Ukraine has signed a new double-tax treaty with Cyprus, to replace the current one which is a legacy from Soviet times.

Although the text of the new treaty has not officially been published, a version has been leaked to the Ukrainian media. This suggests that the new treaty will be based on the OECD model convention. Whereas under the current treaty Ukraine deducts no tax at source on income received in the country, under the new treaty tax will be withheld at the following rates depending on the types of income below:

  • Dividends – 5% provided the Cypriot entity holds a minimum 20% stake in the Ukrainian company paying the dividends or, alternatively, has made an investment of at least EUR 100,000; in other cases, the withholding tax will be 15%;
  • Interest – 2%;
  • Royalties – 5% or 10% depending on the type of IP rights that have been licensed;

Is this bad news for Cypriot-held investments in Ukraine? Well obviously this will not be good news for existing Cypriot-held investments in that investments would become subject to withholding taxes when they were not before. Having said that though, the revised withholding tax regime with Cyprus nevertheless remains competitive relative to the ones imposed under bilateral agreements with other countries. The new treaty is therefore unlikely to result in an exodus of investors in Ukraine from Cyprus towards other jurisdictions.

In addition, Cyprus remains an attractive jurisdiction from which to invest in Ukrainian real estate. The vast majority of double-tax treaties concluded between Ukraine and other countries provide for taxation of the gains made from the disposal of shares in ‘real-estate companies’ (i.e. companies whose principal assets consist of real estate) by the country in which the real estate is located. The new treaty will, in contrast, retain Cypriot investors’ right to pay tax on gains made from the disposal of shares in a Ukrainian real-estate company in their country of residence.

The new double-tax treaty is not yet in force. What is more, following the recent parliamentary elections in Ukraine, members of parliament may be more concerned with distributing seats in parliamentary committees and other important matters until the end of the current year, rather than with ratifying the new treaty with Cyprus. Given that the treaty is due to take effect only one calendar year after its ratification, it is possible that it may only become effective as of 2014.

At the same time, at CMS we have observed a growing trend of clients preferring to establish their holding structures, or even to restructure existing ones, using companies incorporated in other low-tax European Union jurisdictions. The Benelux countries are among the most popular jurisdictions for this purpose. In our experience, an appropriate structuring of investments in Ukraine via such other low-tax European Union jurisdictions is likely to achieve a similar effect as would result under the new double-tax treaty with Cyprus.