Date Tax Reform Reloading - Problems of reforming the tax System of Ukraine: "Beneficial owner - lack of definition in OECD model convention and German practice" 02/06/2011

TAX REFORM: RELOADING,JUNE 2, 2011; BENEFICIAL OWNER Problem 2 Art. 160 of new Tax Code (TC): income (e.g.: dividends, interest and royalties) received from Ukrainian origin by non-residents generally taxable in Ukraine, unless respective Double Taxation Agreement (DTA) foresees a different taxation Reduced tax rates can be applied according respective DTA if the recipient is the beneficial owner (art ); respective certificate of residence has to be provided (art ) Art OECD Model Convention “beneficial owner” mentioned as condition OECD model convention (e.g. as well in DTA Ukraine-Germany) no definition of „beneficial owner“ Art par. 2: recipient not beneficial owner, if he is only an “agent, nominal shareholder or intermediary” – even in case this agent, nominal shareholder or intermediary has got the right receiving this income. Question: how to prove not being only “agent, nominal shareholder or intermediary”

TAX REFORM: RELOADING,JUNE 2, 2011; BENEFICIAL OWNER Comments to OECD Model Convention 3 Sense of beneficial owner: avoidance of transfer entities (“treaty shopping”) But, not a final shareholder should be regarded as beneficial owner, but the person (entity), who (which) can decide on its own discretion how to proceed with respective income Attention: − recipient 100% owned by a single third party does not exclude beneficial ownership at recipient − even profit transfer agreements do not exclude beneficial ownership

TAX REFORM: RELOADING,JUNE 2, 2011; BENEFICIAL OWNER German Practice 4 As OECD Model Convention, most of German DTAs do as well not contain a definition of Beneficial Owner – except with Italy, Norway, Sweden and the USA DTA Germany-Sweden: −Beneficial owner (+), if income is assigned to the recipient as taxable income according tax legislation of recipients state DTA Germany-USA 1989 −Beneficial Owner (+), if income assigned to the recipient as taxable income according tax legislation of recipients state (definition canceled according minutes to DTA Germany-USA 1989/2006) DTA Germany-Italy and Germany-Norway: −Right to receive respective income and −Income to be assigned as taxable income according tax legislation of both contracting countries

TAX REFORM: RELOADING,JUNE 2, 2011; BENEFICIAL OWNER Conclusion 5 −proving “the right to decide on its own discretion” practically not possible −Therefore focus on tax residency – as outlined in above mentioned DTAs – is a common practicable approach −Suggestion: ▪Delete par. 2 of art TC ▪Implementation of formal application for a certain DTA to be applied (to be submitted together with a valid certificate of residence) ▪In case of royalties a copy of brands registration or any other document which proves grounds of royalties

TAX REFORM: RELOADING,JUNE 2, 2011; BENEFICIAL OWNER Management Reporting Implementation Cost Centre Accounting Financial Due Diligence IFRS-Transfer Recruiting of financial personnel Tax Consulting Interim-Management Outsourcing Accounting 6 TOV Otten Consulting