Dmytro Perevozchykov, Head of kyiv office, Michael Kyprianou & Co Ukraine LLC
On December 11, 2015 the Minister of Finance of Ukraine Ms. Natalia Yaresko and the Minister of Energy, Commerce, Industry and Tourism of the Republic of Cyprus have signed the Protocol to the Convention on avoidance of double taxation.
In general the main idea of Convention was saved and reserved the possibility to pay the taxes only in one country and to avoid double taxation. The instrument of the similar Conventions is quite popular in most countries of the world and many countries concluded Conventions on double taxation between themselves.
After ratification of the Protocol the following amendments will be entered into the Convention:
- The amount of tax for the interests will be increased from 2% to 5%.
- For application of the rate 5% on payment of dividends it will be necessary to hold not less 20% of the charter capital and compulsorily to contribute 100 thousand euros into the charter capital.
- Incomes are not subject of taxation in Ukraine, obtained by the resident of Cyprus in case of transfer the shares or other corporate rights more than 50% of value of which directly or indirectly related to the real estate based in Ukraine.
Also please note that amendments introduced by the Convention will come into effect after ratification by the parliaments and not earlier than 1 January 2019, that is after 3 years.
The above mentioned amendments on some extent will make more expensive the deals, executed by Ukrainian and Cyprus companies. However, any corporate structuring and development of financing shall be evaluated in complex way considering not only Convention but also Ukrainian currency control, as well as Cyprus laws.
Procurement of loans from Cyprus companies are quite popular way of financing. The loan contracts with non residents shall be registered with National bank of Ukraine and considered as valid from the moment of such registration. For the purpose of registration the relevant loan agreement and the application shall be applied to the servicing bank which transfer the documents for the registration. After registration of the loan agreement the contracting parties have a right to execute the transfer of funds. At which time the significant condition is compliance with currency control regarding interest rate: in case of loan period not more than 1 year – the rate is not more 9,8% per annum, in case of loan period from 1 to 3 years – not more than 10% per annum, and in case of loan period more than 3 year – not more than 11% per annum. Application of Convention is executed at the moment of commencement of the pay-back period. The general tax rate in case of payment of interest to the non-resident is 15%, but the Convention provides the lower tax rate which currently is 2% and after amendments to the Convention will be 5%. Such rates are considered as withholding tax and shall be paid by Ukrainian companies into Ukrainian state budget, because in such case the Ukrainian company acts as a tax agent. At the same time in order to apply the lower rate it is necessary to provide the tax authority with tax residence certificate of non-resident, confirming that the contracting party is the resident of certain country which is provided by the tax certificate. At the same time the subject of taxation is the interests but not principal amount of the loan. Thus it is possible to evaluate the materiality of increasing of tax rate from 2% to 5%. However, the increase of tax rate in 2,5 times is quite significant, but at the same time the economic efficiency is saved.
Quite often the Cyprus companies act as holder of corporate rights of Ukrainian companies and obtain the dividends, that’s why it is necessary to note regarding the amendments of application of tax rate for dividends that the necessity of introduction of 100 thousand euros into charter capital will be significant issue for not large companies, but for large companies such condition will not be interference. Also please note that the payment of dividends shall be carried out from the amount of net profit that is after taxation by profit tax in Ukraine, which is currently is 18% in Ukraine.
In international trading Cyprus companies quite often act as participants of export-import operations, but the amendments of Convention will not be applied to such sphere. In the sphere of export-import operations the most important issue is currency control, in particular the purchase and sale of currency and the rules of its transfer.
At the same time it is necessary to note, that at the present moment there are several significant advantages in Cyprus which remain Cyprus jurisdiction as effective in particular, profit tax is 12,5% and the absence of withdrawal tax in case of payment of dividends to the shareholder which is non-resident. Cyprus legislation is based on English laws, which is quite convenient and flexible. Also the membership of Cyprus in European Union plays the significant role during opening the bank accounts and tax planning.
In case of comparison of tax rates in Cyprus and other popular jurisdiction it is necessary to note, that taxation in Cyprus is quite optimal for most types of taxes.