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19 May 2017
Income from immovable property
International shipping and transport
Relief against double taxation
The new double tax agreement between Cyprus and Barbados, which was signed on May 3 2017, was published in the Official Gazette on May 12 2017. The agreement will enter into force once each country has notified the other that its domestic ratification procedures have been completed and will have effect from the following January 1. The agreement closely follows the 2014 version of the Organisation for Economic Cooperation and Development (OECD) Model Tax Convention.
Article 5 of the double tax agreement, which deals with permanent establishments, reproduces the provisions of the OECD Model Tax Convention almost word for word.
The following will be deemed to be permanent establishments if they last for more than six months:
If an enterprise which is resident in one of the countries has a representative in the other country that has, and habitually exercises, authority to conclude contracts in the name of said enterprise, the enterprise concerned is deemed to have a permanent establishment in respect of any activities which the representative undertakes on its behalf. As in the OECD Model Tax Convention, the double tax agreement provides that an independent broker or agent that represents the enterprise in the ordinary course of business will not be caught by this provision. Particular care needs to be taken regarding the issuing of general powers of attorney so as not to risk unintentionally creating a permanent establishment, with potential adverse consequences.
As in the OECD Model Tax Convention, income from immovable property may be taxed in the country where the property is situated.
Article 7 of the double tax agreement reproduces the corresponding article of the OECD Model Tax Convention almost word for word. An enterprise's profits are taxable only by the country in whose territory the enterprise is resident unless it carries out business in the territory of the other country through a permanent establishment, in which case the profit attributable to the permanent establishment may be taxed by the country in whose territory it is located.
Profits from the operation of ships or aircraft (including income from containers, trailers and related equipment) in international traffic are taxable only in the country in which the effective management of the enterprise is exercised.
The double tax agreement eliminates withholding taxes on dividends, interest and royalties paid by a resident of one country to a resident of the other, as long as the royalties and interest are no more than would apply on an arm's-length basis.
Capital gains derived by a resident of one country from the alienation of immovable property situated in the other, together with gains from the alienation of movable property forming part of a permanent establishment's business property, may be taxed in the country in which the property is located. Gains on the disposal of ships or aircraft operated in international traffic are taxable only in the country in which the place of effective management of the enterprise is situated. Other capital gains, including gains on the disposal of shares in 'property-rich' companies, are taxable only in the country in which the alienator is resident.
Like several other of Cyprus's recent double tax agreements, the Cyprus-Barbados agreement includes an article dealing specifically with offshore activities. It provides that a resident of one country undertaking activities in the territory (including the territorial sea or exclusive economic zone) of the other will be treated as exercising a trade or business in the latter territory through a permanent establishment in respect of the activities concerned, unless the aggregate duration of the activities is less than 30 days in the fiscal year concerned. Associated companies are treated as one for the purpose of assessing the duration of their activities.
Profits from maritime or air transport, towing, mooring, refuelling and similar activities in connection with offshore exploration and the exploitation of resources are taxable only by the country of which the enterprise concerned is resident.
Salaries, wages and other similar remuneration derived by a resident of one country in respect of employment in connection with exploration or exploitation of sub-sea resources of the other country may be taxed by the second country. However, if the employer is not a resident of the second country and the employment amounts to less than 30 days in any 12-month period starting or ending in the fiscal year concerned, the remuneration is taxable only by the country in which the employee is resident.
Gains derived by a resident of one country from the alienation of exploration or exploitation rights or property used in connection with the exploration or exploitation of the seabed situated in the territory of the other country may be taxed by the country in whose territory the rights or the property are located. The same applies to shares deriving the greater part of their value directly or indirectly from such rights or property.
Relief against double taxation is given under the credit method. Credit is limited to the amount of tax that would be payable on the income concerned in the country of residence.
The exchange of information provisions in the agreement replicate those of the OECD Model Tax Convention, but are supplemented by a protocol setting out the information required to accompany a request for information, in order to demonstrate the foreseeable relevance of the information requested, in line with Cyprus's Assessment and Collection of Taxes Law. The protocol also provides that information should not be provided unless the contracting state that made the request has reciprocal provisions or applies appropriate administrative practices for the provision of the information requested.
Either contracting state may terminate the double tax agreement by giving at least six months' written notice no earlier than five years after it entered into force. The agreement will cease to have effect from the beginning of the next calendar year.
For further information on this topic please contact Philippos Aristotelous at Elias Neocleous & Co LLC by telephone (+357 25 110 110) or email (email@example.com). The Elias Neocleous & Co LLC website can be accessed at www.neo.law.
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