7th of August, 2014
Cyprus recently signed two significant new tax agreements.
1. New Double Tax Treaty with Switzerland
On July 25, Switzerland and Cyprus signed a new agreement for the avoidance of double taxation. It is the first double tax agreement between the two countries and will contribute to the development of bilateral economic relations. The agreement will come into force once it has been ratified by both countries.
As well as being one of the world’s most important financial centers, Switzerland is the base for many ultra-high net worth individuals with business and personal interests in Cyprus. The new double tax agreement will be a valuable addition to Cyprus’s extensive treaty network and it is hoped that the remaining steps required to bring it into effect will be completed soon.
The new agreement closely follows the 2010 Organization for Economic Cooperation and Development (OECD) Model Convention, with only minor modifications, and the protocol to the agreement clarifies certain detailed provisions.
The agreement covers all taxes on income and wealth levied by a contracting state or by any of its subdivisions or local authorities, including taxes on capital appreciation and on gains from the alienation of property. Income taxed at source and lottery winnings are excluded from the scope of the agreement.
The key provisions of the said agreement are the following:
- Income from immovable property: As in the OECD Model Convention, income from immovable property may be taxed in the contracting state where the property is situated.
- Business profits: Business profits are taxable only in the contracting state in which the taxpayer is resident, unless it carries on business in the other contracting state through a permanent establishment there, in which case the profit attributable to the permanent establishment may be taxed in the contracting state in which it is located.
- International shipping and transport: Business profits from the operation of ships or aircraft (including income from containers, trailers and related equipment) in international traffic are taxable only in the contracting state in which the enterprise is resident.
- Dividends: Cyprus does not impose withholding taxes on dividends paid to non-residents. In Switzerland, dividends paid to non-resident shareholders are generally subject to withholding tax at a rate of 35%. The double tax agreement exempts dividends paid by a company resident in one contracting state to a resident of the other from withholding taxes in the contracting state from which they originate, as long as the beneficial owner of the dividend is a company (but not a partnership) resident in the second contracting state that has held at least 10% of the capital of the company paying the dividend for at least a year without interruption. Article 2 of the protocol makes clear that the shares need not have been held for a year before the dividend is paid, but that the minimum holding period may be completed after the payment of the dividend.
- Interest and royalties: Interest and royalties are taxable only in the country in which the recipient is resident, provided that the recipient is the beneficial owner. Cyprus-resident natural persons who receive interest from Switzerland will be subject to a lower tax charge by disclosing the interest and opting for taxation in Cyprus, rather than imposition of withholding tax in Switzerland under the taxation of savings income agreement between Switzerland and the European Union. In any event, the current renegotiation of the taxation of savings income agreement is expected to result in automatic information exchange.
- Capital gains: Gains derived by a resident of one contracting state from the alienation of immovable property situated in the other contracting state, or from the disposal of property associated with a permanent establishment situated in the other contracting state, may be taxed in the contracting state in which the immovable property or the permanent establishment is situated. Gains from the disposal of ships and aircraft used for international traffic are taxable only in the disponor’s country of residence. Gains made by a resident of one contracting state from the disposal of shares that directly or indirectly derive more than 50% of their value from immovable property situated in the other contracting state may be taxed in that other state, with the exemptions of shares listed or of a company and disposals in the course of a reorganization, merger, demerger of companies or similar transaction.
- Offshore activities: Like other recent Cyprus double tax agreements, the Cyprus-Switzerland agreement includes an article dealing specifically with offshore activities. It provides that a Swiss-resident enterprise undertaking activities on the continental shelf of Cyprus will be treated as conducting a trade or business in Cyprus through a permanent establishment in respect of the activities concerned, unless the aggregate duration of the activities is no more than 30 days in any 12-month period.
2. CoE-OECD Convention on Mutual Administrative Assistance in Tax Matters
Cyprus signed the CoE-OECD Convention on Mutual Administrative Assistance in Tax Matters (ETS no.127) and its Protocol (ETS no.208) in Strasbourg on 10 July.
The Convention seeks to strengthen international cooperation among member states of the Council of Europe and the Organization for Economic Cooperation and Development (OECD) with a view to combating and countering tax avoidance and evasion.
The Convention was developed jointly by the OECD and the Council of Europe in 1988 and amended by Protocol in 2010. It is the most comprehensive multilateral instrument available for all forms of tax cooperation to tackle tax evasion and avoidance.