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Tax deal with Ukraine key for $12 bln FDIs

17/09/2015 06:09
The deal between the Cypriot and Ukrainian government to amend the bilateral agreement on the avoidance of double taxation, creates expectations that Cyprus will maintain its status as the leader in direct foreign investments in Ukraine.

The agreement is deemed particularly important as it contributes to ending a period of uncertainty caused last December, when the Ukrainian Prime Minister Arseniy Yatsenyuk said that his country wishes to cancel the existing agreement with Cyprus.

The aim is for the new agreement to be implemented from 1 January 2019. Until then the existing agreement will be in force.

According to KPMG partner Costas Markides, who is responsible for international tax services, "the text agreed is in the interests of both countries".

"For Cyprus because it largely maintains the comparative advantages that it previously enjoyed and the primacy in the relevant list of countries maintaining direct foreign investment in Ukraine. For Ukraine because it ensures additional taxing rights with respect to interest payments to Cypriot companies and taxation on the profit from the sale of shares the value of which by more than 50% comes from real estate, from 2019 onwards."

The new agreement provides that in relation to dividends, the tax remains at 5%. However, the beneficiary must be a company which directly holds 20% of the company paying the dividends and has invested at least € 100 thousand in the acquisition of shares or similar rights of the company.

In the previous agreement only one of these two conditions should be in place.

For all other cases, the tax will be 10% on the gross amount of the dividends compared with 15% in the previous agreement.

With regard to the interest, the tax imposed will amount to 5% of the gross amount compared with 2% in the previous agreement.

For capital gains, a special provision is introduced whereby profits from the sale of shares of which more than 50% of their value comes from property may be taxed in the country where the property is situated, however, various exceptions will be taken into account.

In the previous agreement, there was no specific provision.

According to Mr. Markides, the adoption of the provision which ensures that the handling of dividends and capital gains interest rate will not be treated less favorably than those prevailing in other double taxation agreements that Ukraine may agree with other countries (Most Favored Nation) is of outmost importance.

According to the Statistical Service of Ukraine, foreign direct investment in the Ukrainian economy amounted to $ 42.85 bn in early July 2015.

The bulk of it comes from Cyprus ($ 12.27 bn), Germany ($ 5.49 bn), the Netherlands ($ 5.11 bn), Russia ($ 2.69 bn) and Austria ($ 2.35 bn).