Self-financing (loan)

Self-financing (loan to account)

An offshore company acts as a lender, our – loan user. A company from a country with which Ukraine has a signed agreement on the avoidance of double taxation must be included as a transit company. This tool avoids double taxation of the company's profits, because in the case of paying dividends to shareholders, the company first pays income tax and then distributes dividends, but they, in turn, are taxed again - as shareholders' profits. When financing through a loan, the tax is paid only by the lender, who receives interest for the use of funds.

This scheme works if:

• there is an agreement on avoidance of double taxation between Ukraine and the resident country of the transit company (for example, Cyprus) – it is necessary to provide a certificate confirming residency;
• taxation rate for the withdrawal of dividends – minimal;
• the tax in the country where the dividend is received is also the minimum.

For large public companies, it is almost impossible to optimize profit to zero in the country of registration (Ukraine), and then the shareholders and founders decide to receive income by distributing dividends. But this is associated with rather serious tax payments: for shareholders - individuals, income tax - 15%, for legal entities - all 24%. In such a situation, it is possible to optimize the tax burden when paying dividends by indirectly owning corporate rights – through a transit legal entity registered in a country with a double tax treaty. The tax rate will then be generally zero.

All dividends received can be fully exempt from taxes even if the country of registration of the shareholder (for example, the Netherlands) has special holding laws. Law of Ukraine "On Holding Companies of Ukraine" No. 3528-IV dated March 15, 2006 defines "holding" as "an open joint stock company that owns, uses and disposes of holding corporate blocks of shares (parts, shares) of two or more corporate enterprises." For the purpose of tax planning, the parent and subsidiary companies are not only created to perform different functions, but also registered in different tax jurisdictions, which is beneficial for the distribution of profits among them and thus – the opportunity not to pay taxes on the part that is not subject to the legislation of Ukraine.

However, it should be borne in mind that the fiscal authorities, in order to fill the treasury, exercise particularly strict control over all payments by the company in favor of its structural divisions abroad. Also, the contribution of a non-resident to the authorized capital of a company is considered a foreign investment (Law "On the regime of foreign investment" dated March 19, 1996 No. 93/96), and the question arises of the need to register it - unregistered foreign investments do not give the right to receive certain benefits and guarantees and also have no return guarantees.

Therefore, when developing international tax planning schemes, it is necessary to take into account all the nuances, as well as study the national legislation of specific jurisdictions and the practice of its application. Our experts will help you to offer the most advantageous option for you.