Tax Rate for Dividends in Favour of a Cypriot Shareholder

Tax Rate for Dividends in Favour of a Cypriot Shareholder

The Convention between the Government of Ukraine and the Government of the Republic of Cyprus On the Avoidance of Double Taxation and the Prevention of Tax Evasion Regarding Income Taxes (hereinafter – the Convention) was ratified by the Parliament of Ukraine on July 4, 2013, entering into force on August 7, 2013.

In line with the Art. 26 of the Convention, the provisions of the Convention are applied in Ukrainian-Cyprus tax relations from January 1, 2014.

The SFS recalled that dividends paid by a company – resident of Ukraine to a Cyprus resident may be taxed in Cyprus (clause 1 of Article 10 of the Convention).

On the other hand, such dividends may also be taxed in the state where the blue-chip company is a resident (in case of payment to Ukraine), in accordance with the law of that state, but if the person, the actual owner of the dividends, is a resident of another state, the tax levied in this way (clause 2 of article 10 of the Convention) should not exceed:

  1. a) 5% of the total amount of dividends, if the actual owner holds minimum 20% of the capital of the blue-chip company, or made investments purchasing shares or any other rights of the company with the equivalent of no less than 100,000 euros;

(b) 15% of the total dividends’ amount in all other cases.

The tax authorities also emphasize that in this case the term “dividends” means income from shares or other rights other than debt claims , giving the right to participate in the profits, as well as the income from other corporate rights, subject to the same taxation as the income from shares in accordance with the laws of the state, the resident of which is a distributing profits company (clause 3 of article 10 of the Convention).

At the same time, a tax agent is entitled to apply independently a tax exemption or a reduced tax rate stipulated by the relevant international agreement of Ukraine for the period of income payment to a non-resident if such a non-resident is the beneficial (actual) recipient (owner) of income and is a resident of the country with which Ukraine has concluded international agreements (Section 103.2 of the TCU).

The fiscal authorities believe that in this case, it is a question of payment of dividends accrued (but not paid) within the previous periods, therefore the company has the right to use independently the tax rate, provided by paragraphs “A” n. 2 Art. 10 of the Convention, if at the time of the actual payment of dividends all the requirements of this provision of the Convention are met, namely:

(a) if a person receiving dividends (as a shareholder) is a beneficial (actual) recipient (owner) of dividends, i.e. a person is entitled to receive such dividends;

(b) if the dividends payee , the shareholder, is a resident of Cyprus, as provided by the document that meets the requirements of art. 103 of the TCU and confirms the tax residence of the person in the relevant previous period for which the company has accrued (and should have paid) the dividends;

(c) if the value of the investment, made by the Cyprus resident in the authorized capital of the company (the amount actually paid by the investor the date of acquisition of company’s shares), at the moment of the company’s decision to pay dividends (in the corresponding terms of all previous periods) was equivalent of no less than 100,000 euros ( Source: INC GFSU from 13.11.2018, No. 4798/6 / 99-99-26-02-03-15 / IPK).