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The Ministry of Finance of Ukraine and the Republic of Cyprus have Agreed on the Tax Rate Revision of Certain Passive Incomes

27.07.2015

Author: Iryna Kalnytska
Source: CEE Legal Matters

As a result of the second round of negotiations between representative of Republic of Cyprus and Deputy Minister of Finance of Ukraine it was agreed to revise certain passive income tax rates determined by the Double Tax Treaty between the mentioned countries.
The main goal of such changes for Ukrainian government is to increase the budget revenues by means of expending the tax base and combating the tax evasion.

The Ministry of Finance and the Government of Cyprus undertook to sign the new Double Tax Treaty that should be in line with the OECD recommendations. Although Ukraine is not a member of the OECD, in February 2013 the Government of Ukraine approved an action plan regarding deeper cooperation between Ukraine and the OECD during 2013-2016. Moreover, on 2 July 2014 a memorandum on mutual understanding and deeper cooperation between the Government of Ukraine and the OECD was concluded. According to the above-mentioned agreements, Ukraine has set a goal to adjust to the OECD model tax convention for all running contracts in order to prevent capital outflow abroad.

The main changes in DTT with Cyprus will be the increase of the tax rate on passive income received in the signatory country.
In particular the most important changes will be the following:

  • A mandatory condition for the application of a 5% withholding tax on dividends will not only a 20% share of ownership in a company that pays dividends but also an invested at least 100 000 EUR to the nominal share capital of the Ukrainian company. The crucial moment is that now either if the above-mentioned condition may be met in order to receive the incentive. In the event of introduction of the new rules both conditions will be obligatory.
  • An agreement on a 5% tax rate for the payment of interest (now it’s only 2%).
  • In Ukraine incomes are not taxed where residents of Cyprus receive from the disposal of stock and other corporative rights, more than 50% of costs which are connected directly or mediated with estate or property located in Ukraine.

If the Convention is signed and ratified by the respective Parliaments of Ukraine and Cyprus, the new conditions of taxation on passive incomes will come into force, as stated in Article 27 of the valid Convention, no sooner than 2019.

In general, the introduction of the said changes in the DTT with Cyprus is quite predictable and even an inevitable measure as a part of Ukrainian government’s policy aimed at combating with aggressive tax planning.

Actually, such changes are not the first amendments of the tax rates in DTT with Cyprus. The last changes that were introduced in 2013 and took effect in 2014 did not affect the cooperation of Ukrainian business with Cyprus substantially (despite all assessments). The national legislation of Cyprus is still very attractive and provides for zero withholding tax on passive income and total exemption of dividends from taxation. Therefore, even if the new alterations will be introduced in the DDT with Cyprus the jurisdiction will remain quite attractive and popular for Ukrainian business.

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