Cyprus: DTT Creates Investment Gateway to the Ukraine

By Emily Yiolitis, Partner, Harneys, Cyprus (01/02/2013)


Pursuant to several years of negotiations between the governments of Cyprus and the Ukraine, a new tax treaty for the avoidance of double taxation was signed on 8 November 2012 during the visit of the Ukrainian president Viktor Yanukovytch to Cyprus. 

The new treaty aims to replace the Cyprus-USSR treaty, which dates back to 1982 and is currently applicable between the two countries. The Cyprus-USSR treaty initially applied to most of the states that emerged after the dissolution of the USSR, but over the years many ex-Soviet states have negotiated new agreements to replace the original treaty and the pressure has been mounting on the Ukraine and Cyprus to follow suit. 

Cyprus and the Ukraine have traditionally enjoyed strong business ties.  Investment flows eastwards via Cyprus were incentivised by the favourable provisions in the tax treaty that provided, inter alia, for nil per cent withholding taxes on all dividends, interest, and royalties that flowed to and from both jurisdictions. Concluding a new agreement was delayed by several years because of the concern that this relationship may have been disrupted by a less advantageous arrangement. However, the amended provisions of the treaty have obliterated such concerns and set the footing for a continued future of mutual cooperation through tax efficient structuring. 

The principal provisions of the new treaty are analysed below. 

Permanent Establishment 

The definition of a ‘Permanent Establishment’ has been aligned with the definition provided by the OECD Model Tax Treaty. The existing treaty provided that a permanent establishment could not be created for a non-resident if the activities of a related agent (conclusion of contracts on behalf of a non-resident on the basis of a power of attorney) did not constitute such agent’s ordinary professional activities, or if goods were stored in a warehouse. Under the new provisions it is possible that such activities may result in the finding of a permanent establishment, unless the activity is of a preparatory or auxiliary character. 

Dividends, Interest and Royalties 

Dividends will be taxed at source at the rate of five per cent if the beneficial owner holds at least 20 per cent of the capital of the company or has invested in the corporate rights of the company an equivalent of at least €100,000. If these criteria are not met, the dividends will be subject to a 15 per cent withholding tax. 

Interest will be taxed at source at the rate of two per cent with the proviso that such rate may be applied only if it is mutually agreed between competent authorities. The proviso will presumably be clarified by a subsequent notification or protocol. 

Royalties will be taxed at source at the rate of five per cent if paid under a license agreement in respect of any copyright of scientific work, patent, trade mark, secret formula, process or information concerning industrial, commercial or scientific experience or at the rate of 10 per cent in the case of literary work, films and all other cases. 

Although the new rates constitute an expected increase on the current nil withholding tax rates, they remain among the lowest rates of withholding tax on dividends, interest and royalties paid from the Ukraine to any treaty partner. Moreover, it should be noted that withholding tax paid in the Ukraine will be credited against the corporate income tax liability of the recipient’s corporate income tax liability in Cyprus, so the increase in withholding tax may be absorbed by the corporate liability in the hands of the recipient resulting in no additional effective taxation.

One significant change that merits closer attention is with respect to the characterisation of the recipient of such dividends, interest or royalties: whereas such person is referred to as a resident of the other contracting state in the current provisions, the new provisions require that the beneficial owner (and not recipient) of the income be a resident of the other contracting state in order to qualify for the reduced treaty rates of withholding tax. This amendment is in line with beneficial ownership provisions in the latest OECD Model Tax Treaty and shifts the emphasis to substance. 

Capital Gains 

Concerns that the new provisions would shift the taxation of a sale of shares from the country of residence of the seller to the country where the immoveable property is situated (in line with the OECD Model Tax Treaty provision which has also been time-phased into the Cyprus-Russian Federation Protocol) have proved unfounded. The new capital gains article reiterates that capital gains from a sale of shares (including capital gains on disposal of shares in immoveable property-rich companies) is taxed in the country of residence of the seller. In light of the exemption in Cyprus from taxation of capital gains or profits resulting from a sale of shares, shares in Ukrainian companies (including shares representing immoveable property in the Ukraine) may continue to be sold without any tax consequences. 

Exchange of Information 

The exchange of information provisions of the new treaty replicate Article 26 of the OECD Model Tax Treaty and are supplemented by a Protocol, which lists the information any request should be accompanied by in order to forestall the possibility of ’fishing expeditions’. The information to be supplied includes: 


  1. the identity of the person under examination;
  2. a description of the information requested, including the form and manner in which the requesting state wishes to receive the information;
  3. the tax purpose for which the information is sought;
  4. the grounds for believing that the requested information is held by the contracting state to which the request is addressed, or is in the possession or under the control of a person within its jurisdiction;
  5. the name and address of any person who may hold the information requested, if known;
  6. A written statement that the provision of such information is in compliance with the legislation and the administrative practices of the requesting state and that if the requested information was within the state in question, the competent authority may get the information in accordance with its own laws and its ordinary administrative practices; and
  7. a written statement that the contracting state making the request has exhausted all other reasonable means of obtaining the requested information. 


In Cyprus, the relevant implementing legislation is the Cyprus Assessment and Collection of Taxes Law, which contains significant safeguards against abuse of any exchange of information provisions and as a final step requires the Attorney General’s written approval authorising ultimate disclosure on a case by case basis. 

Entry into Force 

The new treaty will enter into force on the date of receipt of the last ratification notice exchanged between the two governments and shall take effect on or after the first day of January in the year following the year in which the ratification occurs. This is likely to be 1 January 2014. Until such time, the existing Cyprus-USSR treaty will apply.  

The new treaty has proven that fears as to the displacement of Cyprus as a gateway for investments into the Ukraine have been unfounded. Cyprus remains a preferred treaty partner with withholding tax rates to rival those of any other treaty partner of the Ukraine and a statement reiteration of the capital gains exemption on the sale of shares in Ukrainian companies, consolidating the position of Cyprus as a favoured holding jurisdiction for Ukrainian shares, including Ukrainian property rich shares.