CYPRUS

DOUBLE TAXATION
PREVENTION TREATIES

DOUBLE TAX TREATIES
Cyprus has entered into 33 double-tax treaties (unusually for a low-tax jurisdiction). The general effect of these treaties is that Cyprus-registered offshore entities that have tax exemptions in Cyprus will have the same exemptions in the treaty countries.

In May 2001, Cyprus announced that it had entered into double tax negotiations with Iran, the Seychelles, Lebanon and Armenia. Talks have been concluded with Indonesia.

In February, 2003, the Cypriot government said it had signed an agreement for the avoidance of double taxation with Lebanon. According to a government statement, the agreement was signed in Beirut by Cyprus' Finance Minister, Takis Klerides, and his Lebanese counterpart, Fuad Siniora, and is designed to prevent both double taxation and fiscal evasion with regard to taxes on income and capital.

In July, 2005, Cyprus announced that a revised Double Tax Avoidance Agreement had been agreed with Germany. One of the more significant outcomes of the agreement is a clarification of taxation in the shipping sector. According to the new deal, profits from international ships and aircraft in international traffic "shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated".

The new agreement also clarifies the taxation of ships' crews who will be taxed according to the residential status of their employer, rather than according to an individual crew member's residential status, and includes provisions which seek to prevent fiscal evasion.

The new agreement will be particularly welcome to the large contingent of German ship-owning firms based on the island of Cyprus, which is the third-largest ship management centre worldwide after Singapore and Hong Kong.

In November, 2005, the Foreign Minister of San Marino, Fabio Berardi, who was in Cyprus on an official visit, met President Tassos Papadopoulos and signed a protocol which may lead to a Double Tax Avoidance Treaty between the two countries. Many Italian companies would be likely to use a San Marino/Cyprus axis in their international structures if there was a DTAA.

In December, 2005, the head of the Russian tax service, Anatoly Serdyukov, announced that double taxation avoidance agreements will be reviewed to prevent companies from avoiding tax by registering offshore, and to "protect Russia's economic interests". According to Mr Serdyukov, the federal budget was deprived of more than $2 billion in unpaid profit tax by oil firms during 2004 because the owners of these firms are resident for tax purposes in low tax jurisdictions, such as Cyprus.

"We think it would make sense to check all agreements on double taxation avoidance to protect Russian economic interests and see whether they correspond to current legislation," Mr Serdyukov reportedly told a meeting of the tax service.

It's not clear whether Russia would be able to take any unilateral action to restrict users of the Cyprus tax treaty.

In July, 2006, the governments of Cyprus and the Seychelles have agreed to a new bilateral pact which aims to prevent the double taxation of income, and boost investment flows between the two countries.

The agreement was signed in the Seychelles last week by the Seychelles' Minister for Economic Planning and Employment, Jacquelin Dugasse, and the Cypriot Minister for Finance, Michalis Sarris.

“The signing is for us in Seychelles very important as it provides the framework which will enable businesses in our two countries to exploit the business ties and cooperation which exist,” Minister Dugasse commented after the formalities had been completed.

The bulk of any new investment is expected to originate initially from Cyprus, but Dugasse argued that there is no reason why investors in the Seychelles could not also capitalise on the agreement.

Cyprus has also shown "keen interest" in starting negotiations towards a a Bilateral Investment Promotion and Protection Agreement.

Most treaties follow the OECD Model Convention, although the US Treaty follows the most recent model of United States Agreements. Normally speaking, therefore, the country of residence will give a credit for taxes paid in the other treaty country. The Cyprus offshore entity qualifies for treaty protection under all the extant treaties except those with Canada, France, the UK and the USA, and even in those cases the limitations apply only to flows of income to Cyprus, and not to income flows from Cyprus to the countries concerned.

Revisions to Cyprus's corporate tax regime consequent upon its accession to the EU, and the abolition of the 'offshore' sector as such, have made Cyprus more rather than less attractive as a tax treaty partner, and the island will need to revise many of its treaties as a result, as well as entering new treaties with additional countries.

The following countries have double-tax treaties with Cyprus (an * indicates that the treaty is awaiting ratification):

• Armenia*
• Austria
• Belgium
• Bulgaria
• Canada
• China
• CIS (ex-USSR)
• Czech Republic
• Denmark
• Egypt
• Federal Rep. of Germany
• Finland*
• France
• Greece
• Hungary
• India
• Ireland
• Italy
• Japan*
• Kuwait
• Malta
• Mauritius
• Norway
• Poland
• Romania
• Russia
• Singapore*
• Slovakia
• South Africa*
• Sweden
• Syria
• Thailand
• Ukraine*
• United Kingdom
• United States
• Yugoslavia (Serbia and Montenegro)

The new Russian treaty signed in December 1998 replaces the USSR (CIS) treaty as regards Russia but not as regards the other member states of the CIS, who remain bound by the old treaty. The differences are relatively minor.

CYPRUS TAX SPARING PROVISIONS
A tax-sparing provision has the effect that if tax is 'spared' ie exempted in Cyprus, then it is credited against an investor's tax liability in his home country (the treaty counterpart) as if it had actually been paid in Cyprus. There are tax-sparing provisions in the treaties with the following countries:

• Canada
• Czech Republic
• Denmark
• Federal Republic of Germany
• Greece
• India
• Ireland
• Italy
• Malta
• Romania
• Slovakia
• Sweden
• Syria
• United Kingdom
• Yugoslavia

The taxes all or partly spared are as follows:

- Tax on interest paid on loans for economic development in Cyprus (Canada, Denmark, Germany, France, UK)
- Tax relieved because of deductions in respect of investment in Cyprus (Canada, UK)
- Tax on interest or profits which is unpaid because of tax incentives, reliefs or exemptions in Cyprus (Czech Republic, Greece, Ireland, Romania, Slovakia, Yugoslavia)
- Tax not withheld on dividends (15%) if the exemption is given for the purposes of economic development in Cyprus (Denmark, Germany, France)

CYPRUS TABLE OF TREATY RATES
(Excluding treaties not yet in force; references to notes are in parentheses after the rates, and apply to payments in both directions unless otherwise specified; all rates are percentages; for countries not listed the rules are too complex to be stated here.)

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