In­dia mulls re­moval, Ukraine wants to rene­go­ti­ate

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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).

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