Overview of changes in Ukraine’s tax treaties with the United Kingdom, Cyprus and Malaysia

published on 9 December 2019 | Reading time approx. 4 minutes

On 30 October 2019 Ukrainian Parliament ratified the protocols amending Ukraine’s double tax treaties with the United Kingdom and Cyprus and the double tax treaty with Malaysia. The changes in the double tax treaties with the United Kingdom and Cyprus, and the key terms of the double tax treaty with Malaysia are summarised below.

United Kingdom

The Protocol amending the convention between the United Kingdom and Ukraine for the Avoidance of Double Taxation was signed on 9 October 2017. The Protocol introduces the following changes:

1. Article 1 of the convention (personal scope) now provides that income or gains derived by or through an entity or arrangement that is treated as wholly or partly fiscally transparent under the tax law of either contracting state shall be considered to be income or gains of a resident of a contracting state but only to the extent that the income or gain is treated, for purposes of taxation by that state, as the income or gain of a resident of that state.

2. The definition of a resident of a contracting state in Article 4 (Residence) is extended by inclusion of pension schemes and organizations established exclusively for religious, charitable, scientific, artistic, cultural, or educational purposes, even if its income is tax exempt.

3. The amended rules for taxation of dividends are the following:

the reduced 5 per cent rate now applies to dividends payable by a company in which the beneficial owner of the dividends holds directly or indirectly at least 20 per cent of the capital;
in all other cases dividends are subject to 15 per cent tax rate, as opposed to the former 10 per cent tax rate;
dividends are exempt from taxation, if the beneficial owner of the dividends is a pension scheme.

4. The exemption of interest and royalty income from tax in the source state is replaced with taxation at 5 per cent tax rate.

5. The convention is supplemented with the provisions introducing principal purpose test (Article 23) according to the wording of Article 7 of the OECD multilateral convention to implement Tax Treaty related measures to prevent base erosion and profit shifting (BEPS).

6. The convention is supplemented with the provisions on arbitration procedure which can be requested by an interested person, if the issued presented to competent authorities is not resolved within 2 years. The procedure of application of this paragraph shall be determined by competent authorities.

The changes introduced by the protocol of 9 October 2017, will come into force upon completion of exchange of diplomatic notifications and will have effect after the first day of January of the year next following the date on which it enters into force. In respect of income tax and capital gains and with respect to corporation tax in the United Kingdom, the protocol will become effective in the year beginning, respectively, on or after the sixth day or on or after the first day of April next following the date on whichit comes into force. The changes related to arbitration and exchange of information will be effective upon entry into force of the protocol.

Cyprus

The protocol amending the convention for the Avoidance of Double Taxation between Ukraine and Cyprus was signed on 11 December 2015. It introduces the following changes:

1. The new rules for taxation of dividends are as follows:

the reduced 5 per cent tax rate on dividends applies, if the beneficial owner holds at least 20 per cent of the capital of the company paying the dividends and has invested in the acquisition of shares or other rights of the company an equivalent of at least 100,000 euro;
10 per cent tax rate (instead of former 15 per cent rate) applies in all other case.

2. The tax rate on interest income is increased from 2 to 5per cent

3. The updated rules on taxation of capital gains – contained in Paragraph (4) of the restated Article 13 of the convention – now provide that gains from the alienation of shares deriving more than 50 per cent of their value or the greater part of their value directly or indirectly from immovable property situated in the other state, may be taxed in that other state. Paragraph (4) applies with the following exceptions:

it applies only to income from immovable property;
it does not apply to income received from the alienation of the shares:
i) traded on a recognised stock exchange;

ii) in case of a corporate reorganization;

iii) if the immovable property from which the shares derive their value is immovable property in which a
business is carried on;

iv) of a public joint stock company; and

v) and similar interests in a real estate investment trust.

it does not apply to gains from the alienation of the shares, of the alienator is:
i) listed on a recognised stock exchange;

ii) a public joint stock company;

iii) pension fund, insurance fund or other similar business entity.

Gains from the alienation of any property not mentioned in Paragraphs 1 to 5 of Article 13, shall be taxable only in the state of alienator’s residence, provided that such gains are subject to tax in this state.

4. The protocol contains a “most favored nation” clause according to which the parties shall be entitled to revise the articles of the convention applicable to taxation of dividends, interest, royalties and capital gains, if Ukraine agrees to grant any relief or lower tax rate for dividends, interest, royalties, or more favorable conditions of taxation of capital gains in any other tax convention.

The changes of 11 December 2015, will apply from 1 January 2020.

Malaysia

The convention between Ukraine and Malaysia for the Avoidance of Double Taxation was signed on 4 August 2016. The key terms and figures of the convention are the following:

1. A building site, construction, assembly or installation project, or supervisory activities in connection therewith constitute a permanent establishment only if they last more than twelve months.

2. Dividends:

5 per cent rate applies, if the beneficial owner is a company (other than a partnership) which holds directly at least 20 per cent of the capital of the company paying the dividends;
15 per cent rate applies in all other cases

3. The tax rate for interest income is limited at 10 per cent, for royalties – at 8 per cent.

4. The tax rate for technical services, which include any technical, administrative and consultancy services, is set at 8 per cent of the gross remuneration amount.

5. Gains from the alienation of shares or participation interest in a company deriving more than 50 per cent of their value directly or indirectly from immovable property situated in the source state may be taxed in that state.

The convention between Ukraine and Malaysia is already in force and the provisions will have effect from 1 January 2020.