A Tax Treaty (TT), in general terms, is an agreement between two or more jurisdictions that regulates the tax amount that an individual or a company must pay, so they are not taxed twice on the same type of income. Under the TT, any tax paid in the country of tax residence will be exempt in the country in which it arises or vice versa.
A bilateral tax agreement or Double Tax Treaty (DTT), is an agreement between two countries.
Many countries have entered into DTTs with other jurisdictions to avoid or reduce double taxation. Such DTTs may cover a variety of taxes including income taxes, inheritance taxes, value added taxes, or other taxes.
Except of the DTTs, multilateral agreements also exist. For example, European Union (EU) countries are parties to a multilateral agreement with respect to value added taxes under the support of the EU.
The provisions and purposes to be achieved vary significantly, with very few TTs being alike.
The main purposes for entering into a treaty include reduction of double taxation, elimination of tax evasion, and encouraging cross-border trade efficiency. TTs improve certainty for taxpayers and tax authorities in their international affairs.
Governments usually follow template treaties as preliminary point. DTTs commonly use the Organisation for Economic Co-operation and Development (OECD) Model Convention and the official commentary and member comments thereon assist as a direction as to understanding by each jurisdiction. Other relevant models exist such as the UN Model Convention and the US Model Convention.
B. Main provisions of the TTs
Most treaties cover the following:
- Describe which taxes are covered;
- Describe who is a resident and eligible for benefits;
- Decrease the tax amounts withheld from interest, dividends, and royalties paid by a resident of one country to residents of the other country;
- Permanent Establishment tax treatments;
- Describe conditions in which income earned by physical persons resident in one country will be taxed in the other country, including salary, self-employment, pension, and other income;
- Gives exemption of certain types of organizations or individuals; and
- Gives procedural outlines for implementation and dispute resolution.
C. Details/ information of the main provisions of the TTs
- In most cases, the benefits of TTs are available only to tax residents of one of the treaty countries. In general, a tax resident of a jurisdiction is any person that is taxable under the local laws of that country by either being domicile, residence, place of incorporation, management and control or similar conditions.
- Generally, TTs provide that profits arising from business activities of a resident of one country are taxable in the other country only if the profits come from a Permanent Establishment (PE) in that other country. Nearly all TTs follow the meaning of PE in the OECD Model Treaty. While most of TTs do not mention a period of time for which activities must be exercised through a place before it gives rise to a PE, most OECD member countries agree that a PE does not exist when a place of business is less than six months.
- Withholding Tax (WHT) apply mainly to interest, dividends and royalties and the relevant tax amount is being deducted from the payments of such type of expenses, to non-tax residents, in accordance with the local laws (and being subsequently paid to the tax authorities of such country). Most TTs decrease or eliminate the amount of tax required to be withheld with respect to residents of a treaty jurisdiction.
- Most but not all TTs include special provisions for eliminating double taxation, however, double taxation risk may still be present. These provisions usually require that each country gives a credit for the taxes of the other country resulting to reducing the taxes of a resident of the country.
- Various jurisdictions ensure that Tax Information Exchange agreement is included in the TTs. The purpose of this agreement is to encourage international co-operation in tax issues through exchange of information. It was created by the OECD Global Forum Working Group on Effective Exchange of Information.
- Prevention of “Treaty Shopping”, which is not the correct way to use TTs, article is included in recent treaties of some countries. The said article provides for restriction on benefits or denies the benefits of the TT to residents that do not meet the extra criteria. This article is usually quite complex.
- TTs are considered the highest law of numerous countries and in such jurisdictions TTs prevail conflicting local law provisions. In some other countries, TTs are considered to be equal to the local law provisions and in case of conflict, this is required to be resolved under the dispute provisions of the local and/ or TT regulations.
D. Update on latest DTTs signed by Cyprus
Cyprus ratified the DTT it signed with Kazakhstan on 15 May 2019, on 24 May 2019. Specific legal actions require now to take place in both countries after which the DTT will enter into force. The DTT will be effective from the next 1 January following the year in which the DTT enters into force.
The DTT between Cyprus and Andorra was signed on 18 May 2018 and entered into force on 11 January 2019. In accordance with the DTT, it will take effect as from 1 January 2020.
The first-time DTT between Cyprus and Saudi Arabia was signed on 3 January 2018 and entered into force on 1 March 2019. Based on the provisions of the DTT, it will take effect as from 1 January 2020.
Cyprus and the UK signed a new DTT on 22 March 2018 and as from 1 January 2019 is effective in Cyprus. The new DTT replaced the previous DTT which was in place and it was signed back in 1974 and updated in 1980. An amending protocol to the new DTT was signed in December 2018 in relation to the government service pensions of individuals who are not citizens of the country in which they are tax resident.
More information and/ or details on each of the recent DTTs of Cyprus and/ or any past DTTs Cyprus has signed and they are already in force may be provided upon special request.
E. List of Cyprus DTTs in place
|3||Austria (new agreement)||19||Georgia||35||Lithuania||51||Singapore|
|4||Azerbaijan***||20||Germany (new agreement)||36||Luxembourg||52||Slovakia**|
|5||Barbados||21||Greece||37||Malta||53||Slovenia (new agreement)|
|6||Belarus||22||Hungary||38||Mauritius (new protocol)||54||South Africa (amending protocol)|
|8||Bosnia*||24||India (new agreement)||40||Montenegro*||56||Sweden|
|9||Bulgaria||25||Iran||41||Norway (new agreement)||57||Swiss Confederation|
|10||Canada||26||Ireland||42||Poland (new agreement)||58||Syria|
|11||China||27||Italy (new protocol)||43||Portugal||59||Thailand|
|12||Czech Republic (new agreement)||28||Jersey||44||Qatar||60||The States of Guernsey|
|13||Denmark (new agreement)||29||Kazakhstan||45||Romania||61||Ukraine*** (new agreement)(amending protocol)|
|14||Egypt||30||Kingdom of Bahrain||46||Russia (amending protocol)||62||United Arab Emirates|
|15||Estonia||31||Kuwait (new agreement)||47||San Marino (amending protocol)||63||United Kingdom (amending protocol) (new agreement)|
* The treaty between Cyprus and the Socialist Federal Republic of Yugoslavia is still in force.
** The treaty between Cyprus and the Czechoslovak Socialist Republic is still in Force.
***The treaty between Cyprus and the Union of Soviet Socialist Republics is still in force.
Savva & Associates aims to work with clients to ensure their Cyprus, international and personal structures are established and administered to the highest level of international standards. Our highly experienced and qualified team will ensure the correct structuring of your Companies and provide comprehensive advice in all VAT and Tax matters.
For further information please contact Mr Charles Savva at firstname.lastname@example.org who will be happy to further assist you.