Executive summary

Cyprus and Saudi Arabia have signed an Income Tax Treaty for the avoidance of double taxation and fiscal evasion with respect to taxes on income (the Treaty). The Treaty is expected to enter into force as from 1 January 2019 provided that the ratification process is completed by both countries during 2018.

With this new Treaty, Cyprus has further expanded its extensive double tax treaty network and also strengthens economic and commercial relations with Saudi Arabia.

This Alert summarizes the key features of the Treaty.

Detailed discussion

Permanent establishment

• Article 5 of the Treaty contains a definition of permanent establishment (PE), used to determine the threshold for taxation of business profits in the source state. The wording of this article is largely in line with the wording of the 2017 Organisation for Economic Co-operation and Development (OECD) Model Tax Convention on Income, except for the "service PE" provisions discussed below.
• In particular, the relevant article provides that a building site, construction, assembly or installation project in connection therewith will constitute a PE if such arrangement lasts for a period of more than six months.
• The provisions relating to "service PE" follow the United Nations Model Tax Convention definition. A "service PE" arises where services, including consultancy services, are furnished in the other state by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where activities of that nature continue (for the same or a connected project) within the country for a period or periods aggregating more than 6 months within any 12-month period.
• According to the Protocol to the Treaty, any enterprise of a Contracting State that carries out "offshore activities" (defined as activities carried on in the territorial sea, as well as any area outside the territorial sea, including the Contiguous Zone, the Exclusive Economic Zone, or the Continental Shelf of a Contracting State, in connection with the exploration or exploitation of the seabed and its subsoil and their natural resources) shall be deemed to have a PE in that other Contracting State.

Dividends

• The Treaty provides for withholding taxes on dividends as follows:
  • No withholding tax if the beneficial owner is a company (other than a partnership) which holds directly or indirectly at least 25% of the capital of the company paying the dividends.
  • Withholding tax shall not exceed 5% of the gross amount of the dividend in all other cases.
• Cyprus does not levy withholding tax on dividend payments under domestic tax law.

Interest

• The Treaty provides for no withholding tax on interest payments, provided that the recipient is the beneficial owner of such interest.

Royalties

• The Treaty provides that withholding tax on royalties shall not exceed:
  • 5% of the gross amount of royalties which are paid for the use of, or the right to use, industrial, commercial or scientific equipment.
  • 8% of the gross amount of such royalties in all other cases.
• These rates apply provided the recipient is the beneficial owner of such income.

Capital gains

• The Treaty contains a clause according to which capital gains derived by a resident of a Contracting State from the alienation of shares of a substantial participation in the capital of a company shall be taxed in the State where the company is a resident (except for listed shares). A substantial participation means ownership of at least 25% of the capital of the company within 12 months prior to alienation of such shares.
• According to the Protocol to the Treaty, any gains derived from the alienation of rights, including shares or interests in a trust or partnership deriving the greater part of their value from such rights, in connection with the exploration or exploitation of the seabed and its subsoil and their natural resources on the territorial sea, as well as any area outside the territorial sea, including the Contiguous Zone, the Exclusive Economic Zone, or the Continental Shelf of a Contracting State, may be taxed in the country where the natural resources are situated.

Other considerations

• Article 22 of the Treaty provides that any income not addressed specifically in any other article of the Treaty should be taxed only in the state of residence of the recipient of income.
• According to Article 6(2), any income derived from rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources should be considered as income from immovable property and may be taxed in the Contracting State of situs.
• Article 25 of the Treaty includes a provision on the exchange of information between competent authorities of the Contracting States and the wording of this article is in line with the wording of the OECD Model Tax Convention on Income 2017. The clause 3 of the Protocol to the Treaty provides a list of the information that needs to be provided by a Contracting State when making a request for information under Article 25.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young Cyprus Limited, Nicosia

• Petros Krasaris
  petros.p.krasaris@cy.ey.com
• Panayiotis Tziongouros
  panayiotis.tziongouros@cy.ey.com

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ATTACHMENT

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