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9 November 2012

Ukraine and Cyprus Reached New Agreement on Avoidance of Double Taxation

Interfax-Ukraine reported yesterday that following several years of negotiations a new double taxation treaty between the governments of Ukraine and Cyprus was signed yesterday, 8 November 2012, during the visit of Ukraine’s President Viktor Yanukovych to Cyprus. It is due to replace the 30 years' old USSR-Cyprus treaty. That treaty provided for zero per cent withholding on dividends, interest and royalties, and lacked any beneficial ownership or anti-avoidance provisions.

The text of the new convention on the avoidance of double taxation and the prevention of income tax evasion has not been made public yet. However, based on certain comments from the Ukrainian officials involved in the negotiations, the main changes introduced by the new treaty may be summarized as follows:

 

Old treaty

New treaty

Interest

0%

2%

Dividends

0%

5/15%

Royalties

0%

5/10%

Ukraine’s Finance Minister, Yuriy Kolobov who signed the treaty on behalf of Ukraine noted to the press that its terms are better for Ukraine than those of the Cyprus-Russia one, which also replaced the old USSR treaty of October 29, 1982 several years ago.

The signed treaty requires further ratification by the parliaments of both countries in order to enter into force. Unless otherwise provided by the new treaty, if such ratification is completed in 2013, the new treaty can be expected to enter into force from 1 January 2014.

The old USSR treaty currently in force between Ukraine and Cyprus contributed greatly to the success of Cyprus as the most attractive jurisdiction for structuring investments into Ukraine. According to the official statistics, more than 27 % of foreign direct investment into Ukraine comes from residents of Cyprus. This is likely to change over time, as new investors will now have comparable alternatives available, but anti-treaty shopping provisions may prevent existing structures from being replaced rapidly. Coupled with the attempts of the Government of Cyprus to maintain an attractive regime for holding companies and relatively favorable taxation terms for interest payments, Cyprus is likely to continue to play an important role in cross-border tax planning of Ukrainian businesses.

You may address any queries you have to Vladimir Sayenko, Nazar Chernyavsky or Dmitry Ivanusa.

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