International tax planning: international agreements and ways to avoid double taxation

  This complicates reporting, implies double taxation for the programmer, and spoils the tax history. And similar difficulties occur not only for individual entrepreneurs, there is also a risk of falling under tax liabilities when working for several countries:

• Small and medium-sized enterprises that export goods or services.
• International companies and holding structures.
• Investment funds and private investors.
• Taxpayers with assets abroad.

   To avoid paying twice, it is worthwhile to understand in advance how double taxation arises and how to prevent it. As of June 2025, Ukraine has 72 effective bilateral treaties double taxation with various countries of the world. This includes both full conventions and protocols to them. However, these agreements are subject to certain conditions. For example, compliance with the “beneficial ownership” conditions or confirmation of tax residency status. The nuances of doing business “for two countries” should be taken into account at the stage of selecting types of activities and choosing a taxation system, and CeDePe specialists can help with this.

   Double taxation occurs when two different states consider the same person (individual or legal entity) to be their tax resident and impose the same tax on the same income. For example:

• An individual resides in Ukraine but receives income from work abroad. Both countries (Ukraine as the country of residence and the other country as the country of source of income) can claim taxation of this income.
• A legal entity is registered in Ukraine but has a permanent establishment or is managed from another country. In this case, the company may be a taxpayer in both jurisdictions.

  For example, a Ukrainian holding company owns three subsidiaries: in Poland, Germany and the United Kingdom. Each of these companies produces components for electronics, sells them on the European market and pays dividends to the parent company in Ukraine. How are taxes paid?

1. Assume that a subsidiary in Poland earns a profit of €1,000,000. This amount is initially taxed in Poland at the standard corporate tax rate of 19%, meaning that the company pays €190,000, leaving a net profit of €810,000.
2. When a Polish firm decides to pay dividends to its Ukrainian parent company, a withholding tax is withheld from this €810,000. Normally, this rate in Poland can be as high as 19%, but thanks to the Double Taxation Agreement between Ukraine and Poland, it has been reduced to 5%. This reduction applies only if the Ukrainian company has provided the Polish tax agent with a certificate of residence and has held at least 25% of the shares in the Polish company for the last 12 months. If all of these conditions are met, EUR 40,500 (5%) will be withheld from EUR 810,000 and EUR 769,500 will be transferred to the account in Ukraine.
3. Already in Ukraine, the €769,500 received is considered dividend income and is taxed at 18% if the company is a low-profit company. This means that a Ukrainian company must pay tax in the amount of EUR 138,510 and military duty of EUR 11,543, for a total of EUR 150,053. If a company has earned income of UAH 40 million or more during a calendar year and complies with the terms of Article 140.4.3 of the Tax Code of Ukraine, no income tax is payable on dividends received.
4. Since EUR 40,500 has already been paid as a source tax in Poland, this amount is offset against the tax liability in Ukraine (credit method). As a result, the Ukrainian budget is not paid EUR 138,510, but only EUR 98,010 – the difference between the full tax and what has already been paid in Poland.
5. As a result, the total amount of taxes at the level of Poland and Ukraine is EUR 340,053: €190,000 of corporate tax in Poland, plus €40,500 of withholding tax on dividends, and €98,010 of final surcharge in Ukraine.

       To avoid or minimise double taxation situations, the following approaches are used worldwide:

1. The “foreign tax credit method”. The country of tax residence allows a taxpayer to deduct from its national tax liability the amount of tax already paid in the country of source of income. For example, in Ukraine, the income tax payable for the reporting period can be reduced by the amount of tax paid in Poland, provided that a confirmation document from the controlling authority is available.
2. The exemption method. Income, if already taxed abroad, is exempt from taxation in the resident country. It is used less frequently, usually for specific types of income (e.g., foreign income from international transportation, dividends, interest).
3. Reduction of withholding tax rates under the ECT. Many bilateral conventions and DTAs (Double Taxation Agreements) provide that the standard national withholding rate is reduced. For example, instead of a 15% withholding tax on dividends, the source country may withhold only 5% (under certain conditions) if there is a relevant DTA between the states.
4. Tax law hierarchy and mutual agreement mechanisms (Mutual Agreement Procedure, MAP). If two countries have different interpretations of the PPP rules (e.g., with respect to permanent establishment or transfer pricing), the taxpayer can use the MAP procedure to have the tax authorities “help” with the interpretation and avoid disputed charges.
5. The existence of clear conditions of “residence” and “permanent establishment”. PPPs contain “tie-breaker rules” – rules that determine in which country a person is a tax resident if both claim to be. For businesses, it is important to correctly interpret where the head office is located, where management decisions are actually made, where the legal entity is registered, etc

    Many problems with double taxation can be prevented through effective business tax planning and legal support from CeDePe specialists who specialise in international tax law and know how to pay taxes on foreign income in Ukraine. If all possible rules of double taxation treaties are taken into account, businesses and individual taxpayers can reduce tax costs, increase profitability and avoid unpleasant tax consequences of working for a foreign customer during audits. To do this, you will need tax advice on international law from CeDePe, involving experts with experience in multi-country projects.

  Increased transparency and properly prepared international tax reports will help you pay less. When the state and the taxpayer know exactly where the income comes from, how the freelancer is taxed in the source country, and what credit/exemption the resident country allows, the risk of accidental tax double-counting abroad is reduced.