Key Provisions of the US Ukraine Tax Treaty

The United States and Ukraine have a bilateral income tax treaty to prevent double taxation and coordinate tax administration. Signed in 1994 and effective since 2000, the agreement establishes which country has the right to tax various types of income. The treaty also aims to prevent tax evasion through mutual cooperation and information exchange between the two nations’ tax authorities.

Determining Residency Under the Treaty

Determining a person’s country of residence is a key function of the treaty. An individual is considered a resident of the U.S. or Ukraine if they are liable for tax there based on factors like domicile, residence, or place of management. Because this is first determined by each country’s domestic laws, a person can be considered a resident of both countries simultaneously, creating a dual residency conflict.

The treaty provides a series of “tie-breaker” rules to establish a single country of residence. These tests are applied sequentially until one resolves the issue:

• The location of a permanent home available to the individual.
• If a permanent home is in both countries, the individual’s center of vital interests (closer personal and economic ties).
• If the center of vital interests is unclear, the individual’s habitual abode (where they spend more time).
• If a habitual abode is in both or neither country, the individual’s citizenship.

Taxation of Specific Income Types

Business Profits

The business profits of an enterprise are taxable only in its country of residence. However, the source country may tax profits attributable to a “permanent establishment” (PE) located within its borders. A PE is a fixed place of business, like an office or factory, through which the enterprise operates. If a PE exists, the source country can tax the profits earned through that establishment’s activities.

Dividends, Interest, and Royalties

The treaty limits the tax rates the source country can impose on passive income paid to a resident of the other country. For dividends, the rate is capped at 15%, but is reduced to 5% if the owner is a company holding at least 20% of the paying company’s voting stock. Interest income paid to a resident of the other country is exempt from tax in the source country.

Royalties for intellectual property use may be taxed by the source country at a rate capped at 10%. These reduced rates do not apply if the income is connected to a permanent establishment in the source country.

Income from Personal Services

The treaty has different rules for income from independent personal services (self-employment) and dependent personal services (employment).

Independent Personal Services

Income from independent personal services is taxable only in the individual’s country of residence. However, if the individual has a “fixed base” regularly available in the other country for their work, that country may tax the income attributable to the base.

Dependent Personal Services

Income from employment is taxed in the country where the work is performed. An exception, known as the 183-day rule, exempts this income from source-country tax if three conditions are met:

• The employee is present in the source country for 183 days or less in a calendar year.
• The employer paying the wages is not a resident of the source country.
• The wages are not paid by a permanent establishment of the employer in the source country.

Pensions and Annuities

Private pensions and similar remuneration are taxable only in the recipient’s country of residence. A U.S. resident receiving a private pension from a Ukrainian source would only pay U.S. tax on that income.

A separate rule applies to government benefits. Social security payments and other public pensions are taxable only by the country that pays them. For instance, a U.S. social security payment to a resident of Ukraine can only be taxed by the United States. This rule is an exception to many other treaty provisions.

Income from Real Property

The treaty gives the primary right to tax income from real property to the country where the property is located. This rule covers income from rent or any other use of the property. For example, if a U.S. resident earns rental income from an apartment in Kyiv, Ukraine has the right to tax that income. This also applies to gains from the sale of real property.

The Saving Clause and Its Exceptions

The treaty includes a “saving clause,” a standard feature in U.S. tax treaties that allows both countries to tax their residents (and the U.S. to tax its citizens) as if the treaty did not exist. This means a U.S. citizen living in Ukraine generally cannot use the treaty to reduce their U.S. tax liability on worldwide income. For instance, if a treaty article states that certain income is “taxable only” in Ukraine, the saving clause allows the U.S. to override that provision and still tax the income if the recipient is a U.S. citizen. The clause preserves each country’s right to tax its own citizens and residents under its domestic laws.

The saving clause has exceptions that preserve certain treaty benefits for citizens and residents. Under the U.S.-Ukraine treaty, the provision for social security payments is an exception. This allows a U.S. citizen in Ukraine who receives Ukrainian social security to use the treaty to exempt those benefits from U.S. tax. Other exceptions relate to benefits for students, trainees, and diplomatic agents.

How to Claim Treaty Benefits

A person who determines they are eligible for a treaty benefit, such as a reduced rate of withholding or an exemption from tax, must formally claim that position with the Internal Revenue Service. This is done by filing Form 8833, Treaty-Based Return Position Disclosure Under Section 6114. Filing this form is required when a taxpayer takes a position that a treaty overrules or modifies a provision of the Internal Revenue Code, thereby causing a reduction in tax.

For example, a Ukrainian resident who is treated as a U.S. resident under domestic law but determines their residency is in Ukraine under the treaty’s tie-breaker rules would need to file Form 8833 to disclose this position. The form must be attached to the taxpayer’s U.S. income tax return for the year the position is taken, though it is not required for certain benefits like reduced withholding on dividends handled by a paying agent.

To complete Form 8833, the taxpayer must specify the treaty country and cite the specific treaty articles they are relying on. The form also requires a detailed explanation of the facts supporting the claim and a summary of the nature and amount of the income involved. Failure to file a required Form 8833 can result in a $1,000 penalty for individuals.