India mulls removal, Ukraine wants to renegotiate
Cyprus’ double tax treaty network has been expanded with three new agreements with Spain, Lithuania and Norway becoming effective as of January 1, 2015, boosting the island’s services sector that has been hammered by Russia’s intentions to clamp down on offshore interest and provide an amnesty for the repatriation of funds.
New treaties were also signed with Switzerland, Guernsey and Iceland in 2014, but these will only enter into force once both sides conclude their ratification process.
“All of the new treaties concluded by Cyprus are generally based on the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention framework with a number of modifications. It is worth noting that each treaty contains an article providing for the exchange of information which is based on article 26 of the OECD Model Tax Convention on Income and on Capital,” said Phillippos Raptopoulos and Petros Liassides of Ernst & Young Cyprus.
Last week, news reports suggested that India was considering moving forward with ratification of its doubletax avoidance agreement with Cyprus, that has been black listed since 2013 for not sharing information about tax evaders, while Ukraine, worried that it is losing an alleged $300 mln, wants to renegotiate the treaty with Cyprus.
The treaty with Spain applies to taxes on income as well as on gains from the alienation of movable or immovable property. In the case of Spain, the treaty covers the income tax on individuals, the corporation tax, the income tax on non-residents and capital tax. In the case of Cyprus, it covers personal and corporate income tax, the defense tax, the immovable property tax and capital gains tax, according to the EY report.
The treaty provides for zero withholding tax on dividends provided that the recipient of the income holds directly at least 10% of the capital of the company paying the dividends (the rate is 5% in all other cases). The treaty also provides for zero withholding tax on interest and royalty payments. The capital gains tax article allocates taxation rights to the source state for gains arising on the sale of shares in real estate rich companies (i.e., shares deriving more than 50% of their value from immovable property) not listed on the stock exchange of Spain or Cyprus.
The protocol to the treaty includes a special provision that it shall not be interpreted to mean that a contracting state is prevented from applying its domestic legal provision on the prevention of tax evasion or tax avoidance.
The treaty between Spain and Cyprus is effective as of January 1 with respect to income and capital taxes and as of May 28, 2014 with respect to other taxes.
The treaty with Lithuania applies to taxes on income as well as on gains from the alienation of movable or immovable property. In the case of Lithuania, it covers the profit tax and income tax, whereas in the case of Cyprus, it covers corporate and personal income tax, the defense tax and capital gains tax, the EY report said.
The treaty provides for zero withholding tax on dividends where the beneficial owner is a company (other than partnership) which holds directly at least 10% of capital of the dividend paying company (5% withholding tax is levied in all other cases). It also provides for zero withholding tax on interest and 5% withholding tax on royalty payments. Capital gains derived by a resident of Cyprus or Lithuania are not
The treaty with Norway replaces the 1955 United Kingdom-Norway agreement, which was an extension of the 1951 treaty between the UK and Norway, which in turn applied to certain British colonies, including Cyprus. This treaty was honoured by Cyprus and Norway through to December 31, 2014.
The new treaty applies to taxes on income as well as on gains from the alienation of movable or immovable property. In the case of Norway, it covers the national tax on income, the county municipal tax on income, the municipal tax on income, the national tax relating to petroleum activities and the national tax on remuneration of non-resident artists. In the case of Cyprus, it covers corporate and personal income tax, the defense tax and capital gains tax, the EY report explained.
The treaty provides for zero withholding tax on dividends where the beneficial owner is a company (other than partnership) which holds directly at least 10% of the dividend paying company (15% withholding tax is levied in all other cases). However, no withholding tax is levied on dividends derived by and beneficially owned by the government of a contracting state. The treaty also provides for zero withholding tax on interest and royalty payments.
Capital gains derived by a resident of Cyprus or Norway are not taxable in the country of investment (except gains relating to immovable property, gains from the alienation of movable property of a permanent establishment and gains from the alienation of containers used for transport solely between places within the source state). In particular, any gains arising from the sale of shares will only be taxed in the country of residence of the seller of the shares.
“Interestingly, the treaty (with Norway) contains special provisions (Article 20 Activities Outside the Coast) about taxation of income and gains derived from offshore activities in connection with the exploration or exploitation of the seabed or subsoil or natural resources,” the report’s authorise Phillippos Raptopoulos and Petros Liassides concluded.
Meanwhile, officials in New Delhi were quoted last week as saying that “we are just examining whether information given by (Cyprus) is substantive ... if we are satisfied, then the matter (of removing Cyprus from Indian government’s blacklist) will be looked at.”
The Indian Finance Ministry had classified Cyprus as a notified jurisdictional area on grounds that it was not
Vladimir Putin introduced a bill to “deoffshorise” businesses, whereby Russian shareholders will be required to pay taxes on the retained earnings of foreign companies in which they hold a controlling stake. This primarily applies to companies registered in offshore or any foreign jurisdictions.
The aim is “to shrink the shadow economy in Russia and retrieve capital that was previously taken out of the country. In light of low unemployment and the fact that production capacity is loaded at a virtual maximum, this factor is being considered as one of the key growth factors in the coming years,” said Anton Soroko, an analyst at the Finam investment holding.
The new deoffshorisation legislation deals with the taxation of profits received and held by Russian-owned businesses in non-Russian low tax jurisdictions.
Perhaps due to its urgency, the deoffshorisation legislation is far from being clear. Further clarifications and amendments, possibly taxpayer friendly, may be introduced in the spring of 2015, as per Deputy Minister of Finance of Russia, Sergei Shatalov, although nothing specific has been officially confirmed.
“Given these uncertainties, it is preferable not to act hastily but form a strategy based on facts and not assumptions, i mplementing only when ready,” Alexis Tsielepis and Daniil Ruderman of the advisory firm Costas Tsielepis & Co wrote in an article last week.
According to Russian pro-government media, in 2014, among the leaders in foreign investment in Russia were the ‘big three’ offshore destinations: Cyprus ($2.9 bln), Luxembourg ($1.9 bln), and the British Virgin Islands ($1.05 bln).