On November 8, 2012 Ukraine and Cyprus signed a new Convention between the Government of Ukraine and the Government of the Republic of Cyprus for the Avoidance of Double Taxation (hereinafter - the "Convention"). The draft of the Convention was approved by the Cabinet of Ministers of Ukraine on November 5, 2012.
The Convention, which is publicly available, is based on the general principles of the OECD Model Tax Convention on Income and Capital.
In contrast to the currently effective 1982 Convention between the Government of the Republic of Cyprus and the Government of the Union of Soviet Socialist Republics for the Avoidance of Double Taxation of Income and Property (the “Tax Treaty”), which exempts dividends, capital gains, interest payments, and royalty payments from the 15% Ukrainian withholding tax, the Convention provides for taxation at source of:
- at 5% of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) that directly holds at least 20% of the capital of the Ukrainian company paying the dividends or has invested the equivalent of at least EUR 100,000 in the acquisition of shares or other rights in the company, and
- at 15% of the gross amount of the dividends in all other cases.
at 2% of the gross amount of the interest if the beneficial owner of the interest is a resident of Cyprus; and
- at 10% of the gross amount of the royalties if the beneficial owner of the royalties is a resident of Cyprus, and
- at 5% of the gross amount of the royalties paid in relation to scientific works, any patent, trademark, secret formula, process or information concerning industrial, commercial or scientific experience (with no requirement regarding beneficial ownership).
In addition to the above the Convention introduces a mechanism for exchange of information between fiscal authorities, the concept of a “beneficial owner” and brings the rules on permanent establishments into line with the OECD Model Convention.
The Convention will enter into force after Ukraine and Cyprus notify each other on the completion of the relevant procedures required by their respective domestic laws. For Ukraine these procedures will be completed after the Verkhovna Rada (the Parliament) of Ukraine ratifies the Convention. When the Convention enters into force the Tax Treaty will automatically terminate.
The Convention will apply from January 1 of the calendar year following the year in which it enters into force. In other words, if the Convention were to enter into force in 2013 its provisions would apply starting from January 1, 2014.