On 16 May 2013 the Ukrainian government submitted a draft law to
the Ukrainian parliament to ratify the new double tax agreement and
Protocol between Cyprus and Ukraine, which was signed on 8 November
2012. The draft law on ratification was registered in the
parliament on 17 May 2013.
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
1 January. For example, if notices of completion of the
ratification procedures are exchanged during 2013, the provisions
of the new agreement will apply from 1 January 2014. Until the new
agreement takes effect, 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.
One of the major benefits of the new agreement is that it retains
the highly beneficial arrangements regarding 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, even in the case of
"property-rich" companies. Since 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.
Unlike the Cyprus-USSR agreement, the new agreement generally
follows the OECD Model Convention. 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.
The withholding tax rates on payments from Ukraine to Cyprus under
the new agreement are highly competitive with Ukraine's other
double tax agreements, and the capital gains tax benefits will
ensure that Cyprus retains its favoured position as a portal for
investment in Ukraine. While this is only the first step along the
road to ratification, the rest of the process is expected to move
relatively quickly, given the pressure there has been in Ukraine to
replace the Cyprus-USSR agreement.
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