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Ukraine may terminate Double Tax Treaty with Cyprus


On June 4th 2008, the Ukrainian Parliament considered a draft law on the termination of the 1982 Double Tax Treaty between former USSR and Cyprus.

On this occasion the Ukrainian Parliament failed to adopt a decision on the termination of the Treaty - short by just 3 votes to reach the minimum of 226 required for passing the law.<--break->

However, it appears that the story is not yet over: it follows from discussion during vote that a second attempt to terminate the Treaty may follow shortly.

Please find below a summary of speeches from Parliament, which may well demonstrate the various party positions on this matter.

The Government initiated the draft law for termination of the Double Tax Treaty between the former USSR and Cyprus in May 2008. On behalf of the Government, the Deputy Minister of Finance Mr. Fudashkin gave a short presentation on the motives for the unilateral termination of the Treaty.

In the Government's view, for the current tax system in Ukraine this Treaty is not a treaty on avoidance of double taxation, but rather a Treaty which promotes the "avoidance of taxation". According to the Treaty dividends, interest, royalties and capital gains from alienation of property are not taxable in Ukraine. At that Ukrainian source incomes remain not taxed in the territory of Cyprus.

Such situation effectively results in the avoidance of direct taxation by Ukrainian tax residents.

In fact, the majority of large Ukrainian corporations employ Cypriot companies in order to "optimize" their profit tax position. Part of such profits is reinvested into Ukraine. As of January 2008 Cyprus based companies boasted USD 5.9 billion of investment into Ukraine or 20% of total investments. At the same time Ukrainian businesses invested USD 5.8 billion into Cyprus (94% of Ukraine's total investment abroad). In 2007 Ukrainian companies made payments of around USD 1 billion of income to Cypriot companies.

Mr. Fudashkin further commented that the new treaty was agreed with Cyprus in 2006 but Cyprus currently delays signing the treaty. Meetings with the Minister of Finance of Cyprus in May 2008 showed that Cyprus does not wish to sign the new Treaty and insists on a zero tax rate for dividends and capital gains.

Pro: Members of majority coalition
Mr. Bilorus, Bloc for Yulia Timoshenko, commented that Russia has terminated the similar (i.e. the USSR) Double Tax Treaty and termination of 1982 Treaty by Ukraine will be an incentive for the Cypriot Government to accelerate the conclusion of the new treaty.

Mr. Zhebrivsky, NUNS party, reported that last year Ukraine lost USD 6 billion of state revenue [because of Cyprus], which could have been used to fuel further investments into Ukraine's economy and contribute to social welfare of Ukraine's people. According to the deputy, elimination of loopholes originally created by the Treaty may also help to decrease the tax burden for small and medium sized Ukrainian businesses which do not use tax haven companies and effectively pay tax at full rates.

Mr. Liashko, Bloc for Yulia Timoshenko, invited minority groups to vote for a draft law, suggesting that only a few owners of large businesses benefit from the Treaty and the money [i.e. taxes which

could be levied on Ukrainian source income paid to Cypriot residents] should work for millions of citizens of Ukraine.

Contra: The minority parliament groups
Mr. Simonenko, the Communist Party, is of the opinion that the draft law does not resolve the issue as the current government steals and will continue to steal in this country. He suggested that a new treaty should be signed prior to the termination of the existing Treaty. He did express concern that the Treaty with a country [Cyprus] whose president is member of communist party is challenged first whereas there are many other treaties that protect those crooks that evade taxation.

Mr. Voropaev, the Regions Party, does not support the unilateral termination of the Treaty as this contradicts other existing international treaties and puts pressure on Cyprus to sign a new treaty on the terms suggested by Ukrainian government. In addition he also expressed concern over the failure by the ministries to prepare analysis of the outcomes if the Treaty were to be terminated.

The Parliament chairman supports treaty termination - which follows from his conclusive remarks made before and after the vote. The first vote provided 223 votes and the chairman ordered a second vote due to the alleged technical errors during the first vote. However, again the second attempt resulted in the same 223 votes.

Next steps
Technically, when a draft law is not supported by Parliament it should be removed from the Parliament's agenda. However, in this case, following a number of speeches after the vote and the concluding speech of the chairman, it was noted that the draft law to implement the termination of the Treaty will remain on agenda of the Parliament and the Government is expected to report on the progress with new treaty as soon as possible.

For further information on this topic please contact:

Vladimir Didenko
T. +380 44 492 8282


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