International Holding Structures


The taxation system of Ukraine is relatively young, sophisticated and un-refined. It is destined to be reformed to provide more business-friendly procedure and to collect more taxes by virtue of efficient administration and expanding the taxable base, rather than by keeping tax rates high. We believe that the introduction of tax benefits for Ukrainian holding companies could be one of the ways to modernize the taxation legislation of Ukraine in this context. Without such benefits, local businesses as well as foreign investors are virtually forced to use tax efficient holding structures outside Ukraine.

Of course, this is not the only reason to implement international holding structures for Ukraine. Among the other reasons are the benefits from:

  • better protection of shareholder rights under the legal system of the holding jurisdiction;
  • flexible legislation for shareholders’ agreements;
  • better accessibility to foreign capital markets and international lending;
  • more business exit options.

In this article we provide an overview of the most commonly used international holding structures for Ukraine, which have proved to be: (1) tax effective; and (2) flexible, depending on the changing needs of investors.

For a jurisdiction to be an attractive location in which to set up a holding company four criteria must be satisfied:

  1. Incoming dividends remitted by the subsidiary to the holding company must either be exempted from, or subject to, low withholding tax rates in the subsidiary’s jurisdiction;
  2.  Dividend income received by the holding company from the subsidiary must either be exempted from, or subject to, low corporate income tax rates in the holding company’s jurisdiction;
  3. Profits realized by the holding company on the sale of shares in the subsidiary must either be exempt from, or subject to, a low rate of capital gains tax in the holding company’s jurisdiction;
  4. Outgoing dividends paid by the holding company to the ultimate parent corporation and/or beneficial owner must either be exempt from, or subject to, low withholding tax rates in the holding company’s jurisdiction.

From the Ukrainian tax law perspective relevant holding companies should be incorporated in the jurisdiction that has a double taxation avoidance treaty with Ukraine (“DTAT”).
Using all of the above-mentioned criteria we have decided to provide you with an overview of holding structures in Cyprus and the Netherlands.

Cyprus Holding Structure

The 2002 Tax Reform combined with Cyprus-wide treaty network and Cyprus EU membership and the implementation of the EU Directives, has rendered Cyprus one of the best holding company jurisdictions in the world. For the many years Cyprus has proven to be the largest direct investor in Ukraine.

The advantages of using a Cyprus holding company are presented in detail below:

  • Tax exempt dividends. Dividends received by the holding company from overseas investments are exempt from corporation tax provided that the holding exceeds 1% of the share capital of the overseas participation. This exemption does not apply if the overseas company paying the dividends: (1) derives 50% or more of its profits directly or indirectly from investment activities; and (2) the foreign tax burden on the profits from which the dividends are paid is substantially lower than the Cypriot corporate tax rate.
  • No withholding tax on distribution of profits to the overseas shareholders. Cyprus does not levy a withholding tax on dividend payments to non tax-residents, irrespective of the country of residence of the recipient or the existence of a DTAT.
  • Tax exempt gains made on the disposal of investments. Profits from the disposal of securities are exempt from capital gains tax and income tax irrespective of whether the gains are considered to be of a capital or revenue nature. Capital gains tax is imposed only if the company whose shares are being sold is not listed on recognised stock exchange and owns immovable property situated in Cyprus. The above exemption enables a holding company to dispose overseas investments in subsidiaries with no tax implications in Cyprus.
  • Tax exempt gains made on the disposal of the shares of the Cyprus holding company. The shareholders of the holding company can dispose their shares in the holding company with any gains being exempt from taxation in Cyprus irrespective of the provisions of a DTAT.
  • No tax on the liquidation of the Cyprus holding company. No capital gains tax, income tax or any other taxes arise on the liquidation of a Cyprus holding company if this is owned by non tax residents.
  • No capital taxes or net worth taxes. Cyprus does not impose capital or net worth taxes.
  • Access to Cyprus wide treaty network. The Cyprus holding company can access the Cyprus wide DTAT network, in this way minimising withholding taxes in the source country and maximising net income for the ultimate owners.
  • Access to the EU Parent-Subsidiary Directive. The Cyprus holding company can enjoy the provisions of the EU Parent-Subsidiary Directive, meaning that any payment of dividend from any other EU country will not be subject to any withholding tax provided that the specified conditions are met.
  • Reorganisation provisions. Cyprus has fully implemented in its legislation the EU Merger Directive and in cases of reorganisations no corporation tax, capital gains tax and transfer fees has to be paid.
  • Other advantages. Under Cyprus law there are no substance requirements, no thin capitalisation rules or other debt-equity restrictions and no requirement for a minimum holding period.

In summary, Cyprus can offer dividend withholding tax minimisation through its extensive treaty network, dividend received tax exemption, tax free disposal of shares, no exit taxes, minimal anti-avoidance provisions, zero withholding tax on outgoing interest and dividends and no ancillary taxes.

According to the current DTAT between Ukraine and Cyprus, payment of dividends by Ukrainian subsidiaries, interest, and income from the sale of shares/membership interests of Ukrainian operating companies are free from taxation in Ukraine.

However it shall be noted that currently, the negotiations are under way for the new DTAT between Ukraine and Cyprus. The draft treaty proposes to provide far less favourable treatment for Cypriot investors in Ukraine.

It is hard to predict the timing of completion of negotiations, however there is also a risk that the current DTAT between Ukraine and Cyprus could cease to be effective before the new DTAT enters into force due to unilateral denunciation by Ukraine, which will logically lead to payment of additional taxes. The last effort of denunciation in the Verkhovna Rada (the Ukrainian parliament) failed by 3 votes to pass the law.

That is why, despite being one of the best holding companies jurisdictions in the world and proven best jurisdiction for Ukraine, investors seeking to structure their businesses in Ukraine should probably start considering other jurisdictions, for example – the Netherlands.

The Dutch Holding Structure

Although the Netherlands has a sophisticated tax system with high tax rates some aspects of its fiscal system are extremely attractive and make it the ideal location in which to base holding companies. Attractive fiscal incentives are further enhanced by a complex network of double taxation treaties (few of which contain any anti avoidance provisions) and by the existence of a procedure of advance tax rulings whereby the tax authorities, who are autonomous and approachable, can at short notice specify the fiscal consequences of certain business structures provided that material financial interests are involved and the propositions are reasonable.

The advantages of using a Dutch holding company are presented in detail below:

  • Withholding taxes on incoming dividends. Under the terms of the EU parent/subsidiary directive, if a Dutch company owns 10% (15% prior to 2009) or more of the shares of another EU company, no withholding taxes will be levied on dividends remitted by the subsidiary. Where a foreign subsidiary is not covered by the EU parent/subsidiary directive the terms of a DTAT will often substantially reduce the amount of withholding taxes deducted on the remittance.
  • Corporate income tax on dividend income received. The general rule is that all dividend payments remitted by subsidiaries to Dutch parent corporations are subject to corporate income tax in the hands of the parent company (with tax credits being due where there is an element of double taxation). Where a Dutch holding company comes within the “participation exemption rules” all income received by the holding company from the subsidiary whether by way of dividends or otherwise is tax free. To come within the “participation exemption rules” the following main criteria must be satisfied: (1) the Dutch holding company must hold at least 5% of the subsidiary’s shares; (2) shares must be held since the beginning of the fiscal year; (3) subsidiary profits must be taxed; (4 ) the parent company must actively involve itself in its subsidiary’s management; (5) the subsidiary must not be a “tax exempt portfolio investment company”; (6) the costs to the parent corporation of running the subsidiary are not deductible from the taxable profits of the parent corporation in the Netherlands.
  • Capital gains tax on the sale of shares. Under the participation exemption, all capital gains made by a Dutch holding company on the sale of shares in a subsidiary are tax free in the Netherlands irrespective of whether the subsidiary is resident or non resident.
  • Withholding taxes on outgoing dividends. Under the EU parent/subsidiary directive dividends paid by Dutch subsidiaries to EU parent corporations are exempt from Dutch withholding taxes provided the EU parent corporation has held 10% of the shares in the Dutch subsidiary for at least 12 months. Where a foreign parent is not covered by the EU parent/subsidiary directive the terms of a double taxation treaty will often substantially reduce the amount of withholding taxes deducted on the outgoing remittance.
  • Other advantages. The Dutch holding company regime now allows a tax deduction of expenses, including interest on acquisition loans. The interest deduction is subject to limitations, but in essence the new regime offers the possibility to create tax losses which can be offset against other sources of income.

According to the current DTAT between Ukraine and the Netherlands, payment of dividends by operating companies, interest, and income from the sale of shares/membership interests of Ukrainian operating companies may be free from taxation in Ukraine, provided that the beneficial owner of the dividends holds at least 50% of the capital in the Ukrainian entity and provided that an investment of at least USD 300,000 was made in the capital of such entity.

On 31 October 2008 State Tax Administration of Ukraine (“STAU”) issued the Letter No 22303/7/12-0117 (“Letter”), by which it declared that the Dutch holding company may take advantage of the tax relief granted by the DTAT only if the following conditions are met: (1) the minimum qualifying investment has been made in monetary form; (2) the minimum qualifying investment has been made in one stage; (3) the minimum qualifying Investment (USD 300,000 or its equivalent) has been invested by the holding company, which is claiming for a tax relief, at that investments made by previous and/or other shareholders of Ukrainian subsidiary do not count.

In addition, in its Letter the STAU demands that the following additional documents be filed by the Ukrainian subsidiary as a precondition for a DTAT relief application: notification on paying of the investment; extracts from the registry of shareholders and structure of statutory capital of Ukrainian subsidiary with regard to shareholding of founders as of the date of paying the investment.

We belive that STAU’s interpretation of the DTAT contradicts the DTAT itself and applicable Ukrainian legislation. There is no need to challenge the Letter at court as it bears no legal force. However, this is the official position of the STAU, which could cause numerous legal disputes in the future.


To summarize, both of the above structures have their benefits and disadvantages. In order to achieve the goal of structuring for Ukrainian business, one may need a more complex structure involving both of the above jurisdictions or even other jurisdictions. We would recommend that investors seeking to implement the most effective structure for their needs firstly request professional analysis from external advisors.