THE PRINCIPAL PURPOSE TEST IN THE СONTEXT OF THE ASSOCIATION AGREEMENT WITH THE EU AND THE РRACTICE OF UKRAINIAN СOURTS

Abstract

According to Article 376 of the Agreement, Ukraineʼs cooperation with the EU is ensured through the intensification of regional and other international cooperation, particularly within the framework of the Organisation for Economic Co-operation and Development (OECD). Consequently, Ukraine joined the Programme for Enhancing Cooperation with the OECD and committed to implementing the minimum standard of the BEPS Action Plan to combat aggressive tax planning, including improving transfer pricing rules. This has become an effective tool for preventing the erosion of the tax base and the shifting of profits out of taxation.

The general rule against tax abuse is addressed in the BEPS Action Plan under the Principal Purpose Test (PPT). According to this test, when one of the main purposes of a transaction or series of transactions is to obtain benefits provided by tax conventions, such benefits should not be granted unless it is established that granting such benefits would align with the object and purpose of the provisions of the tax convention.

A specific provision on limiting the benefits provided by double taxation conventions (the Principal Purpose Test) is contained in Article 29 of the OECD Model Tax Convention. This article stipulates that, notwithstanding any provisions of the double taxation convention, benefits shall not be granted concerning income or capital if there are reasonable grounds to conclude, considering all relevant facts and circumstances, that obtaining such benefit was one of the principal purposes of any arrangements or transactions that resulted directly or indirectly in that benefit. This is unless it is determined that granting the benefit in these circumstances would be consistent with the object and purpose of the relevant provisions of the convention.

Purpose. Analyzing the category "main purpose test" and identifying the main differences from the concept of "business purpose". On the basis of the study of relevant judicial practice, formulating the main criteria of the Principle Purpose Test.

Results. 1. The Principal Purpose Test is used to determine whether a particular transaction or structure is primarily designed to achieve tax benefits rather than to fulfill genuine business purposes. The PPT is applied specifically in the context of double tax avoidance conventions and aims to prevent the misuse of such conventions to avoid taxation.

1. The concept of a business purpose is assessed in the context of the genuine business objectives and economic circumstances of the transaction. If a transaction has a legitimate business purpose, this can confirm its legality and justification, regardless of whether it also provides tax benefits.
2. To analyze the Principal Purpose Test, that is, to determine whether the primary purpose (or one of the primary purposes) of the operation was to gain the benefits of the relevant double tax avoidance convention, the following criteria should be applied:

– Fact of Interest Payments to Third Parties: determine whether all or nearly all received interest is transferred to third parties shortly after being received from the debtor. This may indicate that the creditor company acts merely as an intermediary and that the main purpose of the operation is to obtain tax benefits.

– Existence of real jbligations to third parties: identify whether the company has real obligations to third parties that necessitate the transfer of interest from the received profit. Such obligations may suggest that the company does not have control over the received funds but acts according to prior agreements with third parties.

– Absence of other economic activity: the lack of other economic activities may indicate that the company was created solely to take advantage of tax benefits.

– Lack of economic presence in the jurisdiction of residence: the absence of economic presence in the jurisdiction of its residence may suggest the artificial nature of the company, created to obtain tax advantages.

– Non-compliance of tax benefits with the objectives of relevant tax legislation: the non- compliance of tax benefits with the objectives of the relevant tax legislation may indicate their improper use to avoid double taxation.