Tax Gross Up Clause Loan Agreement

The gross-up tax clause generally requires an employer to compensate an officer for the 20% excise duty levied on the golden parachute payment by paragraphs 280G and 4999. The consequence of this clause is that an officer receives all of his payments in golden parachute. That is, the payment plus 20% for excise duty. In response to this practice, the State Tax Administration clarified, in its letter 14086/5/22-5016, its official position on the possibility of using such gross clauses for cross-border transactions by express prohibition. Although the letter explicitly covered only cross-border loans, it was considered that it would also apply to all cross-border transactions. Nevertheless, many Ukrainian lawyers continue to express the position that this letter is merely an opinion with which it is possible to disagree and be ignored (see the IFLR briefing of the registry of 3 June 2010). Under a standard gross payment clause, the interest and other taxable amounts that a Ukrainian debtor must pay under the typical cross-border loan contract must be deducted from the withholding tax that the non-resident creditor must pay to the Ukrainian tax authorities. The gross hedging clause thus defers the tax burden from the creditor to the debtor, who must then withhold the amount of tax owed by the creditor. Ukraine`s new tax code expressly prohibits the inclusion of a so-called “gross up” clause in cross-border agreements, particularly for cross-border loans. This is a common market practice for loan contracts (also known as facilitated contracts), whether bilateral or syndicated, so that, in practice, non-tax contractual clauses have always been included in cross-border loan contracts, as this provision was vaguely languaged. 1.1. Gross-Up.

Despite any other clause in this agreement, if apparently as a response, the ban on the gross up clause was explicitly included in Article 161 of the tax code. Article 161 prohibits the inclusion of crude clauses in any type of cross-border agreement. Any gross clause, which is nevertheless contained in a cross-border contract, is non-contractual. Accordingly, the National Bank of Ukraine should refuse to register agreements with such “gross” clauses (for which registration of foreign payments is required in accordance with current foreign exchange control rules) and the service bank (the bank by which payments abroad must be made under an agreement made by a resident debtor in accordance with Ukrainian foreign exchange control rules) should refuse to make transfers abroad on the basis of these agreements. The prohibition on detention is general and applies to any form of detention. It would, for example, prevent the borrower from deducting an amount owed to the borrower by the lender. An exception to the prohibition is that any deduction imposed by law can be deducted from a payment. Since withholding tax on interest is generally the only type of statutory deduction for loan payments, the only withholding tax authorized under a loan is probably withholding tax, so the prohibition applies to any other type of withholding that is not required by law. Similarly, the borrower`s gross proceeds, where the tax is legally required to withhold a payment (e.g.B. withholding tax on interest), requires (subject to limited exceptions) a borrower to pay an additional amount that, after deducting tax, the lender with the same amount as it would have been eligible if no payment tax would have been required – what is known as gross tax as a result of the above restrictions on services and interest rates, and the relatively high interest rates set for most Ukrainian borrowers, the solution to mitigate the effects of the ban on the gross clause will generally be a combination of both approaches by imposing higher and higher interest rates.