The new Convention between the Government of Ukraine and the Government of Republic of Cyprus for the avoidance of double taxation and the prevention of fiscal evasion with respect to income taxes (the “Treaty”) has been signed on 8 November 2012, according to the Ukrainian President's press service.

Entering into force

The Treaty should enter into force upon its proper ratification, which, judging by other treaties, could take months and is unlikely to happen in 2012. The Treaty then should apply starting 1 January of a year following the year of ratification (e.g., starting 1 January 2014 if ratified in 2013).

Only unofficial versions of the Treaty are available to us so far and these are inconsistent as to when the existing double tax treaty between Cyprus and the USSR of 1982, which is effective for Ukraine so far, would lose effect.

The English draft reads that the old treaty terminates once the new Treaty starts applying. However, under the Ukrainian version, the old treaty would lose effect once the new Treaty enters into force. The Ukrainian version, therefore, allows for interpretation that between the moment when the Treaty enters into force and 1 January of the next year Ukraine-Cyprus transactions would not benefit from any treaty. In such case the Ukrainian-sourced income of Cypriot companies would be subject to standard 15% withholding tax in Ukraine.

The official texts of the Treaty (whereby English prevails), should be further analyzed to confirm or dismiss the above interpretations. We will keep you informed in this matter.

New rates
As compared to the existing USSR-Cyprus double tax treaty that allows 0% tax rate for most types of income, the Treaty provides for the following key withholding tax rates and conditions:
► Dividends: 5% / 15%
The lower tax rate should apply if the dividends recipient holds at least 20% of the capital of the dividend paying company or has invested in such company at least EUR 100,000.
► Interest: 2%
► Royalty: 5% / 10%
− 5% - for royalties paid in respect of copyright of scientific work, any patent, trademark, secret formula, process or information concerning industrial or commercial experience;
− 10% - for other royalties, in particular for literary or music work, films, software.
► Capital gains from shares (including those deriving their value from real estate) are exempted from taxation.

Beneficial ownership
Beneficial ownership status of the income recipient is a condition for applying the Treaty's reduced tax rates to dividends, interest and royalties.
At that, the Treaty does not provide for definition of a beneficial owner.
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We will be happy to assist you with any further queries you may have on this matter.