Verkhovna Rada of Ukraine ratified Convention about avoiding double taxation between Ukraine and Cyprus

04.07.2013

On the 4^th of July Verkhona Rada of Ukraine voted for adoption of legislative proposal about ratification of Convention between Ukraine`s and Cyprus governments about avoiding double taxation and prevention of tax evasion and Protocol to Convention. For the adoption of legislative proposal on ratification voted 244 out of 352 deputies registered in the session hall. Adopted law ratified the Convention and its Protocol.

As stated in the explanatory note to the law proposal, after conclusion of this Convention, businessmen of both countries would ensure that the profits derived from their business activities in another country, as well as from sources located in their country in the form of dividends, interest and royalties, would not be the subject of double taxation.

The Convention also ensures that businessmen of both countries would be taxed on the same terms established by states.

According to the Convention, instead of the existing zero tax rates, dividends of Ukrainian businessmen would be taxed by rates from 5% to 15%. In particular, actual owner, who owns at least 20% of the company`s capital or capital of the acquisition of shares or other rights of not less than 100 thousands euros, would have to pay 5% of the total amount of dividends.

Income from shares of the remaining shareholders would be taxed by 15% rates.

Also, instead of the existed zero tax rates, there would be 10% tax on royalties, 2% - on incomes from debt-claims. However, transactions on sale of property would be taxed by zero tax rates.

Ratification of the Convention is an important moment for both countries, because residents of Cyprus are the biggest investors in Ukraine (14.52 billions dollars on July 1of 2012) and Ukrainian banks listed in the offshore zone of Cyprus about 53 billions, 397 millions dollars.

Based on:

http://rada.gov.ua/ru/news/

Expert’s opinion

I was particularly pleased with this quote: “…after conclusion of this Convention, businessmen of both countries would ensure that the profits derived from their business activities in another country, as well as from sources located in their country in the form of dividends, interest and royalties, would not be the subject of double taxation”- it`s seems that before adoption of this Convention businessmen hasn`t got any guaranties, that is absolutely untrue! Such guaranties were provided by both countries and there were zero tax rates.

The striking slyness in wording.

So, last offshore bastion collapsed. Free (albeit illusory) cash flow from and to the Ukraine has came to a final end.

Dividends - the essence of purified profit after taxation. In Ukraine, the tax scheme optimizes the taxable turnover of pre-tax income. So, the actual dividends that should be paid now does not remain. Also the entry of dividends to the Ukraine would stop in the nearest future. How are you going to finance elections now?

The output of interest on loans allowed companies to increase gross expenditure. Now this mechanism is closing up. It`s seems, that the input of funds through credit facilities will now be interest-fee. And now, as we can suggest, in near future lawmakers can enact some sort of "imputed tax" on such loans.

Registration of intangible assets on Cyprus wasn’t mass. And, registration of in tangible assets was used only for tax planning schemes, which increases the gross expenditure. Now those operations and those schemes comes to an end.

As we can predict, Cyprus will be used as one of the low-tax jurisdictions, which has traditionally developed infrastructure to work with the post-Soviet space.

After loss of Cypriot bank`s confidence, registration of Cypriot companies seems probably real.

Although, we shouldn’t expect mass evasion of existing holdings

Yaroslav Lomakin ( Managing partner of “Honest&Bright” company)