New tax regime for Ukrainian loan participation notes issued on international capital markets
January 2017 – On 21 December 2016, Ukraine’s parliament adopted the Law “On Amendments to the Tax Code of Ukraine Concerning Improvement of the Investment Climate in Ukraine” No. 1797-19. With effect from 1 January 2017, the legislation introduces new rules for the taxation of interest payable by Ukrainian economic issuers of loan participation notes (LPNs) on international capital markets.
Under an LPN structure, a foreign company (most commonly, a UK SPV) issues notes for the sole purpose of funding a loan to a Ukrainian company as borrower. The interest payments that the Ukrainian borrower makes are used by the issuer to fund coupon payments under the terms of the LPNs.
Until recently, a risk existed that interest payments by Ukrainian companies as borrowers to the SPVs in their capacity as lenders and LPNs issuers may be denied the benefits available under the applicable Double Taxation Convention and be subject to 15% withholding tax in Ukraine. This was primarily because an SPV could be seen as not qualifying as a ‘‘beneﬁcial owner’’ in relation to such interest payments under Ukrainian law.
Ukrainian lawmakers chose to address this uncertainty not by elaborating on the beneficial owner rules, but rather by introducing a special withholding tax rate in respect of such interest payments. The withholding tax rules are different depending on whether the loan funded by means of an LPN issuance was or will be extended to the Ukrainian borrower prior to 2017, in 2017 and 2018, or thereafter.
Taxation of Existing LPNs
Payments of interest by Ukrainian borrowers to foreign lenders under an existing LPN structure will be free from Ukrainian withholding tax if:
- the loan extended to the Ukrainian borrower was funded by means of a placement of foreign debt securities listed on a foreign stock exchange;
- the funds made available as a loan to the Ukrainian borrower were raised for the purpose of extending such a loan, directly or indirectly; and
- the foreign lender (or the entity acting as paying agent in relation to the interest payments) is not a resident of a jurisdiction which, as at the date of the foreign securities placement, is considered a low tax jurisdiction or a non-cooperative tax jurisdiction by the Cabinet of Ministers of Ukraine (currently, in particular Cyprus and Ireland).
Taxation of LPNs to be Issued in 2017 and 2018
Payments of interest by Ukrainian borrowers to foreign lenders under an LPN structure established in 2017 and 2018 will also be free from Ukrainian withholding tax, subject to the same conditions and further provided that the foreign stock exchange in question will be indicated in the list to be approved by the Cabinet of Ministers of Ukraine.
Taxation of LPNs to be Issued in 2019 and onwards
Payments of interest by Ukrainian borrowers to foreign lenders under an LPN structure established in 2019 and onwards will be subject to a 5% withholding tax, provided that the same conditions applicable to 2017 and 2018 LPNs are satisfied.