On 21 December 2016, the Parliament of Ukraine introduced new provisions into the Tax Code relating to taxation of interest payments under Eurobonds issued in the form of Loan Participation Notes (or "LPNs").
Generally, the amendments establish three special rules:
- reduced 5 per cent withholding tax rate on interest payments for the LPNs issued after 2018;
- withholding tax exemption of interest payments for the LPNs issued during 2017 and 2018; and
- withholding tax exemption of interest payments for the existing LPNs issued prior to 2017.
Background
Historically, due to complicated requirements of the Ukrainian securities laws and currency control rules, issuance of Eurobonds by Ukrainian business was structured through foreign entities. Large corporates were able to use their offshore holding companies as the issuer of debt securities, which were guaranteed by Ukrainian operating subsidiaries. Ukrainian banks usually used an orphan special purpose vehicle (SPV) to issue the LPNs and on-lend the proceeds to the bank under a loan agreement.
Taxation of LPNs issued after 2018
Interest on loans provided by foreign lenders to Ukrainian borrowers after 31 December 2018 will be subject to a withholding tax at the rate of 5 per cent if all of the following criteria (the "Exemption Criteria") are satisfied:
- a loan provided by the foreign lender to the Ukrainian borrower is funded by issuance of debt securities on a foreign exchange included in the list to be approved by the Cabinet of Ministers of Ukraine;
- funds provided by a foreign lender under a loan to the Ukrainian borrower have been raised for the purpose of making (directly or indirectly) such loan; and
- as of the date of issuance of debt securities by a foreign lender, it (and/or any payment agent through which interest is paid) is not a resident of a low-tax jurisdiction (such as the BVI, Cyprus, Hong Kong, Panama) the list of which is approved by the Cabinet of Ministers of Ukraine.
Temporary exemption for new LPNs
The amendments to the Tax Code establish a full withholding tax exemption of interest income on loans to be provided by foreign lenders to Ukrainian borrowers in 2017 and 2018, provided that the Exemption Criteria are satisfied.
Exemption for existing LPNs
Interest payments on loans provided by foreign lenders to Ukrainian borrowers prior to 1 January 2017 have also been exempted from the Ukrainian withholding tax, to the extent such loans satisfy the Exemption Criteria (with the only difference being that any foreign exchange would qualify for the first criterion).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.