Further to ratification of the Protocol by Ukraine, the Ministry of Foreign Affairs of Ukraine has announced that the relevant interstate procedures for bringing the Protocol into force was completed on 28 November 2019 (Letter of Ministry of Foreign Affairs No 72/14-612/1-3120 of 5 December 2019). Therefore, the Protocol will have effect on and from 1 January 2020.

Further to our previous comment on this, as well as the changes in rates and conditions for dividends and interest income, another notable change relates to the taxation of capital gains.

The Protocol envisages that gains from the disposal of shares in companies (which should not apply to corporate rights in limited liability companies) deriving more than 50 per cent. of their value directly or indirectly from immovable property situated in the contracting state, may be taxed in that state. There are certain exclusions related to sales of such shares.

Importantly, gains from the alienation of any other property (including corporate rights other than shares) as well as shares not deriving their value from immovable property shall be taxable only in the state where the alienator is a resident, provided that those gains are subject to tax in that state.

This means that when a Cypriot company alienates its corporate rights in a company not owning immovables in Cyprus to a Ukrainian company, the latter will have to charge the Ukrainian withholding tax at the 15% rate, as those capital gains are not taxable in Cyprus. In a reverse situation, a Cypriot company would not charge the withholding tax.

As this provision might be regarded as less favourable regarding Article 13 (Capital Gains) compared with e.g. the double tax treaty with Malaysia concluded after the Protocol was signed, Cyprus might seek to renegotiate this Article.

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