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January 10, 2022
2022-5026

Cyprus expands treaty network as of 1 January 2022

Executive summary

Cyprus’ Double Tax Treaty network has been further expanded with a new tax treaty concluded with Jordan. The Treaty between Cyprus and Jordan was signed on 17 December 2021. Cyprus’ internal ratification process has been finalized. As such, the Treaty will enter into force upon its ratification by Jordan and once the two countries exchange ratification instruments.

In addition, protocols for amending the existing tax treaties with Switzerland and Germany are also now effective.

This Alert summarizes the key provisions of the new tax treaty and the amending protocols.

Detailed discussion

Treaty with Jordan

Withholding taxes on dividends, interest and royalties

The Treaty with Jordan (the Treaty) provides for a 5% withholding tax on dividends if the beneficial owner of such dividend is a company (other than a partnership) which holds directly at least 10% of the capital of the company paying the dividends. In all other cases, the withholding tax rate is 10% of the gross amount of the dividends paid, assuming the recipient is the beneficial owner of the dividends.

Moreover, the Treaty provides for a 5% withholding tax on the gross amount of interest paid provided that the recipient is the beneficial owner of such income. However, if the beneficial owner of the interest income is the government, political sub-division, local authority or the National Bank of the other Contracting State, such interest shall be exempt from withholding tax.

In addition, the Treaty provides for a 7% withholding tax on the gross amount of royalties or fees for technical services (as defined in the Treaty) provided that the recipient is the beneficial owner of such income.

Capital gains tax

In general, capital gains are taxable only in the Contracting State in which the alienator is resident, except for gains relating to immovable property and gains from the alienation of movable property of a permanent establishment for which the source jurisdiction maintains taxation rights. However, capital gains arising to a resident of a Contracting State from the sale of shares in real estate rich companies deriving more than 50% of their value directly from immovable property may also be taxed in the source state. This provision applies only to gains which are attributable to the immovable property. Moreover, this provision does not apply to the sale of shares listed on an approved stock exchange.

Other key treaty provisions

Contrary to the 2017 Organisation for Economic Co-operation and Development (OECD) Model Convention, the Treaty incudes an article on Independent Personal Services in a similar wording as it existed before its elimination in 2000.

The Treaty also includes an article on taxation of activities in the exclusive economic zone or on the continental shelf in connection with the exploration or exploitation of the seabed or subsoil or their natural resources which overrides any other provisions of the Treaty.

Article 29 of the Treaty includes a principal purpose test whereby a benefit under the Treaty shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the objective and purpose of the relevant provisions of the Treaty.

As noted, the Treaty was signed on 17 December 2021. Cyprus’ internal ratification process has been finalized. As such, the Treaty will enter into force upon its ratification by Jordan and once the two countries exchange ratification instruments. Once it enters into force, it will be effective as follows:

  • With regard to taxes withheld at source, in respect of amounts paid or credited on or after the first day of January next following the date upon which the Treaty enters into force.

  • With regard to other taxes, in respect of taxable years beginning on or after the first day of January next following the date upon which the Treaty enters into force.

Protocols to existing treaties

Protocol to the treaty with Germany

The protocol to the treaty with Germany, among others, introduces the minimum standards of the OECD’s Base Erosion and Profit Shifting (BEPS) actions. It is worth mentioning that the 2011 treaty with Germany was not listed as an agreement covered by the multilateral convention (MLI) upon the deposit of the instrument on 23 January 2020.

The protocol amends the preamble of the Treaty to specify that the treaty’s intention is to eliminate double taxation with respect to taxes covered by the treaty, without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in the treaty for the indirect benefit of residents of third states).

The protocol also introduces specific wording to Article 7 of the treaty, Business Profits, with particular emphasis on elimination of double taxation resulting from adjustments on profits of a permanent establishment made by one of the Contracting States. It also introduces the possibility of the two Contracting States resolving the issue of double taxation by mutual agreement.

Moreover, the protocol revises the provisions of Article 27 of the treaty, Application of the Agreement in Special Cases, and provides that notwithstanding the other provisions of the treaty, no benefit shall be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting the benefit in such circumstances would be in accordance with the object and purpose of the provisions of the treaty.

The Protocol between Cyprus and Germany is effective as from 1 January 2022 for both countries.

Protocol to the treaty with Switzerland

The protocol, among others, introduces the minimum standards of the OECD BEPS actions. It is worth mentioning that the 2014 treaty with Switzerland was not listed as an agreement covered by the MLI upon the deposit of the instrument on 23 January 2020.

The protocol amends the preamble of the treaty to specify that the treaty’s intention is to eliminate double taxation with respect to taxes on income and on capital, without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in the treaty for the indirect benefit of residents of third states).

The protocol also revises the provisions of Article 7 of the treaty, Business Profits, to introduce a six-year limitation in relation to the right to make an adjustment to the profits attributable to a permanent establishment made by one of the Contracting States. However, this provision does not apply in the case of fraud, gross negligence, or willful default.

Moreover, Article 9 of the treaty, Associated Enterprises, has been amended to require the other Contracting State to make an appropriate adjustment to the adjustment made by the first Contracting State. Previously, the other Contracting State was required to make such adjustment only if it agreed that the adjustment made by the first Contracting State was justified both in principle and as regards the amount. The right to make an adjustment is subject to a six-year limitation unless there is fraud, gross negligence of willful default.

In addition, the protocol revises Article 26 of the treaty, Mutual Agreement Procedure, and provides that where a person considers the actions of one or both of the Contracting States result or will result in taxation not in accordance with the provisions of the treaty, such person may, irrespective of the remedies provided by the domestic law of those states, present his case to the competent authority of either Contracting State.

The protocol further introduces Article 28A to the treaty, Entitlement to Benefits, and provides that, notwithstanding the other provisions of the treaty, no benefit shall be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting the benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the treaty.

The protocol between Cyprus and Switzerland is effective as from 1 January 2022 for both countries. The amendments resulting from Articles II (Business Profits), III (Associated Enterprises) and IV (Mutual Agreement Procedure) of the protocol apply from 3 November 2021, without regard to the taxable period to which the matter relates.

Other developments

Cyprus is currently in the process of negotiating new treaties with Oman, Hong Kong, Vietnam, Sri Lanka, and Pakistan while the treaties with Poland and France are under renegotiation.

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

Ernst & Young Cyprus Limited, Nicosia

 
 

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