On May 16, 2013, the Cabinet of Ministers of Ukraine submitted a draft law on ratification of a new Ukraine-Cyprus double tax treaty1 together with the related Protocol to the parliament.
Once Ukraine and Cyprus exchange notices on completion of ratification procedures, the new convention will enter into force. Its provisions will, however, only affect taxation of cross-border payments between the two countries starting fromthe 1st of January of the year following the year of its ratification. Thus, if both Ukraine and Cyprus ratify the new convention yet in 2013, it will apply starting from January 1, 2014.
The new convention was signed by Ukraine and Cyprus on November 8, 2012. According to the new treaty, dividends, interest and royalties will become taxable at increased rates of, respectively, 5%, 2% and 5/10%2. Nevertheless, the Ukrainian withholding tax on interest or royalty payments can potentially be set off against the Cypriot tax attributable to the respective types of such income. Capital gains of a Cypriot company derived fromdisposal of shares in a Ukrainian real estate company will continue to be exempt fromtaxation in Ukraine.
Unlike the currently effective USSR/Ukraine-Cyprus double tax treaty, the new treatymainly follows the OECD Model Convention. It introduces a beneficial ownership concept, associated enterprises definition, updates the permanent establishment definition and facilitates the exchange of information between the authorities of the two countries.
Even with the anticipated increase of withholding tax rates on income paid fromUkraine to Cyprus under the new treaty, such rates will, when the treaty takes effect, nonetheless be low and competitive with the rates under Ukraine's other double tax treaties. The overall tax regime of Cyprus remains attractive for investing in Ukraine and competitive as compared with other jurisdictions. It remains to be seen, however, whether recent changes in Cyprus will impact on its continued attractiveness as the country with the largest foreign investment in Ukraine.