Scope to promote and strengthen economic, scientific, technical and industrial cooperation of these two countries on a mutual benefit basis.
Ratification of New DTT between Cyprus and Ukraine
- On 4 July 2013 the Verkhovna Rada of Ukraine approved the bill in Ukraine:
“On Ratification of the Convention between the Government of Ukraine and the Government of the Republic of Cyprus for the avoidance of double taxation and the prevention of fiscal evasion on taxes on income and the Protocol thereto”
– Double Taxation Treaty and Protocol signed on 8 November 2012 in Nicosia, during the visit of the President of Ukraine Mr. Victor Yanukovych in Cyprus.
– The Double Taxation Treaty and Protocol will come in force on notification of of completion of all domestic procedures, effectively by the 1 January 2014.
– The new Double Taxation Treaty will replace the old treaty, between USSR and Cyprus of 1982.
Withholding Tax Rates
The withholding tax rates (WHT) provided are:
A. 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%.
Example:
A Cyprus tax resident company receives dividends from its 100% Ukrainian subsidiary.
Dividends will be subject to 5% withholding tax in Ukraine.
In Cyprus, dividends received from a Ukrainian subsidiary will not be subject to any taxation.
B. Interest (Article 11):
2% WHT.
Example:
A Cyprus tax resident company receives interest income from its Ukrainian borrower.
– Interest income will be subject to 2% withholding tax in Ukraine.
– Interest income less any relevant expenses (i.e. interest expense) will be subject to taxation in Cyprus.
– The withholding tax paid in Ukraine can be used as a tax credit against the taxation generated in Cyprus.
C. Royalties (Article 12):
5% WHT on income from copyright of scientific work, trademarks and formulas. 10% WHT in all other cases.
Royalties arising in a contracting state and paid to a resident of the other contracting state will be subject to 5% withholding tax.
In all other cases the withholding tax rate is 10%.
Example:
A Cyprus resident company receives royalty income on patents from Ukrainian Company.
Royalty income paid in Cyprus subject to 5% withholding tax in Ukraine.
In Cyprus, 80% of the royalty profit is considered as a deemed expense, only 20% of royalty profit subject to 12.5% corporation tax in Cyprus, in effect 2,5% on income.
Since withholding tax is paid in Ukraine used as a tax credit against the tax liabilities raised in Cyprus, therefore no additional tax will be generated in Cyprus.
Permanent Establishment (Article 5) of the OECD Model Tax Convention
The “Permanent Establishment” provisions contained in the New DTT are in accordance with the OECD Model Treaty,
“A fixed place of business where the business of an enterprise is wholly or partly carried on”.
2. The term “permanent establishment” includes especially:
a) place of management;
b) a branch;
c) an office
d) a factory;
e) a workshop, and
f) a mine, an oil or gas well, a quarry or other place of extraction of natural resources.
A building site or construction or installation project constitutes a permanent
establishment only if it lasts more than twelve months.
PE will also include a warehouse or other structure that is used for the sale of goods.
PE any supervisory activities carried out in connection with a construction or installation project for a period exceeding 12 months in a year.
Director’s fees
Director’s fees received by a resident of a contracting state may be taxed in the other state where the company has its residency.
Example:
A Ukrainian individual serves on the Board of Directors of a Cyprus tax resident company and receives director’s fees.
Under the new Treaty, such director’s fees may be subject to taxation in Cyprus and not in Ukraine.
Beneficial Ownership – Right to receive income
Ukrainian legislation, Article 103 § 3 of Tax Code “Beneficial Owner is the individual person entitled to receive such income”.
Under the new DTT nominees and agents are excluded from such income, only the Beneficial Owner.
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):
Gains realised by Cyprus residents from the alienation of shares in Ukrainian companies of any kind as well as real estate companies will not be taxed in Ukraine.
Cyprus Resident Company having a shareholding participation in a Ukrainian Company possessing immovable property located in Ukraine, on disposal of such shares, Cyprus that has the right to impose capital gains tax.
Cyprus fully exempts Capital Gains Tax on the sale of securities (including shares), if immovable property located outside 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.
Conclusion
The Treaty allows Cyprus to remain one of the most beneficial jurisdictions for investment in Ukraine.
Removes the uncertainty and controversy created by the applicability of the old treaty with the former USSR.
Investments in Ukraine through Cyprus will continue to increase in a stable tax environment and planning of future investments.
The new Treaty in combination with the favorable tax system offering the low tax rate of 12.5%, and the legal framework in Cyprus guarantees the required stability and promotes investment, no tax on any dividend income earned, reduced tax rates on any income arising from royalties, whereas no tax is charged in Cyprus for any income relating to the sale of the shares of any company including immovable property which is situated in Ukraine.
