Global Tax Alert | 30 July 2013

New Ukraine and Cyprus Treaty may take effect 1 January 2014

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Both the Cypriot parliament and the Ukrainian parliament have ratified the Ukraine-Cyprus Double Tax Treaty (the Treaty).1 They have also ratified the Protocol to the Convention, an integral part of the Treaty. The two countries signed the Treaty in Nicosia on 8 November 2012. The Treaty will replace the existing USSR-Russia Double Tax Treaty.

As compared to the existing USSR-Cyprus double tax treaty that allows a 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 at least €100,000 in such company.
  • Interest: 2%
  • Royalties: 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 exempt from taxation.

The Convention is based on the OECD Model Tax Convention on Income and on Capital of 2010 (the OECD Model).

Beneficial ownership status of the income recipient is a condition for applying the Treaty's reduced tax rates to dividends, interest and royalties. However, the Treaty does not define beneficial owner.

It is expected that the Ukrainian President will sign the law ratifying the Treaty and that the contracting states will notify each other in writing, through the diplomatic channels, about the completion of all the domestic ratification procedures this year. The Treaty should then take effect on 1 January 2014.

Uncertainties exist, however, about when the USSR-Cyprus Treaty that preceded the new Treaty would lose effect. The Treaty's English text says that the USSR-Cyprus treaty shall end on the date the Treaty takes effect (not on the date it takes force).

But the new Treaty's Ukrainian text says that the USSR-Cyprus Treaty will end when the new Treaty enters into force (ratification).

Although the English text prevails over the Ukrainian, the risk is that the Ukrainian tax authorities will, on the basis of the Ukrainian text, maintain that the USSR-Cyprus Treaty will lose effect when the new treaty is ratified. That means that until the end of the year there could be no treaty protection for income distributed to Cyprus and that the standard 15% withholding tax rate would apply.

Future Alerts will cover developments regarding the Treaty and its application.


1. Cyprus ratified the Treaty on 22 March 2013 and Ukraine ratified the Treaty on 4 July 2013. The Official title is the Convention between the Government of Ukraine and the Government of Cyprus for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLC, Kiev, Ukraine
  • Vladimir Kotenko
    +380 44 490 3006
  • Jorge Intriago
    +380 44 490 3003
  • Igor Chufarov
    +380 44 492 8231
Ernst & Young LLP, Eastern European Business Group, New York
  • Julia Samoletova
    + 212 773 8088

EYG no. CM3688