Protocol to Double Tax Treaty between Ukraine and Cyprus

29 December 2015
Iryna Kalnytska
GOLAW Law Firm Senior Associate
On 11th of December the new Protocol to Double Tax Treaty between Ukraine and Cyprus was signed. The provisions of the new Protocol aimed at eliminating of such harmful practices in international corporate restructuring as treaty shopping and indirect alienation of the immovable property that results in double non taxation.

Namely, the new Protocol amends the conditions for application of reduced  withholding tax  related to payments of dividend and  interest and amend the procedure of taxation of capital gains.

In particular, after the Protocol enters into force in order to apply 5% WHT on dividends the company shall be the beneficial owner of such dividends and holds directly at least 20% of the capital of the company paying dividends and at least invest on the acquisition of the shares of the company of at least EUR 100 000 (previously such conditions were interchangeable).

With regard to the interest, the amount of the WHT tax is increased up to 5% (previously it was 2%).

New anti abuse provisions were added to the Article 13 related to the taxation of the capital gains from alienation of  immovable property.

In particular, gains derived from alienation of shares deriving more than 50% of their value directly or indirectly from  immovable property situated in Contracting state (Ukraine for instance) shall be taxed in such Contracting state (Ukraine for instance).

In other words, if a Cyprus company sells the shares in a Ukrainian company and more than 50% of the value of such shares derives from immovable property, the taxes shall be paid in Ukraine.

However, such limitation does not apply if the shares  of the company that are alienated are  (i) traded on the stock exchange, (ii) in the course of the a corporate reorganization  (iii) if the immovable property from which the shares derived their value is immovable property in which the business is carried on, (iv) of a public company, (v) similar interest in the Real Estate Fund.

Also, such limitation does not apply if the alienator is: (i) listed on the approved stock exchange, (ii) public company, (iii) a pension fund or similar fund.

Such provisions  remind the standard Limitation of benefit clause the implementation of which is envisaged in  Action 6 of the OECD BEPS Plan.

However, there are lot of questions to such new procedure of taxation of capital gains and its implementation to Ukrainian legislation. Namely, who will be responsible for the payment of the tax, what tax exactly shall be paid (tax from alienation of immovable property/capital gain tax), how the tax base will be calculated etc…

The previsions set forth in the Protocol will enter into force not earlier than 1st of January 2019, so Ukrainian business  still has  some time to restructure its business in a proper way.