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Article New DTT Cyp-Ukraine

 
18/02/2013
NEW DOUBLE TAX TREATY SIGNED BETWEEN CYPRUS AND UKRAINE

On 8th November 2012, the presidents of Cyprus and Ukraine signed a convention (Tax Treaty) on the avoidance of double taxation and the prevention of income tax evasion.
 
The new treaty will substitute the existing DTT between the former USSR and Cyprus signed on the 29th October 1982, which was honored by Ukraine and was highly favorable among the investors. 

The end of uncertainty 
After the announcement of the signing of the new Treaty, a new era for the business relationships between Ukraine and Cyprus has began.
 
The long period of negotiations came to an end making way for further co-operation among the two countries.
 
Days of uncertainty belong to the past and investors should feel confident enough to continue the exploitation of the business opportunities arising as the new Treaty will be a significant instrument for bilateral investment.
 
Numerous beneficial provisions are included in the new Treaty. It should be noted that no limitation on benefits clause (LOB) is included in the Treaty.
 
Main provisions of the existing DTT of 1982
 
Under the existing DTT, dividends, interest, royalties and capital gains from alienation of shares were not taxable in Ukraine.
 
All the above mentioned income streams bared  0% withholding taxes.
 
 
Main changes in the provisions introduced by  the New DTT
 
The main changes contained  in the new DTT among Cyprus and Ukraine are briefly described below:
 
Article 10 : Withholding tax on dividend payments
 
Where the company receiving the dividend owns at least 20% in the capital of the paying company OR has invested an amount of at least EUR 100.000, a reduced withholding tax on dividends of 5% is applied. In all other cases withholding tax of 15% will be applicable.
 
Article 11 : Withholding tax on interest payments
 
A withholding tax of 2% on interest payments will be applicable under the provisions of the new DT Treaty.
 
Article 12 : Withholding tax on royalty payments
 
In respect of the use or the right to use of any patent, trade mark, secret formula, process or information concerning industrial, commercial or scientific experience, a reduced 5% withholding tax will be applicable under the provisions of the new Treaty. In all other cases a general withholding tax on royalties of 10% will apply.


NEW DOUBLE TAX TREATY SIGNED BETWEEN CYPRUS AND UKRAINE

Article 13: Capital Gains
 
Any gains arising from the sale of shares shall be taxed only in the country of residence of the seller of the shares, even in the case where the assets of the company derive their value wholly from real estate.
 
It is of utmost importance to emphasise on the above provision of the new DTT. The gains realised by Cyprus residents from the alienation of shares in Ukrainian real estate companies will not be taxed in Ukraine.
 
In practice, when a Cyprus Company has a shareholding participation in a Ukrainian Company that possesses immovable property situated in Ukraine, on the disposal of such shares, Cyprus will have the right to impose Capital Gains Tax. However, Cyprus does not impose any Capital Gains Taxes on the sale of securities (including shares), provided that the Cyprus company does not own immovable property situated in Cyprus.
 
It is very important to mention that the vast majority of other double tax treaties of Ukraine provide that taxation of such gains shall  be taxed in Ukraine.
 
Article 24 : Exchange of Information
 
The new Treaty incorporates the latest version of Art.26 of the OECD on the exchange of information, illustrating Cyprus’ commitment to internationally accepted tax standards and transparency. Nevertheless, the Protocol to the Treaty clearly stipulates all the necessary procedural steps relating to a request for information, thus affording to taxpayers maximum protection against the possible misuse of the clause.
 
Effective date
 
Once the ratification procedure of the new Treaty is completed by both countries, the new Treaty will come into effect. If the above mentioned procedure is completed before 31st December 2012, the provisions of the new Treaty would be applicable by the  1st January 2013. Otherwise, the effective date will be postponed until the 1st January 2014.
 
New horizons and prospects for further economic cooperation
 
Despite the fact that all WHT rates have been increased in accordance with the provisions of the New DTT, for most typical business transactions, such increase is considered as insignificant (2%-5%).
 
Cyprus’ remains the primary investment route into Ukraine and by the signing of the New Treaty the competitive advantage of Cyprus has been strengthened. The beneficial provisions of the New Treaty in consideration with the advantageous provisions of the Cyprus tax system, imposes no tax on the gains arising from  the disposal of shares and other securities, imposes no withholding taxes on dividends and imposes no tax on immovable property situated abroad.
 
Furthermore, the provisions recently introduced by the Cyprus Inland Revenue such as the deduction on acquisition costs and the new IP Regime, is expected to further strengthen the international tax planning schemes through Cyprus. Cyprus will continue to be the gateway for Ukrainian investors into the EU but also as a gateway for other foreign investors wishing to invest in Ukraine.
 

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