no patriotic duty whatsoever to increase his own tax payments.”
(Federal Judge Hand, U.S. Supreme Court)
Gregory vs. Helvering, 293 U.S. 454 (1935).
Using of offshore holding companies is becoming more and more widely used in the difficult structures of business with the number of companies situated in various jurisdictions worldwide. From small beginnings early in the 20th century, the offshore sector has grown ever faster in response to high tax rates in the developed countries, until it is estimated now that more than half of the world’s money is offshore. Creation of the offshore holding company (hereafter “the HoldCo”) allows the owners efficient planning of investments (including repatriation of the profits from such investments) as well as possibility of anonymous ownership of assets and their use. Offshore HoldCo is an efficient instrument of operating a business, which allows reduce the efficient tax rate, accumulate sufficient investment assets as well as run the business outside tough legislation requirement generally settled in the onshore jurisdictions.
Selection of the jurisdiction
The main driver of choosing the jurisdiction for creation of the HoldCo, is determination of the main goals of the created company. Thus, this creates a possibility of choosing the cheapest jurisdiction with the beneficial opportunities.
The main goals of the HoldCos, located in the offshore jurisdictions include inter alia the following:
– Efficient tax planning and reduction of the efficient tax rate of the company;
– Using of the HoldCo into export/import transitions as an intermediary company;
– Using the HoldCo for the purpose of accumulation of currency and international settlements; etc.
For the other point of view, the selection of the jurisdiction should be also based on the availability of the valid double tax treaty between the offshore jurisdiction and the country, in which business is going to be running. The effective jurisdictions allow decreasing the withholding tax rates at the moment of income reimbursement as well as eliminating risks of the strict rules prescribed by respective national legislation. Thus, for making a decision of investment into real estate sector in Ukraine, the following issues should be considered:
Withholding tax
According to Ukrainian tax legislation interest, dividends, royalties and engineering services paid to a non-resident are subject to 15% withholding tax. In addition, sale of immovable property located in Ukraine by a non-resident to a resident is subject to 15% withholding tax (to be withheld and remitted by the resident), and the sale of shares by a non-resident to a resident is subject to a 15% withholding tax on the gain realised. In cases where double tax treaty (DTT) relief is available, lower rates may apply.
In order to benefit from a respective DTT, a non-resident should provide the Ukrainian paying entity with a certificate of residence, issued by the relevant tax authority abroad. That certificate should be properly legalized with the Ukrainian consulate if it does not carry an apostil in accordance to the Hague Convention of 5 October 1961. In respect of interest on loan from a non-resident bank, confirmation of residence can be obtained from the Bank Identifier Code. Currently Ukraine has effective double tax treaties with 69 jurisdictions.
There are a number of treaties that provide for reduced rates of withholding tax in respect of interest. The United Kingdom, Spanish and Cypriot treaties all provide for a zero withholding tax (although the Cyprus treaty is currently being renegotiated), whilst the Swiss treaty provides for zero withholding tax if payments are made to a Swiss financial institution.
There are also a number of treaties (including the French, German, Austrian and Dutch treaties) that provide for a 2% withholding tax for interest payments to financial institutions registered in these jurisdictions
The Cypriot treaty provides for zero withholding tax on dividends paid by a Ukrainian legal entity to its parent entity registered in this jurisdiction. Additionally treaties with the Netherlands, France, Finland and Sweden allow avoiding the Ukrainian withholding tax on dividends provided certain investment and participation thresholds are met.
– The Netherlands – minimum investment of usd 300k and at least 50% holding;
– France, Finland – minimum investment euro/usd 1mil and at least 50% holding;
– Sweden – at least 25% holding and providing at least 50% of Swedish company’s capital belongs to Swedish residents.
Sale of corporate rights in a
Ukrainian LLC by a non-resident
If a non-resident (with no treaty relief) sells shares in a Ukrainian legal entity, a 15% withholding tax applies to the gain. When a non-resident shareholder sells shares in a Ukrainian company to another non-resident and the settlement is outside Ukraine, the Ukrainian tax authorities may have difficulties in taxing the event (particularly if the company is an LLC) as there appears to be no mechanism to collect the tax. The Corporate Profits Tax Law requires that responsibility to collect the tax rests with the resident entity or non-resident’s permanent establishment.
The majority of tax treaties that Ukraine has signed provide for a tax exemption on the sale of shares, unless the underlying assets consist primarily of real estate located in Ukraine. The treaties with Cyprus and Slovakia provide for an exemption from taxation in Ukraine, even if the underlying assets consist principally of real estate.
The existing Cypriot treaty is currently being re-negotiated and the current draft of the new treaty does not provide for an exemption from Ukrainian tax on the sale of shares if the underlying assets consist principally of real estate. Once the new treaty is in place, the sale (by a Cypriot resident) of shares in a Ukrainian legal entity to another Ukrainian entity would be subject to 15% withholding tax in Ukraine if the underlying assets are primarily real estate located in Ukraine.
Current status of Ukraine –
Cyprus double taxation treaty
The existing Ukraine-Cyprus double taxation treaty is unique in that it provides for zero withholding tax on all payments and effectively exempts the sale of real estate Special Purposes Vehicle’s from Ukrainian capital gains tax. The combination of the favourable double tax treaty with Ukraine and favourable domestic tax regime, have made Cyprus the most preferred jurisdiction for structuring investments into Ukraine.
Given the lack of well-developed anti-avoidance rules, the tax authorities decided to combat this perceived abuse through the process of treaty renegotiation. The draft new treaty is substantially less favourable. It provides for 10% withholding tax on interest and 5% withholding tax on dividends. In addition, Ukraine will be entitled to impose 15% withholding tax on capital gains realised from the sale of shares held in Ukrainian real estate companies (i.e. Ukrainian legal entities whose assets consist principally of immovable property).
In January 2008, the Cabinet of Ministers of Ukraine has authorised the Ukrainian Ambassador to Cyprus to sign the new treaty with Cyprus. However, the new Ukraine-Cyprus treaty has not been signed yet due to the attempts of the Cypriot party to renegotiate certain provisions of the new treaty.
Due to the reluctance of the Cypriot party to sign the new treaty, the Cabinet of Ministers of Ukraine has referred the draft law on unilateral termination of the existing Ukraine-Cyprus treaty for consideration of the Ukrainian Parliament. The draft law was approved by the respective parliamentary committee in May 2008. If the Ukrainian Parliament passes the law on unilateral termination, the standard 15% rate of withholding tax will apply to dividends, interest and capital gains payable from Ukraine to Cyprus.
Given the unstable political situation in Ukraine, it is uncertain when or if the law on unilateral termination of the existing Ukraine-Cyprus treaty will be passed. In any case, the fact that the law on termination has been referred to the Ukrainian Parliament will give Ukraine more ‘’bargaining power’’ in negotiations with Cyprus and force Cyprus to sign the new treaty.
Classification of offshore jurisdictions
All offshore jurisdictions in worldwide practice are divided into three main categories, which are:

1. Classic offshore jurisdiction
In such jurisdictions legislations allow to be fully exempt from the taxation. Thus, the company pays the fixed duties for the prolongation of licence on the business activity.
Main part of the classic offshore jurisdictions is not required to prepare and present financial statements and documents to the government. Some of such jurisditions, however, require preparation of the financial reporting, but these requirements are very minimised (e.g. Panama, Bahamas, British Virgin Islands, etc.).

2. Low tax jurisdictions (so called tax heaven zones)
Under this category fall counties in which the offshore companies can benefit from tax privileges. However, the financial reporting is obligatory for these jurisdictions (e.g., Cyprus, Hungary, etc.)

3. Other jurisdictions, which under certain circumstances creates advantageous conditions for tax and financial planning
Using and registration of the offshore companies in the countries and administrative units of this category allows benefiting from the certain provisions of the legislation, provided that the financial structure of the business is created with respect of these provisions. So, the tax burden under this option could be minimised. As for example, financial and holding activity of the Netherlands’ company is tax at 1% rate, provided such activity is presenting outside the Netherlands’ territory. Nevertheless, the company is still obliged to prepare and fill the financial statements for its activity. The most popular jurisdiction from this category as at today is the United Kingdom, which is used for creating of holding and financial companies by the different countries worldwide.
The offshore under the USA jurisdiction generally falls out the described above categories. Though, they are not treated as offshore, legislations of certain states enable to almost fully exempt from taxation the activities outside respective state. At the same time, financial reporting and federal tax settlement are mandatory.
Using of offshore for financial activities
Broadly speaking, it is larger companies, especially multinationals, that use international offshore financial companies (hereafter “IOFC”) for holding and investment. At one time, the tax advantages that could be got from routing investment or ownership through an IOFC had got to be balanced against the extra cost, difficulty and risk of using a possibly somewhat backward offshore island without sophisticated business infrastructure or switched-on professionals.
Some of the International Offshore Financial Centres are difficult to distinguish from centres in high-tax countries in Europe or North America in terms of financial infrastructure, while the spread of modern telecommunications, computer technology and now the Internet has pretty well done away with the difficulties of working with offshore.
Still, it is the tax advantages that drive offshore, as always, and the 500 banks in the Cayman Islands are there to reduce their own tax bills and to service the needs of corporations that want to lower their tax burdens, not because of the climate. There is a very wide variety of corporate financing and investment purposes offshore, some of which are indicated in the following list:
1. to hold foreign subsidiaries and receive dividends or interest on loans from them in a tax-efficient manner; either because there is a good tax treaty between the IOFC and the foreign country concerned; or because the IOFC itself has low taxes; or a combination of the two.
2. to concentrate the profits and losses from subsidiaries in one low-tax area, which may be more tax-efficient than remitting them to the high-tax base country separately.
3. to obtain financing from institutions that are themselves free of high taxation (especially withholding tax) and can therefore provide it more cheaply than they can from high-tax centres. Especially project finance is often assembled offshore, where the burden of regulation is lighter, alongside the tax advantages.
4. to base in-house treasury and finance departments in a flexible, low-tax environment from which they can provide the best and cheapest service to group companies wherever they may be.

List of literature:

1. Ihor Tunik, Vadim Polykov Offshore. – St.P.:Piter, 2008
2. Model Tax Convention on Income and on Capital. – OECD, July 2008.
3. Comments to Model Tax Convention on Income and on Capital, condensed version. – OECD Committee on Fiscal Affairs, July 2008.
4. Convention between the government of the Republic of Cyprus and the government of the Union of Soviet Socialist Republics for the avoidance of double taxation of income and property of 29 October 1982.
5. Convention between the government of the Kingdom of the Netherlands and Ukraine for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income and in property of 24 October 1995.