On 4th July 2013, Ukraine parliament approved the bill for ratification of the new double tax treaty of Cyprus – Ukraine on income and capital that was signed back in November 2012.
If Cyprus ratifies the treaty and the notification are exchanged during 2013, then the new treaty will be applicable from 1 January 2014. The new double tax treaty will replace the Cyprus – Former USSR Income and Capital Tax Treaty of 1982.
We outlined below the most important elements of the treaty;
Withholding Tax Rates
The withholding tax rates (WHT) provided in the treaty are:
- Dividends (Article 10): 5% WHT, if the holding participation is at least 20% or the direct investment is 100,000 Euros. In all other cases the WHT imposed will be 15%
- Interest (Article 11): 2% WHT
- Royalties (Article12): 5% WHT on income from copyright of scientific work, trademarks and formulas. 10% WHT in all other cases.
In order to benefit from the favourable provisions of the New DTT the recipient of the income must be the beneficial owner of that income, regardless of whether it involves income from dividends (article 10), interest (article 11) or royalties (article 12). The Cypriot domestic legislation does not provide a definition as to who constitutes a “beneficial owner”, but the Ukrainian tax legislation does. In fact, the beneficial owner for Ukrainian purposes is the individual that is entitled to receive the said income (nominees and agents are excluded).
Permanent Establishment (Article5)
The Permanent Establishment (PE) provisions contained in the New DTT are in accordance with the OECD Model Treaty. Nevertheless there have been some additions made to the definition of PE. Namely a PE will include a warehouse or other structure that is used for the sale of goods. In addition, any supervisory activities carried out in connection with a construction or installation project for a period exceeding 12 months in any given year will also be considered as a PE. Instead of …….%
Immovable Property (Article 6)
Any income generated from immovable property located in either of the Contracting States, may be subject to tax at the state where the immovable property is located.
Capital Gains (Article 13)
It is of utmost importance to mention that, gains realised by Cyprus residents from the alienation of shares in Ukrainian real estate companies will not be taxed in Ukraine. In practical terms this means that when a Cyprus Company has a shareholding participation in a Ukrainian Company possessing immovable property located in Ukraine, on the sale of such shares, it is Cyprus that has the right to impose capital gains tax. However, Cyprus does not impose any Capital Gains Tax on the sale of securities (including shares), provided that such a Cyprus company does not own immovable property located in Cyprus.
Elimination of Double Taxation (Article 21)
Income tax which may be payable by a resident of a Contracting State in the other Contracting State shall be tax deductible in the state of residence. Such deduction will be equal to the income tax paid in the other Contracting State.
Exchange of Information (Article 26)
Do note that the exchange of information provisions contained in the treaty, are identical with the provisions of the OECD model treaty. Namely, information will be exchanged where it is “foreseeable relevant” for the purpose of carrying our the provisions of the DTT and domestic laws. Contracting States however, are not required to carry out procedures which are in violation of their domestic laws.
The entry into force of the New DTT between the Ukraine and Cyprus will occur in the year following the ratification by both signatory countries. In the case of Cyprus, ratification can be carried out within 10 days. Therefore, if the Ukraine carries out all the relevant procedures that their domestic legislation requires before the end of 2012, the New DTT could enter into force on 01 January 2013.