Cyprus: Double Tax Treaties
Cyprus has entered into almost 50 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 (see Tax-Sparing Provisions below).
Most of Cyprus's 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 has found itself needing to revise many of its treaties as a result, as well as entering new treaties with additional countries.
The German Ministry of Finance announced on September 1, 2009, that it had initialled the text of a revised double taxation agreement with Cyprus to allow for the exchange of information on tax matters between the two countries’ tax authorities, in accordance with Article 26 of the OECD model convention.
Upon entry into force, the agreement will allow the respective countries' tax authorities to request information pertaining to tax crimes, and in civil tax matters. The Ministry’s statement recognized Cyprus’ commitment to implementing the internationally-agreed standard.
The agreement will enter into force when both countries have signed and concluded their individual ratification procedures.
The Cyprus/Germany DTA was also updated In July, 2005, with one of the more significant outcomes of the revision being a clarification of taxation in the shipping sector. According to the amendment, 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 agreement also clarified the taxation of ships' crews, who were to be taxed according to the residential status of their employer, rather than according to an individual crew member's residential status, and included provisions which seek to prevent fiscal evasion.
Cyprus has signed a number of other double taxation avoidance agreements in recent years (see the table below for a list of tax agreements signed by Cyprus):
In May 2001, Cyprus announced that it had entered into double tax negotiations with Iran, the Seychelles, Lebanon and Armenia. Talks were also 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 released at the time, the agreement was signed in Beirut by Cyprus' Finance Minister, Takis Klerides, and his Lebanese counterpart, Fuad Siniora, and was designed to prevent both double taxation and fiscal evasion with regard to taxes on income and capital.
In November, 2005, the Foreign Minister of San Marino, Fabio Berardi, who was in Cyprus on an official visit, met then President Tassos Papadopoulos and signed a protocol designed to lead to a Double Tax Avoidance Treaty between the two countries.
In July, 2006, the governments of Cyprus and the Seychelles agreed to a new bilateral pact which aimed to prevent the double taxation of income, and boost investment flows between the two countries.
The agreement was signed in the Seychelles 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.
In November 2008, the Qatari Prime Minister Sheikh Hamad bin Jassim al Thani visited Nicosia to ratify several bilateral agreements and Memoranda of Understanding between Qatar and Cyprus, including an agreement on the avoidance of double taxation.
Seven agreements in all were ratified, including agreements for the avoidance of double taxation, tax evasion, economic and technical cooperation and the promotion and protection of international investment.
Memoranda of Understanding were also signed to intensify cooperation between both countries' tourism, health and immovable property sectors. An additional Memorandum of Understanding was also signed between the central banks of Cyprus and Qatar for cooperation in the monitoring of money lending organisations.
In the summer of 2010, The Italian Ministry of the Economy issued amendments to the relevant legislation, by which Malta and Cyprus have been removed from the country’s ‘blacklist’ of tax havens.
The Ministry has made the appropriate changes to all three lists of countries considered to have tax systems which favour the avoidance of taxation - that concerning the residence of individual taxpayers; the list valid within the tax legislation concerning controlled foreign companies (CFCs); and that regarding the non-deductibility of corporate costs and expenses.
Malta and Cyprus, which are also full member states of the European Union, will now have fully ordinary fiscal status as far as the Italian tax system is concerned. In particular, with effect from this tax year, those Italian individuals who have attempted to transfer their residence to one of those countries will not have a continued presumed residence in Italy, while there will be no additional tax consequences for those Italian businesses with subsidiaries or associated companies in Malta or Cyprus.
The changes to the lists are also significant with regard to the new Italian value-added tax (VAT) reporting requirements that were announced in April, for all 'risky' import and export transactions above EUR50,000 (US$65,400), particularly those transacted with countries considered not to have a sufficient level of tax information exchange.
Under the new rules, the details of transactions in goods and services from companies or individuals having an establishment, residence or domicile in those countries will have to be forwarded electronically to the Italian Revenue Agency.
In September 2010, Panama’s President, Ricardo Martinelli met with his Cypriot counterpart, Demetris Christofias, to discuss improving economic cooperation, including through the signing of a convention for the avoidance of double taxation and fiscal evasion.
Negotiations for an agreement between Cyprus and the United Arab Emirates on the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income were concluded successfully in Nicosia in October 2010. The agreement was initialled in June 2010 and according to the Cypriot government "negotiations were held in a friendly atmosphere and in a climate of perfect cooperation."
In November 2010, the Prime Minister of Ukraine, Mykola Azarov called for the renegotiation of the double tax agreement between Ukraine and Cyprus while meeting with the President of the Cypriot House of Representatives, Marios Karoyan.
"For many years we have negotiated the signing of the convention on avoiding double taxation. Ten years ago when I worked as the Head of Tax Administration I started to deal with that matter. I think it's time to put an end to this process and to sign an agreement," Azarov emphasized.
Azarov said that the renegotiated convention for the avoidance of double taxation (replacing the treaty inherited from the former Soviet Union) would be signed on a forthcoming visit by the Cypriot Finance Minister.
In July 2011, Luxembourg’s Finance Minister Luc Frieden conducted an official visit to Cyprus at the invitation of his Cypriot counterpart Charilaos Stavrakis, with the talks focussing on strengthened fiscal cooperation by means of a future bilateral tax agreement.
According to the Luxembourg government, during the course of the meeting, the ministers exchanged views on recent developments in their respective financial sectors and on European and national legislation in this area. Within this context, Cyprus and Luxembourg agreed to initiate negotiations seeking to conclude a bilateral double taxation agreement (DTA) between the two countries, in a bid to strengthen cooperation between the two financial centres.
The Cyprus/Russia Double Tax Agreement
In December, 2005, the head of the Russian tax service, Anatoly Serdyukov, announced that double taxation avoidance agreements would 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 US$2bn 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.
The Russia/Cyprus tax treaty once again became the focus of attention when the Russian authorities launched tax evasion proceedings against a prominent foreign hedge fund manager. It was alleged that Kameya, a Russian company advised by Hermitage Capital, the largest foreign hedge fund in Russia, had failed to pay the correct amount of tax on a dividend paid to the controlling shareholder of a Cypriot registered firm in May 2006.
In April 2009, Russia and Cyprus signed a new double taxation avoidance agreement which finally secured Cyprus's removal from the notorious Russian 'blacklist' of jurisdictions which have not demonstrated a sufficient level of cooperation with the Russian tax authorities.
The protocol, the result of several years of hard bargaining, was signed in Nicosia by Finance Minister Charilaos Stavrakis and Ilya Trunin, a senior tax official in the Russian Finance Ministry.
The pre-existing tax treaty between Russia and Cyprus was one of the major reasons for the huge flow of Russian investment through the Mediterranean island in recent years. In 2006, 21.6%, or US$28bn, of the US$130bn total accumulated investments in Russia came via Cyprus, while Russian deposits in Cypriot banks are said to exceed US$26.35bn.
In 2008, Russia added Cyprus to a 'blacklist' of 54 countries (since reduced in number), on the grounds that it was an ‘uncooperative territory’. This blacklist was part of an amendment to the Russian tax code which introduced a tax exemption on the repatriation of dividends from foreign subsidiaries of Russian companies under certain circumstances. Russian subsidiaries based in territories and countries on the so-called blacklist were not included in the exemption.
Many European countries such as Ireland, Luxembourg and Switzerland successfully lobbied the Russian government to be removed from the blacklist, but Cyprus remained on the list due to its apparent failure in the past to fulfil requests for information from the Russian tax authorities in certain cases. According to Stavrakis, Cyprus's name was to be erased from the blacklist thanks in large part to a commitment by Nicosia in 2008 to improve exchange of information provisions.
Stavrakis said that the new agreement maintains "the very low and competitive factors Russians are enjoying today concerning investments through Cyprus" although he conceded that Russia succeeded in winning "a significant number of concessions" that they had been asking for.
A major concession won by Russia will see capital gains made by Russian subsidiaries of Cypriot holding companies with more than 50% of their assets in Russian property taxed at the prevailing rates in Russia.
Trunin remarked that the amendments ensure that the double tax agreement will not be used "in an inappropriate way" by residents and investors in Cyprus and Russia, but would nevertheless result in Cyprus's removal from Russia's "list of offshore jurisdictions" which he stopped short of calling a "blacklist."
However, at the behest of President Medvedev, the Russian Ministry of Finance prepared an amendment to Article 7 of the Tax Code in late 2009 to crack down on tax avoidance by means of offshore companies set up to benefit from lower tax rates granted under double taxation treaties.
The primary objective of the legislation would be to deny Russian residents who set up offshore companies for the purposes of tax avoidance the benefit of lower treaty withholding tax rates.
Russian business has tended to favour Cyprus as the preferred location for setting up offshore companies owned nominally by local lawyers or accountants; as a result of the double taxation treaty between Russia and Cyprus the Russian company can remit dividends to such offshore companies subject to a withholding tax of only 5% compared with usual Russian tax of 15%, and remittances of royalties and interest are free of Russian tax, compared to 20% within Russia.
According to Russian official statistics quoted by Vedomosti, Russia received US$56.9bn in foreign investment from companies registered in Cyprus last year, or 22% of total inward investment, and in the first nine months of this year, the figure was US$5.2bn, or 10% of the total.
After changes to the double-tax agreement with Cyprus are ratified by the Russian government, the Russian tax authorities will be able to request information from their Cypriot counterparts about beneficial ownership of companies, in line with standard modern tax information exchange conditions.
Speaking at the Fifth All-Russia tax forum of Chambers of Commerce, Stanislav Voskresensky, deputy head of the Ministry of Economic Development and Trade, was quoted in the national media as suggesting that that new legislation will define the term "beneficial ownership" in respect of agreements for the avoidance of double taxation, and ensure that treaty benefits are not extended to individuals or organizations where the actual beneficiary is not a tax resident of the country with which Russia has a double taxation agreement; the individual or organization and the earnings received would be subject to taxation in line with the Russian Tax Code rather than the bilateral agreement.
This would also affect ultimate beneficiaries in countries where no such treaty exists.
In October 2010, Russia and Cyprus signed a protocol to their double taxation agreement which allows for extensive exchange of tax information and removes Cyprus from the notorious Russian 'blacklist' of jurisdictions which did not demonstrate a sufficient level of cooperation with the Russian tax authorities.
Russian President Dmitry Medvedev signed another 14 agreements to enhance economic relations with Cyprus on the same day.
The Russian President advised that the new accord made business more transparent and confirmed that Cyprus would be removed from the Russian Central Bank's black list.
Cypriot President Demetris Christofias told reporters at a joint news conference in Nicosia that economic economic relations would be strengthened by ensuring that financial and investment relations were untainted.
The protocol amending the 1998 tax treaty between Russia and Cyprus includes special provisions related to real estate investment.
Russian commentators believe that more than half of current property investment projects in Russia involve offshore companies based in Cyprus.
The most important change in the treaty relates to source-state taxation of capital gains in companies which predominantly hold real estate as their main activity: where more than half the company’s assets comprise Russian immovable property, Russia will be able to apply its domestic capital gains tax. This conforms with articles contained in the standard OECD model tax convention. Prior to this change, capital gains taxing rights were applied in the country of residence of the selling company.
In addition, real estate investment trusts and funds will have their dividends treated as being income from real estate for the purposes of the treaty.
Both Cyprus and Russia aim to ratify the protocol without delay in order that it can take effect from January 1, 2011, but the amendments to the provisions on capital gains tax will only come into effect four years after ratification and the transition period will therefore extend at least until January 2015.
The following countries are among those which have double-tax treaties with Cyprus, although not all have been ratified at the time of writing:
The Russian treaty signed in December 1998 replaced the USSR (CIS) treaty as regards Russia but not as regards the other member states of the CIS, who remained bound by the old treaty. The differences are relatively minor.