Cyprus and Estonia have concluded a new double tax treaty on 16 February 2011. Details of the new treaty are not available yet. Since Estonia did not apply the 1982 double tax treaty between Cyprus and the former Soviet Union, this is the first double tax treaty ever concluded between the two countries.
5 Germany-Cyprus double tax agreement
A new tax treaty replacing the original 1974 treaty between Cyprus and Germany was signed by the representatives of the countries on 18 February 2011. The treaty, being the outcome of negotiations launched in 2005, will enter into force after the parties exchange instruments of ratification.
The following are the key changes introduced by the new agreement:
The main changes are outlined below:
The Agreement's appliance on taxes has been expanded to include further forms of tax such as the Cyprus corporate income tax and the capital gains tax.
A new definition is also provided on the Protocol to the Agreement according to which the 'place of effective management' will be considered as the place where the key management decisions are taken, that is where the senior partner/s make such decisions.
Article 5 (Permanent Establishment): In relation to permanent establishments (PE), a building site or construction or even any supervisory activities in connection with the aforementioned will be considered as a PE when it lasts more than 12 (previously six) months. Furthermore, the term PE is further restricted by the exclusion of any preparatory or auxiliary activity as PE.
Article 6 (Income from immovable property): The two countries have, further, decided to include income of agriculture or forestry as an income of immovable property but to exclude income from immovable property used for the performance of professional services, which was included on the 1974 Treaty.
Article 8 (Shipping, inland waterways transport and air transport): Significant additions have been established on shipping. Profits from the operation of boats engaged in inland waterways transport are going to be taxed in the Contracting State in which the enterprises' effective management is situated. Profits have also been extended to include profits from rentals of ships, aircrafts, the use or rental of containers, as well as tasks performed for the operation of the ship.
Moreover, the new Agreement completely abolishes the provision according to which Germany could tax profits of a Cyprus resident company or partnership, owed more than 25% by a non-Cypriot-resident, if it could not prove that the tax appropriate is equal to Cyprus tax.
Article 9 (Associated enterprises): A new provision has been introduced according to which adjustments on tax imposed on an enterprise need to be made when an associated enterprise has been taxed in the other Contracting State, and those profits would have accrued to the first enterprise if they were not associated.
Article 10 (Dividends): An amendment on dividends has been established according to which, where the dividends are taxed in the State in which the company paying the dividends is a resident and the beneficial owner of those dividends is company and a resident of the other State, then the charge should not exceed 5% of the gross amount of the dividends (before 10%) if the Beneficial owner holds directly at least 10% (before 25%) of the capital of the company paying the dividends.
Moreover, a new restriction is introduced. A State will not impose tax on dividends paid where a resident-company of a Contracting State derives income or profit from the first State, unless dividends paid to a resident of the other Contracting State or the holding in respect of which the dividends are paid is effectively connected with a PE in that other Contracting State.
The limitation on the German tax on dividends paid to a Cyprus-resident-company by a Germany-resident-company is abolished. This is due to the change from imputation system to the so called partial income procedure for corporate income tax purposes. The tax rate for companies is the same regardless whether the profits are kept within the company or issued to the shareholders as dividends.
Article 11 (Interest): The provision on interest is made absolute by stating that interest derived from a Contracting State shall only (previously may) be taxed in the other Contracting State where its beneficial owner is a resident. The exemption from tax on interest paid to governmental institutions is abolished. The term interest is slightly extended but the penalty charges for late payment are excluded for interest purposes.
Article 12 (Royalties): The term royalties has been slightly extended to include new provisions, while the special case of royalties taxed from the right to use cinematograph films is abolished. Furthermore, a specification is introduced on which royalties shall be taxed in the Contracting State of which a PE related to the royalties paid is established, irrespectively of whether the person paying the royalties is a resident of a Contracting State or not.
Article 13 (Capital Gains): In terms of capital gains, there is a new provision referring to profits arising out of shares connected to immovable property. Also, the provision sets a minimum percentage, where at least 50% of the value of the shares is connected to immovable property situated in another country. In this case, the profit may be taxed where the property is located.
With regard to the taxation on capital gains arising out of the alienation of ships or aircraft, there is a new provision as a follow up to Art. 8 mentioned above, which provides that these profits are taxed only in the contracting state where the effective place of management is situated.
Article 25 (Exchange of information): The new Agreement gives a wider power on the two countries to exchange information on a tax payer when it is foreseeably relevant (previously necessary) for the purposes of the Agreement or for the purposes of domestic laws (previously only for the purposes of the Agreement).
The relevant authorities of the countries involved may at any time require information and personal data on a taxpayer, if it is considered necessary. Any information received by the authorities shall be treated as confidential. In the case of Cyprus Authorities, Cypriot Law 72(I)/2008 on the Collection of Taxes, provides that the Director of the Tax Authorities shall only supply foreign tax authorities (signatories of a DTT) with information if he has received substantial details about the concerned person and the reason for the request of information. This provision seems to have been put in place to ensure that the foreign tax authorities do not engage in “fishing expeditions” without having any real evidence against the person under investigation. As a further control mechanism, the Cypriot Law provides that the Director of the Inland Revenue shall only supply information if he has obtained the written consent of the Attorney General of Cyprus.
An interesting point added by the follow up Protocol is that the receiving authority shall bear liability in accordance with its domestic laws in relation to any person suffering unlawful damage as a result of the supply under the exchange of data. The Protocol remains silent as to what the consequences will be where there is an issue of unlawful damage. It also fails to determine what such damage entails.
6 Cyprus starts double tax treaty negotiations with Indonesia
According to a press release published by the Indonesian Ministry of Foreign Affairs on 1 March 2011, Cyprus and Indonesia have agreed to commence negotiations for the conclusion of a new double tax treaty.
5 Germany-Cyprus double tax agreement
A new tax treaty replacing the original 1974 treaty between Cyprus and Germany was signed by the representatives of the countries on 18 February 2011. The treaty, being the outcome of negotiations launched in 2005, will enter into force after the parties exchange instruments of ratification.
The following are the key changes introduced by the new agreement:
The main changes are outlined below:
The Agreement's appliance on taxes has been expanded to include further forms of tax such as the Cyprus corporate income tax and the capital gains tax.
A new definition is also provided on the Protocol to the Agreement according to which the 'place of effective management' will be considered as the place where the key management decisions are taken, that is where the senior partner/s make such decisions.
Article 5 (Permanent Establishment): In relation to permanent establishments (PE), a building site or construction or even any supervisory activities in connection with the aforementioned will be considered as a PE when it lasts more than 12 (previously six) months. Furthermore, the term PE is further restricted by the exclusion of any preparatory or auxiliary activity as PE.
Article 6 (Income from immovable property): The two countries have, further, decided to include income of agriculture or forestry as an income of immovable property but to exclude income from immovable property used for the performance of professional services, which was included on the 1974 Treaty.
Article 8 (Shipping, inland waterways transport and air transport): Significant additions have been established on shipping. Profits from the operation of boats engaged in inland waterways transport are going to be taxed in the Contracting State in which the enterprises' effective management is situated. Profits have also been extended to include profits from rentals of ships, aircrafts, the use or rental of containers, as well as tasks performed for the operation of the ship.
Moreover, the new Agreement completely abolishes the provision according to which Germany could tax profits of a Cyprus resident company or partnership, owed more than 25% by a non-Cypriot-resident, if it could not prove that the tax appropriate is equal to Cyprus tax.
Article 9 (Associated enterprises): A new provision has been introduced according to which adjustments on tax imposed on an enterprise need to be made when an associated enterprise has been taxed in the other Contracting State, and those profits would have accrued to the first enterprise if they were not associated.
Article 10 (Dividends): An amendment on dividends has been established according to which, where the dividends are taxed in the State in which the company paying the dividends is a resident and the beneficial owner of those dividends is company and a resident of the other State, then the charge should not exceed 5% of the gross amount of the dividends (before 10%) if the Beneficial owner holds directly at least 10% (before 25%) of the capital of the company paying the dividends.
Moreover, a new restriction is introduced. A State will not impose tax on dividends paid where a resident-company of a Contracting State derives income or profit from the first State, unless dividends paid to a resident of the other Contracting State or the holding in respect of which the dividends are paid is effectively connected with a PE in that other Contracting State.
The limitation on the German tax on dividends paid to a Cyprus-resident-company by a Germany-resident-company is abolished. This is due to the change from imputation system to the so called partial income procedure for corporate income tax purposes. The tax rate for companies is the same regardless whether the profits are kept within the company or issued to the shareholders as dividends.
Article 11 (Interest): The provision on interest is made absolute by stating that interest derived from a Contracting State shall only (previously may) be taxed in the other Contracting State where its beneficial owner is a resident. The exemption from tax on interest paid to governmental institutions is abolished. The term interest is slightly extended but the penalty charges for late payment are excluded for interest purposes.
Article 12 (Royalties): The term royalties has been slightly extended to include new provisions, while the special case of royalties taxed from the right to use cinematograph films is abolished. Furthermore, a specification is introduced on which royalties shall be taxed in the Contracting State of which a PE related to the royalties paid is established, irrespectively of whether the person paying the royalties is a resident of a Contracting State or not.
Article 13 (Capital Gains): In terms of capital gains, there is a new provision referring to profits arising out of shares connected to immovable property. Also, the provision sets a minimum percentage, where at least 50% of the value of the shares is connected to immovable property situated in another country. In this case, the profit may be taxed where the property is located.
With regard to the taxation on capital gains arising out of the alienation of ships or aircraft, there is a new provision as a follow up to Art. 8 mentioned above, which provides that these profits are taxed only in the contracting state where the effective place of management is situated.
Article 25 (Exchange of information): The new Agreement gives a wider power on the two countries to exchange information on a tax payer when it is foreseeably relevant (previously necessary) for the purposes of the Agreement or for the purposes of domestic laws (previously only for the purposes of the Agreement).
The relevant authorities of the countries involved may at any time require information and personal data on a taxpayer, if it is considered necessary. Any information received by the authorities shall be treated as confidential. In the case of Cyprus Authorities, Cypriot Law 72(I)/2008 on the Collection of Taxes, provides that the Director of the Tax Authorities shall only supply foreign tax authorities (signatories of a DTT) with information if he has received substantial details about the concerned person and the reason for the request of information. This provision seems to have been put in place to ensure that the foreign tax authorities do not engage in “fishing expeditions” without having any real evidence against the person under investigation. As a further control mechanism, the Cypriot Law provides that the Director of the Inland Revenue shall only supply information if he has obtained the written consent of the Attorney General of Cyprus.
An interesting point added by the follow up Protocol is that the receiving authority shall bear liability in accordance with its domestic laws in relation to any person suffering unlawful damage as a result of the supply under the exchange of data. The Protocol remains silent as to what the consequences will be where there is an issue of unlawful damage. It also fails to determine what such damage entails.
6 Cyprus starts double tax treaty negotiations with Indonesia
According to a press release published by the Indonesian Ministry of Foreign Affairs on 1 March 2011, Cyprus and Indonesia have agreed to commence negotiations for the conclusion of a new double tax treaty.
