The Double Tax Convention between Ukraine and Cyp... | KPMG | UA

The Double Tax Convention between Ukraine and Cyprus is ratified

The Double Tax Convention between Ukraine and Cyp...

4 July 2013, the Parliament of Ukraine by adopting the respective draft Law No.24 of 17 May 2013 ratified the Convention between Ukraine and Cyprus for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income (the “Convention”). Based on our information, the ratification procedure thereof was also completed by the Council of Ministers of Cyprus.

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The Convention provides for the following withholding tax rates for payments made between residents of Contracting States:

 

Dividends:

  • 5% (if the beneficial owner holds at least 20% of the capital in a paying company and invested at least EUR 100 000 in its shares or other rights);
  • 15% (in other cases).

Interest:

  • 0% (if the interest is paid to or with the help of the Government or any state political subdivision or state agency as well as under the loan guaranteed, insured or issued by a relevant state authority);
  • 2% (in other cases);

Royalties:

  • 5% (for scientific works, patents, trademarks, secret formulas, processes or information regarding industrial, commercial or scientific experience);
  • 10% (in other cases).

 

The Convention introduces the concept of the ‘beneficial owner of income’ for the purposes of application of the reduced tax rates provided for in the Dividends, Interest and Royalties Articles. Unlike the currently effective Convention between USSR and Cyprus of 1982, the Convention also includes the article specifically addressing the rules for taxation of capital gains.


Further, the Convention introduces the procedure for exchange of information generally in line with the one provided for in the OECD Model Tax Convention as well as more detailed non-discrimination provisions covering,  inter alia,  the rules of non-discrimination with respect to deductibility of interest, royalties, and other cross-border payments for tax purposes.


The new Convention is to enter into force after the respective ratification instruments are exchanged by Ukraine and Cyprus and will be effective in respect to income paid on or after the first January of the year following the year when it takes effect. Accordingly, in case the exchange of ratification instruments occurs in 2013, the Convention will become effective as from 1 January 2014.

 

Due to uncertainties in English version of the Convention, there is a possibility of a time lag when the former convention becomes ineffective and the new one does not enter into force. During such time lag, the payments of dividends, interest and royalties between residents of two Contracting States could be subject to Ukrainian withholding tax at the ordinary rate of 15%. Hopefully, this uncertainty will be solved by way of a mutual assistance procedure or unilateral clarifications by the Ukrainian and/or Cypriot tax authorities.

 

The Convention may have significant impact on the tax position of Ukrainian and international groups operating in Ukraine. KPMG in Ukraine is ready to provide further comments on application of the Convention and discuss alternative structuring options.

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