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Beneficial Ownership

Supreme Court Position on Beneficial Ownership of Income in International Structures

5/25/2026
Beneficial Ownership

On March 18, 2026, the Supreme Court, in case No. 620/7208/24, confirmed the legality of applying a reduced 2% withholding tax rate on interest payments made to a Cypriot company pursuant to the provisions of the Convention between Ukraine and the Republic of Cyprus.

The dispute arose from additional tax assessments imposed by the tax authority based on its conclusion that the non-resident recipient did not qualify as the beneficial owner of the income. The tax authority argued that the Cypriot company performed an intermediary (conduit) function because the interest received was allegedly transferred to other companies within the group. Accordingly, the tax authority maintained that the standard 15% withholding tax rate under the Tax Code of Ukraine should apply.

The taxpayer justified the application of the 2% rate on the grounds that the non-resident was a tax resident of Cyprus, was entitled to receive the income, independently controlled and disposed of the funds received, and was under no obligation to pass them on to third parties. To support its position, the taxpayer provided certificates of tax residency, contractual documentation, and financial statements.

The courts of first and appellate instances, whose conclusions were upheld by the Supreme Court, noted that the application of a reduced tax rate under an international treaty is permissible provided that three conditions are simultaneously met: (i) the non-resident is a resident of the relevant jurisdiction, (ii) proper evidence of such residency status has been provided, and (iii) the non-resident is the beneficial owner of the income. The Court emphasized that a beneficial owner is a person who not only formally receives the income but also effectively controls it and determines its economic use without any obligation to transfer it to another person.

The Supreme Court further stressed that the burden of proving circumstances demonstrating the conduit nature of the transactions or the absence of the non-resident’s effective control over the income rests with the tax authority. In this case, the tax authority failed to provide sufficient evidence to substantiate its conclusions, and its arguments were found to be based on assumptions.

The Court also stated that the existence of a corporate structure, related-party relationships, or intra-group financing arrangements does not, in itself, justify a conclusion that beneficial ownership is lacking. Furthermore, the mere fact that the funds are subsequently used for corporate purposes, including within the group, does not indicate a conduit arrangement in the absence of an obligation to transfer such funds to third parties.

The Supreme Court separately noted that the application of Cyprus’s Notional Interest Deduction (NID) regime does not affect the determination of beneficial ownership status and cannot serve as a basis for denying treaty benefits.As a result, the Supreme Court dismissed the tax authority’s cassation appeal and upheld the decisions of the lower courts. Consequently, the Court confirmed the taxpayer’s right to apply the reduced withholding tax rate under the Convention.

This decision is of practical significance because it reaffirms the Supreme Court’s established approach: the key criterion for applying treaty benefits is the recipient’s actual control over the income and the absence of restrictions on its use. By contrast, formal features of a corporate structure or assumptions regarding the flow of funds are insufficient grounds for denying the application of treaty benefits.