Analyzing the New Double Tax Treaty Between Cyprus and Ukraine

December 2, 2012

New Double Tax Treaty

 

Analyzing the New Double Tax Treaty Between Cyprus and Ukraine: Cyprus and Ukraine Government has just entered into a new Double Tax Treaty signed last 8 November 2012. This was done during the official visit in Cyprus of Mr. Viktor Yanukovych, the President of Ukraine. The new treaty entails revisions to the existing Double Tax Treaty between Cyprus and the USSR, but is to have full effect only after its 1 year of ratification, which will commence on 1 January 2014. With this news, many are interested to learn how these will affect current businesses in both regions.

Article 10: The Dividends

The New Double Tax Treaty with Ukraine states that a maximum withholding rate of five percent (5%) is to be applied to beneficial owners residing in either Cyprus or Ukraine who holds a minimum of twenty percent (20%) of the company’s capital or who may have invested €100.000 by buying shares or rights of the company. Otherwise, the withholding tax rate will be at fifteen percent (15%).

Article 11: The Interest Rate

In the case of the withholding tax to be applied for interests, both countries believed it is beneficial to grant the 2 percent (2%) withholding tax rate for interests.

Article 12: The Royalty Rate

In terms of the royalties that has to be paid, both agreed that a maximum rate of 5% on royalties will be sufficient and would cover patents, scientific works, scientific know-how, secret formulas, and industrial processes. Nevertheless, a rate of 10% will be applied on literary works including films.

Article 26: The Exchange of Information

This specific provision in the New Double Tax Treaty has been patterned to the OECD Model Treaty with the following rules pertaining to the request of information:

  1. Identity of the person under examination
  2. The tax reason behind the request for such an information
  3. Statement of information requested and form from the Contracting State that wishes to receive the said information
  4. Supplementary reasons that pushes the fact such information may be under the safeguard of the person under the jurisdiction of either Cyprus or Ukraine
  5. The name and address of the individual who is believed to hold the requested information
  6. A written statements specifying that the request is in compliance of administrative and legislation practice of the state requesting the information; otherwise, it has to be given only after laws and administrative processes of the receiving party has been granted
  7. A written statement that shows evidence that the requesting state has done the best to obtain information on its own end but has failed to do so; thus, the need for assistance

The above documents have to be submitted before any information pertaining to the account of beneficial owners and the like can be provided by the State. With this, the confidentiality of the end owner of companies and establishments remain safe because only under extreme need will their information be disclose to another party. Furthermore, the Cyprus Assessment and Collection of Taxes Law safeguards any abuse with exchange of information provisions.

Rule Pertaining Permanent Establishment

It was ruled that the definition of permanent establishment has to be slightly changed in compliance with the OECD Treaty. Under this, a site or project can only be considered a permanent establishment if and only if it will last for more than 12 months; otherwise it wouldn’t be qualified under this category. This includes ancillary properties like livestock and equipment that are used in the agriculture and forest industry. However, it excludes aircrafts, boats and ships.

Income generated from immovable party will be liable to taxation only from the country where this is located. This saves owner from double taxation, if and only if, that country has also signed similar DTT agreement with Cyprus or Ukraine. Otherwise, the possibility of needing to pay tax will be inevitable. Therefore, it is certainly wise to review taxation rules and DTT agreements of the country before choosing it as home for your next business enterprise.

Conclusion:

The loss of zero withholding taxes on royalties, interests, and dividends are inevitable, but the rate applied to it by both countries remains very modest in comparison to neighboring countries. This makes Cyprus the most favored partner of Ukraine and adds to its claim of being one of the most favorable countries to invest due to the low tax rates and its implementation of strict confidentiality of information.