NEW DOUBLE TAX TREATY BETWEEN UKRAINE AND CYPRUS

Signed on 8 November 2012
Following several years of negotiations, a new double tax treaty between the Ukraine and Cyprus was signed on 8 November 2012 during an official visit of Ukraine’s President Viktor Yanukovych to Cyprus.

To replace the USSR – Cyprus double tax treaty of 1982
Once ratified by both countries, the new treaty will replace the USSR – Cyprus Income and Capital Tax Treaty of 29 October 1982, that provided for 0% withholding tax on dividends, interest and royalties, and lacked any beneficial ownership or anti-avoidance provisions.

This treaty has contributed greatly to the success of Cyprus as the most attractive location to base an (intermediate) holding company for structuring investments into the Ukraine. According to official statistics, more than 27 % of foreign direct investment into the Ukraine comes from residents of Cyprus.

Expected to enter into force on 1 January 2014
The treaty will enter into effect on 1 January following the year in which the parties exchange notifications of ratification. Accordingly, it is expected that the treaty will enter into force on 1 January 2014.

Businesses will have by then to consider whether a corporate restructuring including re-allocation of holding and/or financial companies to other jurisdictions is required. The new treaty may force investors to move to comparable jurisdictions, such as the Netherlands. Nevertheless, Cyprus is likely to continue to play an important role in cross-border tax planning of Ukrainian businesses.

Most significant provisions
The most significant provisions of the new double tax treaty between the Ukraine and Cyprus are highlighted below.

Dividends
The withholding tax rate on dividends is 5% if the beneficial owner holds at least 20% of the capital of the company paying the dividends or has invested in the corporate rights of the company equivalent of at least EUR 100,000. In all other cases the withholding tax on dividends will be 15%.

Interest
The withholding tax rate on interest will be 2% if received by the beneficial owner of the income.

Royalties
The withholding tax rate will be 5% on royalties in respect of any copyright of scientific work, any patent, trade mark, secret formula, process or information concerning industrial, commercial or scientific experience if received by the beneficial owner of the income and 10% in all other cases if the recipient is the beneficial owner of the income.

Capital Gains
Capital gains arising from the disposal of shares (irrespective of the underlying assets of the company in which the shares are being disposed of) or any other movable property is attributed to the State where the person making the disposal is tax resident. Consequently, shares in Ukrainian companies can be sold by their Cypriot shareholders without any tax consequences.

Beneficial ownership provisions
The new double tax treaty introduces beneficial ownership provisions in almost articles, including but not limited to payments of dividends, interest and royalties. The income received will only attract the lower rate of withholding tax if the entity receiving the income is the beneficial owner.

This corresponds to international tax approaches as well as to Ukrainian tax legislation requirements. In this respect, in future attention should be paid to the so-called “substance” of foreign companies and ensuring availability of a real office abroad, effective management of the company in the country of its tax residence, availability of appropriate personnel, etc.

Exchange of information provisions
The double tax treaty also introduces general clauses regarding exchange of information between the Ukrainian and Cypriot authorities regarding tax matters. However, currently there is no clear mechanism how such exchange of information would work in practice. This should be further elaborated in the Protocol to the treaty.