CYPRUS: DOUBLE TAX TREATIES

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).

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 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 was 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 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.

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 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 $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.

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 mananger. 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. See below for further important developments regarding the Cyprus/Russia tax treaty.

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 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 USD28bn, of the USD130bn total accumulated investments in Russia came via Cyprus, while Russian deposits in Cypriot banks are said to exceed USD26.35bn.

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."

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.

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 following countries are among those which have double-tax treaties with Cyprus, although not all have been ratified at the time of writing:

Cyprus Other International Agreements

In March 2009, Cypriot Minister of Commerce, Industry and Tourism, Antonis Paschalides, signed an agreement to protect and promote mutual investment.

During the Minister’s meetings in Tehran, issues of common interest were discussed and ways of further developing economic, trade, tourism and investment relations between Cyprus and Iran were examined. In the framework of the meeting with the Iranian Minister of Finance, an agreement was signed for the Mutual Promotion and Protection of Investments between Cyprus and Iran.

On March 27, 2009, Cyprus ratified the Council of Europe Convention on Money Laundering, Search, Seizure and Confiscation of the Proceeds from Crime and on the Financing of Terrorism (CETS No. 198).

The convention opened for signature to the member states of the Council of Europe, the non-member states which have participated in its elaboration, and the European Community, in Warsaw, on May 16, 2005. It entered into force on May 1, 2008.

The latest convention replaces the Council of Europe’s 1990 convention, providing legislation to take into account the fact that not only could terrorism be financed through money laundering from criminal activity, but also through legitimate activities.

The new convention is the first international treaty covering both the prevention and the control of money laundering and the financing of terrorism. The text addresses the fact that quick access to financial information or information on assets held by criminal organisations, including terrorist groups, is the key to combating them. The convention includes a mechanism to ensure the proper implementation of its provisions by participants.

Following the completion of the work of the Joint Cyprus - Libya Committee, an important Protocol of Cooperation was signed between the two countries in June 2009, which aims inter alia to enhance and further develop their bilateral relations in the fields of economy, commerce and science.

The Protocol was signed in Nicosia by the Minister of Finance Mr Charilaos Stavrakis who was head of the Cyprus delegation at the talks and by the Minister of Justice of Libya Abdel Jalil, who headed the Libyan delegation.

"Cyprus’s aim is to attract foreign investment companies in Libya, which could make their investments through Cyprus", the Cypriot Minister said in a statement after the signing, underlining in particular Cyprus’s tax regime as the lowest in Europe.

Stavrakis noted that following the meeting he had agreed with Libya to visit within the coming months to conclude an agreement for the avoidance of double taxation to further boost trade and investments between Cyprus and Libya.