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Signature of the Protocol to the double taxation agreement between Cyprus and Ukraine

The Cyprus Ministry of Finance has announced that the Protocol to the double taxation agreement between Cyprus and Ukraine, which was agreed in September 2015, was formally signed on 11 December. The existing double taxation agreement entered into force on 1 January 2014. The Protocol, when formally ratified by both countries, will enter into force no earlier than 1 January 2019.
According to the announcement issued by the Cyprus Ministry of Finance a “most favoured nation” clause has been agreed for the taxes on interest, dividends, royalties and capital gains, ensuring that Cyprus is treated no less favourably than any other of Ukraine’s double taxation agreement counterparties in the future.
An announcement on the website of the Ukrainian Ministry of Finance provides more details of the amendments made by the Protocol.
Dividends
The current double taxation agreement provides for withholding tax at 15% on dividends paid by Ukrainian companies to Cypriot shareholders, with a reduced rate of 5% if the beneficial owner owns more than 20% of the share capital of the company paying the dividend or has invested more than €100,000 in the shares. Under the Protocol the lower rate will apply only if both conditions are satisfied.
Interest
Under the current double taxation agreement the rate of withholding tax on interest paid by a Ukrainian debtor to a beneficial owner in Cyprus is 2%. When the Protocol takes effect it will increase to 5%.
Capital gains
The current double taxation agreement provides that capital gains derived from movable property, including shares in so-called “property-rich” companies, the assets of which principally comprise immovable property, are taxable only in the country of residence of the person making the disposal. When the Protocol enters into force, which will not be before 1 January 2019, gains on shares in “property-rich” companies will also be taxable in the country in which the immovable property is located.
Conclusion
Subject to ratification by both countries the new Protocol provides a basis for the existing DTA to continue until at least 1 January 2019, the earliest date on which the Protocol may enter into force. While the Protocol provides slightly reduced benefits after that date compared with the current DTA, the “most favoured nation” provision means that they will be at least as attractive as under any other of Ukraine’s DTAs.