On October 30, 2019 Verkhovna Rada of Ukraine ratified the Protocol amending the Convention between the Government of the Republic of Cyprus and the Government of Ukraine for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income”.
Abovementioned Protocol significantly influences taxation of some types of business operational between residents of Ukraine and Cyprus. Of utmost importance are amendments in terms of taxation of dividends and capital gains.
Taxation of dividends – article 10 of the Convention:
Provisions of Convention in current version
Basic rate – 15%
Reduced rate - 5%:
«a) 5 per cent of the gross amount of the dividends if the beneficial owner holds at least 20 per cent of the capital of the company paying the dividends or has invested in the acquisition of the shares or other rights of the company equivalent of at least 100 000 euro from total sum of dividends;»
Provisions of Convention with Protocol amendments
Basic rate - 10%
Reduced rate - 5%:
«a) 5 per cent of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 20 per cent of the capital of the company paying the dividends and at least has invested in the acquisition of the shares or other rights of the company equivalent of at least 100 000 euro;»
Hence, the mentioned changes underline reducing the maximum tax rate from 15% to 10% and tightening the terms of application of the reduced withholding tax rate (5%) upon payment of dividends.
Taxation of capital gain – article 13 of the Convention:
Changes to Art.13 “Capital Gains” shall significantly change the approach to taxation of income from sale of property (which include shares, investment certificates of CIVs, other securities, participatory interest other than shares) in favor of residents of Ukraine:
Provisions of Convention in current version
«4. Gains from the alienation of any property other than that referred to in the receding paragraphs of this Article shall be taxable only in the Contracting State of which the alienator is a resident».
Provisions of Convention with Protocol amendments
«6. Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3, 4 and 5 shall be taxable only in the Contracting State of which the alienator is a resident provided that those gains are subject to tax in that Contracting State».
Considering the above, special attention must be paid to a situation when a Cypriot resident receives income (capital gains) from sales of assets to a resident of Ukraine. Provisions of Cypriot tax legislation do not imply taxation of capital gain income (excluding income received from sales of property located in Cyprus). In accordance with the current version of Convention, abovementioned income shall not be subject to a withholding tax in Ukraine. However, in accordance with the changes provided by the Protocol, income (capital gains) paid from a resident of Ukraine to the Cypriot resident will generally be subject to taxation at source in Ukraine at the rate of 15%.
For instance, after entering into force of the Protocol the sale by a resident of Cyprus of the investment certificates of a collective investment fund in favor of a resident of Ukraine shall be subject to a withholding tax in Ukraine at the rate of 15%. In order to eliminate the negative tax implications it is recommended to change the model. In particular, in the mentioned example – to shift a collective investment fund to a corporate one, and hence, change the type of payments from capital gains to dividends. In such case, the withholding tax in Ukraine may be reduced to up to 5%, and such dividends shall not be subject to corporate income taxation on Cyprus. As such, the total tax burden shall be 5%.
The changes above shall enter into force from the date of receiving by the Contracting States of notifications in writing, through diplomatic channels, on the completion of the procedures required by the domestic law for the bringing into force of the Protocol. Ratification of the Protocol from the Cypriot side is expected till the end of this 2019 year. In such case, the changes shall be applied to the operations starting next year.
What is recommended:
• To monitor the exchange of notifications (to determine the date of the entry into force);
• To revise the corporate structures, including the ones with investment funds, in terms of tax privileges after the Protocol and MLI (PPT etc.) take effect;
• If necessary – to adapt the existing business models to the requirements of the Protocol and MLI.
