Article 24. RELIEF FROM DOUBLE TAXATION

Each Contracting State uses the foreign tax credit method to avoid double taxation of income arising in the other State. The credit is subject to the limitations of domestic law, such as Code sections 56(a) and 904.

Paragraph 7 of the Protocol explains and modifies this Article. Subparagraph (a) of paragraph 7 of the Protocol modifies the Ukrainian taxes described in Article 2 (Taxes Covered), i.e.. the tax on income (profits) of enterprises, the income tax on individuals, and any substantially similar tax that

is subsequently introduced. The modified taxes constitute separate levies (i.e., are considered to be distinct from the Ukrainian statutory taxes) for purposes of determining their eligibility for the credit allowed under section 901. The Protocol's modifications (described below) are intended to make such levies conform to taxes on net income that would satisfy the U.S. standards of a creditable foreign income tax.

At the time the Convention was signed, the base on which the Ukrainian taxes covered in Article 2 were imposed was determined without a full deduction for labor costs and interest expense in the case of companies with Ukrainian participation (either wholly owned by Ukrainian residents or joint ventures with Ukrainian participation). The Protocol's modifications remove this obstacle to creditability of the Ukrainian tax for the persons described in the Protocol. Based on these modifications, the Protocol provides that the Ukrainian taxes described in Article 2, as modified by this Convention and in effect on the date of signature of the Convention (March 4, 1994), are income taxes for purposes of Article 24 (Relief from Double Taxation), and therefore are fully creditable for U.S. income tax purposes. This provision has no effect on the creditability of Ukrainian taxes imposed on persons other than those described in the Protocol; the creditability of taxes imposed on such persons would be determined under the general principles of U.S. law.

Subparagraph (a) of paragraph 7 of the Protocol permits full deductions for wages and interest expense of a joint venture that is a resident of Ukraine when U.S. residents own at least 20 percent of the beneficial interest in the venture and the venture's total corporate capital (i.e., equity capital owned by all participants determined without regard to country of residence) amounts to at least $100,000 (an "eligible U.S. venture"). An eligible U.S. venture may deduct its expenses for remuneration for personal services in determining its Ukrainian tax base. Subparagraph (a) also applies to a permanent establishment in Ukraine of a United States resident, and to an individual who is a U.S. citizen or resident and who carries on activities in Ukraine as an entrepreneur (i.e., a sole proprietorship or self-employed service provider). This provision does not alter the general rule under Article 7 (Business Profits) that deductions will not be allowed for interest paid by a permanent establishment to the home office. Consequently, in accordance with Article 7 (Business Profits), a permanent establishment will be allowed deductions for interest expenses only to the extent they are reasonably allocable to the permanent establishment.

Subparagraph (b) of paragraph 7 of the Protocol provides that the 20 percent beneficial U.S. ownership requirement of subparagraph 7(a) of the Protocol for eligible U.S. ventures may be satisfied by indirect ownership through residents of the

United States or Ukraine. Thus, for example, a Ukrainian company that is wholly-owned by another Ukrainian company would be an eligible U.S. venture if at least 20 percent of the second Ukrainian company were owned by a U.S. resident. If, however, the second Ukrainian company were a resident of a third state, the U.S. ownership of that second company would not be considered for purposes of subparagraph 7(a).

Subparagraph (c) ensures that the U.S. recipient of Ukrainian source dividends and royalties can claim a U.S. foreign tax credit with respect to the Ukrainian withholding taxes imposed on such income. Under Ukrainian law, the payor of dividends and royalties is considered to be liable for the withholding tax, rather than the recipient as under U.S. law. Subparagraph (c) provides that for U.S. tax purposes the recipient will be deemed to be liable for the tax, if the recipient elects to include the tax in gross income, thereby ensuring that the Ukrainian tax may be claimed as a credit against U.S. liability.

Finally, subparagraph (d) provides that no tax sparing credits will be provided. If the United States permits such a credit in the future, whether through an amendment of its internal law or through a treaty with a third State, it is agreed that the Convention will be amended to authorize the provision of such credits. Such an amendment to the Convention would be subject to constitutionally required ratification procedures in each State. The United States has undertaken a similar obligation with respect to the income tax convention with India.

25. MON-DISCRIMINATION

This Article ensures that citizens of a Contracting State, in the case of paragraph 1, and residents of a Contracting State, in the case of paragraphs 2 through 4, will not be subject to discriminatory taxation in the other Contracting State.

Paragraph 1 provides that a citizen of one Contracting State may not be subject to taxation or connected requirements in the other Contracting State that are different from or more burdensome than the taxes and connected requirements imposed upon a citizen of that other State or of a third State in the same circumstances. A citizen of a Contracting State is afforded protection under this paragraph even if the citizen is not a resident of either Contracting State. Thus, a U.S. citizen who is resident in a third country is entitled, under this paragraph, to the same tax treatment in Ukraine as a citizen of any other country who is a resident of that third country and in the same circumstances.

It is understood, however, that for U.S. tax purposes, a U.S. citizen who is resident outside the United States, whether

in Ukraine or a third country, is not in the same circumstances as a citizen of Ukraine who is a resident outside the United States, because the U.S. citizen is subject to U.S. tax on his worldwide income and the Ukrainian citizen is subject to U.S. tax on only his U.S. income. Thus, a citizen of Ukraine resident in a third state is not entitled under this Article to net-basis taxation at source of dividends paid by U.S. companies because a U.S. citizen resident in a third country is taxed on a net basis by the United States. Similarly, it is understood that neither Contracting State is required to grant to residents of the other Contracting State the same personal exemptions and deductions that it provides to its own residents to take account of marital status or family responsibilities.

Paragraph 2 of the Article provides that a permanent establishment in a Contracting State of a resident of the other Contracting State may not be less favorably taxed in the firstmentioned State than an enterprise of that first-mentioned State or of a third State which is carrying on the same activities.

Section 1446 of the Code imposes on any partnership, whether domestic or foreign, the obligation to withhold tax from a foreign partner's distributive share of income effectively connected with a U.S. trade or business. If tax has been overwithheld, the partner can, as in other cases of over-withholding, file for a refund. In the context of the Convention, this obligation applies with respect to a Ukrainian resident partner's share of the partnership income attributable to a U.S. permanent establishment. There is no similar obligation with respect to the distributive shares of U.S. resident partners.

It is understood that this withholding provision is not a form of discrimination within the meaning of paragraph 2 of the Article, but merely a reasonable adaptation of the mode of taxation to the particular circumstances of nonresident partners. Like other withholding provisions applicable to nonresident aliens, this is a reasonable method for the collection of tax from persons who are not continually present in the United States, and as to whom it may otherwise be difficult for the United States to enforce its tax jurisdiction.

Paragraphs 3 and 4 prevent discrimination against residents of a Contracting State who engage in business transactions with residents of the other Contracting State. Paragraph 3 prohibits discrimination in the allowance of deductions. When a resident of a Contracting State pays interest or royalties or makes other disbursements to a resident of the other Contracting State, the first-mentioned Contracting State must allow a deduction for those payments in computing the taxable profits of the enterprise under the same conditions as if the payment had been made to a resident of the first-mentioned State. An exception to this rule is provided for cases where the provisions of paragraph 1 of

Article 9 (Associated Enterprises), paragraph 4 of Article 11 (Interest) or paragraph 6 of Article 12 (Royalties) apply, because all of these provisions permit the denial of deductions in certain circumstances in respect to excess (not at arm's length) payments between related persons. Accordingly, paragraph 3 permits the denial or deferral of a deduction for interest in accordance with domestic thin capitalization rules such as section 163 (j). The term "other disbursements" is understood to include a reasonable allocation of executive and general administrative expenses, research and development expenses and other expenses incurred for the benefit of a group of related persons which includes the person incurring the expense.

Paragraph 3 also provides that any debts of a resident of a Contracting State to a resident of the other Contracting State are deductible in the first-mentioned Contracting State in computing taxable capital under the same conditions as if the debt had been contracted to a resident of the first-mentioned State. Thus, for example, if a tax is imposed on the value of real property net of debt, the same deduction must be allowed with respect to debt of creditors who are residents of either Contracting State. In this case, the Article would also apply to a real property tax imposed by a local government.

Paragraph 4 requires that a Contracting State not impose other or more burdensome taxation or connected requirements on a company that is a resident of that State that is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, than the taxation or connected requirements that it imposes on similar resident companies owned by residents of the first-mentioned State or of a third State. It is understood that the U.S. rules that impose tax on a liquidating distribution of a U.S. subsidiary of a Ukrainian company and the rule restricting the use of small business corporations to U.S. citizens and resident alien shareholders do not violate the provisions of this Article.

Paragraph 5 of the Article specifies that no provision of the Article will prevent either Contracting State from imposing the branch profits tax described in paragraph 5 of Article 10 (Dividends). At present Ukraine does not impose such a tax, but if it were to introduce one consistent with paragraph 5 of Article 10 it could do so under this Article.

Paragraph 6 provides that the provisions of this Article do not extend to benefits granted to citizens or residents of a third State in accordance with a special agreement with that third State, such as an income tax Convention.

Paragraph 7 provides that, notwithstanding the specification of taxes covered by the Convention in Article 2 (Taxes Covered), for purposes of providing nondiscrimination protection this

Article applies to taxes of every kind and description imposed by a Contracting State or a political subdivision. Customs duties are not considered to be taxes for this purpose.

The saving clause of paragraph 3 of Article 1 (General Scope) does not apply to this Article, by virtue of the exceptions in paragraph 4(a) of Article 1. Thus, for example, a U.S. citizen who is resident in Ukraine may claim benefits in the United States under this Article.