Dmytro Perevozchykov, Manager and Partner of the Michael Kyprianou & Co Ukraine LLC, Kiev Office in the Ukraine
On December 11, 2015 the Minister of Finance of Ukraine Ms. Natalia Yaresko and the Minister of Energy, Commerce, Industry and Tourism of the Republic of Cyprus, Mr. George Lakkotrypis have signed the Protocol to the Convention on avoidance of double taxation.
The central objective of the Convention was to maintain the option to pay taxes in one country and to avoid double taxation. Similar Conventions between many countries prevail in most areas of the world.
After the ratification of the Protocol the below amendments will be entered into the Convention:
- Interest on Tax will be increased from 2% to 5%.
- To apply for the 5% rate on the payment of dividends it will be obligatory to hold not less than 20% of the Charter Capital and to contribute €100.000 (one hundred thousand euros) to the same.
- Incomes obtained by residents from Cyprus are not subject to taxation in the Ukraine, when there is a transfer of shares or there are other corporate rights totalling more than 50% of the value if directly or indirectly related to real estate in the Ukraine.
In addition, the amendments introduced by the Convention will come into effect after ratification by parliament and not earlier than 1 January 2019.
The above amendments will to a certain extent increase expenses for Ukrainian and Cypriot companies however any corporate structuring and financing will be evaluated in consideration with the Convention, Ukrainian Currency Control including Cypriot laws.
The attainment of loans from Cyprus companies is a frequent method of financing and non-resident loan contracts are registered with the National Bank of the Ukraine and are considered valid on their registration. For registration an application is provided to the servicing bank to transmit the documents for registration. On the registration of the loan agreement the contracting parties are entitled to transfer the funds on condition of compliance of the currency control regulations that are assessed according to the loan period interest rates indicated below:
- Not more than 1 year – less than 9,8% per annum
- 1 – 3 years – less than 10% per annum
- More than 3 years – less than 11% per annum
The application for the Convention is executed on the commencement of the pay-back period. A typical tax rate for the payment of interest for non-residents is 15% however the Convention provides a lower tax rate of 2% that will be amended to 5%. The rate is considered a withholding tax and will be paid by Ukrainian companies into the Ukrainian state budget. At the time of applying for the lower rate it is also obligatory to provide the Tax Authorities with a Tax Certificate indicating that the non-resident resides abroad.
It is usual for Cyprus companies to act as corporate rights holders of Ukrainian companies and acquire its dividends hence the significance of the amendments. In addition, the payment of dividends will be issued from the net profits and after the 18% profit taxation in the Ukraine.
Furthermore, for international trading purposes many Cyprus companies participate in export/import operations however the amendments of the Convention will not be applicable for this purpose. In export/import operations the most significant issue is currency control and in particular the purchase and sale of currency.
The tax advantages provided in Cyprus is the 12,5% profit tax and the lack of withdrawal tax on the payment of dividends to non-resident shareholders. Cyprus legislation is established on English law and its membership in the European Union is significant for tax planning purposes and the opening of bank accounts.