On 16.5.2013 the Ukrainian government submitted a draft law to the Ukrainian parliament to ratify the new double tax treaty and Protocol between Cyprus & Ukraine, which was signed on 8 November 2012.
The new agreement will enter into force once Ukraine and Cyprus have exchanged formal notices of completion of the ratification procedures, and its provisions will take effect from the following 1st January, i.e. if notices of completion of the ratification procedures are exchanged during 2013, the provisions of the new agreement will apply from 1st of January 2014. Until then, the Cyprus-USSR double taxation agreement of 1982 will continue to apply.
The new agreement provides for higher rates of withholding tax than the Cyprus-USSR agreement on dividends, interest and royalties. The maximum rate of withholding tax on dividends will be 5% if the beneficial owner is a resident in the other contracting state and holds at least 20% of the capital of the company paying the dividend or has invested at least €100,000 in it. For investments not satisfying these criteria the maximum rate of withholding tax will be 15%. The maximum rate of withholding tax on interest under the new agreement is 2%. The maximum rate of withholding tax on royalties in respect of copyright of scientific work, patents, trademarks, secret formulas, processes or industrial, commercial or scientific know-how is 5%; and on royalties in respect of literary or artistic work, such as films it is 10%. Any Ukrainian withholding tax paid can be set off against Cyprus tax attributable to the relevant income.
The new agreement retains the highly beneficial arrangements relating to capital gains that currently apply. Capital gains realised by a Cyprus-resident company derived from disposal of shares in a Ukrainian company will continue to be exempt from taxation in Ukraine. The fact that Cyprus imposes no tax on disposals of shares except and to the extent that the gain is derived from real estate in Cyprus, Cyprus companies will continue to be an ideal means of holding real estate in Ukraine, effectively allowing property there to be disposed of tax-free.
The new agreement generally follows the OECD Model Convention, unlike the Cyprus-USSR agreement. It introduces a beneficial ownership concept, defines associated enterprises, updates the definition of permanent establishment and facilitates the exchange of information between the two countries’ tax authorities, subject to the strong taxpayer safeguards contained in Cyprus’s Assessment and Collection of Taxes Law.
