The news of the new double tax treaty signed by the two countries was welcomed by the business community of both countries as it ended years of speculation and uncertainty as to the outcome of the negotiations and is offering a fresh stable platform for investors to plan their strategies and business interests.
The new treaty was signed on the 8 of November 2012 during the official visit of the president of Ukraine in Cyprus.
Main new provisions
As expected the ultra favorable zero withholding tax regime the old USSR treaty was offering was abandoned for more conventional but again favorable provisions.
- The withholding tax on dividends will be 5% if the holding is at least 20% of the capital of the company paying the dividend OR the overall investments exceeds 100,000 euro. If not then a 15% withholding tax will apply. This in practice only affects dividend payments from Ukraine to Cyprus since dividends paid from Cyprus to foreign nationals and companies are exempt from withholding tax as per local law.
- The new withholding tax on interest was set at 2%. Again in practice this provisions only affects interest payments from Ukraine to Cyprus since interest paid from Cyprus to foreign nationals and companies are exempt from withholding tax as per local law.
- For Royalties 2 rates were imposed. 5% on patents, trademark, copyrights of scientific work, secret formulas, process of information concerning industrial, commercial or scientific experience and 10% on any other cases. There is no withholding tax on payments for Royalties from Cyprus to abroad if the Royalties in question are not earned within Cyprus.
- Gains from the sale of shares are taxed in the country where the seller is resident. This is irrespective of the assets that the company, its shares are being sold, may hold.
- The OECD definition of permanent establishment has been adopted.
Implementation of the new treaty will begin on the 1st of January following the year of ratification by the parliaments of both countries.
It is important to note that any tax withheld can be used as a tax credit in Cyprus on any tax imposed on the same income in the other country.