Cyprus: Double Tax Agreement Round-Up

The new Protocol to the Cyprus – Ukraine double taxation agreement

The Cyprus Ministry of Finance has announced that agreement has been reached with Ukraine on a Protocol that will amend the existing DTA between the two countries. The existing DTA was signed in 2012 and entered into force on 1 January 2014. The Protocol, when signed and ratified by both countries, will enter into force no earlier than 1 January 2019.

According to the announcement issued by the Cyprus Ministry of Finance a “most favoured nation” clause has been agreed for taxes on interest, dividends, royalties and capital gains, ensuring that Cyprus is treated no less favourably than any other of Ukraine’s DTA counterparties in the future. An announcement on the website of the Ukrainian Ministry of Finance provides further details of the amendments made by the Protocol.

Dividends

The current DTA provides for withholding tax at 15% on dividends paid by Ukrainian companies to Cypriot shareholders, with a reduced rate of 5% if the beneficial owner owns more than 20% of the share capital of the company paying the dividend or has invested more than €100,000 in the shares. Under the Protocol the lower rate will apply only if both conditions are satisfied.

Interest

Under the current DTA the rate of withholding tax on interest paid by a Ukrainian debtor to a beneficial owner in Cyprus is 2%. When the Protocol takes effect it will increase to 5%.

Capital gains

The current DTA provides that capital gains derived from movable property, including shares in so-called “property-rich” companies, the assets of which principally comprise immovable property, are taxable only in the country of residence of the person making the disposal. When the Protocol enters into force, which will not be before 1 January 2019, gains on shares in “property-rich” companies will also be taxable in the country in which the immovable property is located.

Conclusion

Subject to ratification by Cyprus and Ukraine the new Protocol provides a basis for the continuation of the existing DTA until at least 1 January 2019, after which the Protocol may enter into force. The Protocol provides slightly reduced benefits after that date compared with the current DTA, but the “most favoured nation” provision means that it will be at least as attractive as any other of Ukraine’s DTAs.

The new Protocol to the Cyprus – South Africa double taxation agreement

On 1 April 2015 Cyprus and South Africa signed a Protocol amending their existing double taxation agreement (“DTA”), which was signed in 1997 and has been in force since 8 December 1998.

The Protocol amends the 1997 DTA in three areas, namely the definition of residence, withholding taxes on dividends and exchange of information. Importantly, it does not change the existing, highly beneficial, arrangements regarding taxation of capital gains.

Residence

The Protocol aligns the definition of “resident of a Contracting State” with the 2010 OECD Model Convention.

Taxation of dividends

The 1997 DTA completely exempts dividends paid by a company in one country to a recipient in the other from withholding tax in the first country, as long as the recipient is the beneficial owner of the dividends.

Under the Protocol withholding tax may be imposed in the first country. The rate is limited to 5% of the dividend if the recipient is the beneficial owner of the dividends and owns 10% or more of the share capital of the company paying the dividend; otherwise it is 10%.

Cyprus does not impose withholding taxes on dividends paid to overseas shareholders, so the change affects only dividends paid by companies resident in South Africa.

Once the Protocol is ratified the provisions regarding dividends will apply retrospectively from 1 April 2012, the date of the introduction in South Africa of taxation of dividends at shareholder level.

Exchange of information

The Protocol aligns the provisions regarding exchange of information with the 2010 OECD Model Convention. In particular, it commits the parties to exchange such information “as is foreseeably relevant” rather than “as is necessary”. An annex to the Protocol sets out the detailed procedures for information exchange and provides robust safeguards against abuse of the information exchange provisions by requiring requests for information to comply with specified conditions in order to demonstrate the foreseeable relevance of the information to the request. No request is to be submitted unless the state making the request has exhausted all reasonable means available in its own territory to obtain the information, and every request must be accompanied by extensive information and justifications, ruling out speculative enquiries or “fishing expeditions”.

Taxation of capital gains

Cyprus retains the exclusive taxing right on disposals by Cyprus tax residents of shares in South African companies, including shares in “property-rich” companies that derive their value or the greater part of their value directly or indirectly from immovable property situated in South Africa. Most of South Africa’s other DTAs allow gains on such shares to be taxed in South Africa, and the effective exemption of gains from South African tax gives Cyprus a significant advantage as a jurisdiction for holding shares of property-rich South African companies.

Entry into force

The Protocol will enter into force when both countries complete their ratification procedures. Cyprus did so on 8 May 2015 but South Africa has yet to do so.

The new DTA with Iran

On 4 August, after negotiations spanning several years, Cyprus and the Islamic Republic of Iran signed a DTA, the first between the two countries. The DTA closely follows the 2010 OECD Model Convention.

Withholding taxes on dividends, interest and royalties

Dividends paid by a resident of one country to a resident of the other may be taxed in the first country. The rate of tax is limited to 5% if the beneficial owner of the dividends is a company that directly owns 10% or more of the share capital of the company paying the dividend; otherwise it is limited to 10%. Interest paid by a resident of one country to a resident of the other may be taxed in the first country at a rate of no more than 5%.

Cyprus does not impose withholding taxes on dividends or interest, so these provisions only affect dividends paid by companies resident in Iran.

Taxation of capital gains

Gains on disposal of immovable property, shares in “property-rich” companies (deriving more than half their value from immovable property) or moveable property associated with a permanent establishment may be taxed in the country in which the immovable property or the permanent establishment (as the case may be) is situated. Gains on disposal of all other assets are taxable only in the country of residence of the disponor.

Entry into force

The DTA will enter into force after ratification by both countries. It will have effect from the start of the following year.