On 8 November 2012, the Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (“the Treaty” or “the Convention”) as well as the Protocol to the Convention (“the Protocol”) have been signed in Nicosia. The Treaty is to replace the 1982 Convention for the avoidance of double taxation of income and property (“the Cyprus-USSR Treaty”) as concluded between Cyprus and the USSR. The Convention is based on the OECD Model Tax Convention on Income and on Capital of 2010 (the “OECD Model”).
The most significant changes provided by the Convention are as follows:
Place of effective management
Article 4 of the Treaty (‘Resident’) follows the OECD Model and provides for ‘place of effective management’ test to determine tax resident status of a company in case it is considered to be resident of both Cyprus and Ukraine.
The Convention applies to taxes on income (including income from alienation of movable or immovable property). In case of Ukraine, the Treaty covers only corporate and personal income taxes whereas in case of Cyprus, it also covers the Defence Tax and the Capital Gains Tax.
Article 3 of the Convention provides definitions of the term “Cyprus” and “Ukraine”. The term “Cyprus” explicitly includes the contiguous zone, the exclusive economic zone and the continental shelf as an area within which Cyprus may exercise sovereign rights or jurisdiction. This may be particularly relevant given the recent discovery of hydrocarbons in Cyprus’ exclusive economic zone.
Income from immovable property
Article 6 of the Treaty is in accordance with the OECD Model and explicitly excludes ships, boats and aircraft from the definition of immovable property for the purposes of the Convention. Profit from the sale of shares in ‘property rich’ companies is not covered under ‘Immovable property’ or ‘Capital gains’ articles and should still fall under article ‘Other income’ and, thus, be taxed in a Contracting State (the “CS”) where the alienator is resident.
Article 5 of the Treaty adjusts the definition of ‘permanent establishment’ to be in accordance with the OECD Model to include place of management, place of exploration and extraction of natural resources. A building site/construction or installation project (or supervisory activities thereof) will be considered ‘permanent establishment’ only if it lasts more than 12 months.
Under the Convention the withholding tax rate is limited to 5% if the beneficial owner holds at least 20% of the capital of the dividend paying company or has invested in the acquisition of the shares or other rights of the company equivalent of at least 100,000 Euro. In case these conditions are not met, withholding tax is limited to 15%.
The Cyprus-USSR Treaty provides for a zero withholding tax on interest received from sources in a CS by a resident of the other CS. Under the Convention the withholding tax rate will be limited to 2% provided the beneficial owner of the interest income is resident of the other CS.
Under the USSR-Cyprus Treaty payments for copyrights and licences received from sources in a Contracting State by a resident of the other CS are not subject to withholding tax. Under the Treaty the withholding tax rate is 5% in case of royalties in respect of copyright of scientific work, any patent, trade mark, secret formula, process or information concerning industrial, commercial or scientific experience and 10% for the rest of the royalties (i.e. films etc.).
Elimination of double taxation
The Convention introduces a tax credit method of tax relief and also provides that income which is exempt from tax in one CS may be taken into account by the other CS in calculating the amount of tax on the remaining income.
Exchange of information
The Treaty introduces a new wording of ‘Exchange of information’ article which is in accordance with Article 26 of the OECD Model. The Protocol clearly states that the requesting CS shall provide certain information when making a request for information to demonstrate the foreseeable relevance of the information to the request. This wording is in accordance with Article 5(5) of the OECD Model Agreement on Exchange of Information on Tax Matters. However, the Protocol specifically states that the information requested shall not be provided unless the requesting CS has reciprocal provisions and/or applies appropriate administrative practices for the provision of the information requested.
Entry in force
The Treaty will enter into force once it is ratified by the appropriate bodies in both Cyprus and Ukraine and once the ratification instruments are exchanged by the two countries. The ratification process is expected to be completed in early 2013, therefore the Treaty will be in effect as from 1 January 2014.