“Ukraine will never join BEPS and will not introduce an automatic exchange of tax information! Ukrainian tax authorities are not able to understand the international tax planning and therefore BEPS will not work in Ukraine!” - such statements in different variations repeatedly sounded addressing the deoffshorization process launched in Ukraine a few years ago.

Indeed, earlier there were grounds for such thoughts, but now it is clear that all this does not match the reality. Particular evidence is ratification by the Verkhovna Rada of Ukraine on February 28, 2019, of the Multilateral Convention to Implement Tax Treaty Related Measures, which was signed back in July 2018, in order to counteract the tax base erosion and profit shifting (hereinafter referred to as the “MLI Convention”).


Double Taxation Avoidance Agreements (“International Agreements”), which are currently used to optimize taxes and withdraw capital outside of Ukraine, are the main target of the MLI Convention. This mechanism is aimed primarily at stopping the aggressive minimization of tax liabilities.

The MLI Convention will provide Ukraine with the possibility to simultaneously and quickly make changes to a large number of International Agreements, bypassing the long-term procedures for individually reviewing each of them bilaterally.

It is interesting that Ukraine will implement several provisions of the MLI Convention at once, which in some cases is more than other countries. However, the decisive influence on foreign structures of the Ukrainian business will be achieved due to two main provisions:

1) Prevention of the unlawful application of double taxation avoidance agreements.

This provision provides for the introduction of the so-called Principal Purpose Test as a condition for the application of the Convention.

The main idea of the Principal Purpose Test is that the preferential tax rates under the International Agreements will not apply if tax authority has a reason to believe that the receipt of this privilege was one of the main objectives of any agreements or transactions that led to this privilege.

In fact, this means that the tax authorities will deeply analyze the purpose of performing a transaction abroad, and businesses will have to prove the reality of other purposes of such transactions, except for tax purposes.

It is obvious that this principle directly threatens the majority of the effective international structures to date, since increasing the tax burden in the absence of preferential tax rates may exhaust the feasibility of the existence of such structures. As an example, the Principal Purpose Test will affect the structures with Cyprus, Malta, Luxembourg, Hungary, etc.

2) Artificial avoidance of permanent representation status.

The MLI Convention expands the cases in which the activity of the entity is considered to be a permanent representation. In particular, systematic conclusion of contracts or activities leading to the conclusion of contracts on behalf of a foreign company is considered to be a permanent representation in relation to any activities that this person carries out for the company.

Also, the possibility of applying the exceptions provided for in the International Agreements is limited to certain types of activities that do not result in the establishment of a permanent representation.

Ukraine will make changes to 76 double taxation avoidance agreements to which it is party. At the same time, some countries, such as the Netherlands, Austria, etc., have not yet agreed to amend the agreements on avoidance of double taxation with Ukraine. Accordingly, innovations will not have an impact on them.


Each of the provisions of the MLI Convention can affect Ukrainian business with a foreign element, so owners and management need to assess right now the implications of MLI Convention entry into force.

For example, in order to assess the impact of the Principal Purpose Test, it is needed to:

1. Identify privileges under the International Agreements that apply to a business.

2. Modify the situation in which the privileges are not applied.

3. Prepare arguments (except for tax ones) that will explain the expediency of establishing foreign companies and conducting relevant transactions.

GOLAW professionals will be always happy to assist you in solving complicated issues.

Taras Lytovchenko,
Senior Associate at GOLAW, Attorney at law