Recently, Switzerland and Cyprus signed a new protocol for the purpose of amending the current tax treaty between the two nations.
Alterations to the tax treaty
The new protocol signed between the countries includes, along with various other things, the minimum required standards of the BEPS actions of the OECD, associated with the bilateral agreements, in addition to other amendments which have been concurred bilaterally.
In accordance with the BEPS Action 6, a particular wording of the preamble is integrated and included within the treaty. This certain wording of the preamble states that this treaty: “intends to eliminate double taxation with respect to the taxes covered by this Agreement without creating opportunities for non-taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this agreement for the indirect benefit of residents of third States).”
As a consequence of this incorporation, it has been clarified that once the taxpayer has intended to get involved in the treaty shopping arrangement and various different strategies of treaty abuse, preventing the jurisdiction in this manner from imposing the tax, the advantages and perks that transpire as a result of the treaty arrangements should be dispossessed.
Article 7: Business profits
It is important to highlight that paragraph 4 of article 7 had been removed and now has been replaced and updated with a new paragraph. As per the new paragraph 4, the state which is contracting should not make any alterations to the profits which are accountable to the fixed establishment of an enterprise of various states which are contracting after a period of around six years from the conclusion of the taxable year. In case of wilful default, laxness, or fraudulent behavior, the provision would not be applied.
For that reason, after the period of six years from the culmination of the taxable year, the treaty has not authorized any of the rewritings of the accounts, despite the fact that the transactions between the PE and head office have not come to pass at arm's length.
Article 9: Associated enterprises
Article 9 is all about the changes to the profits that may take place for tax purposes, where the transactions have been recorded among the associated businesses ( parents as well as subsidiary organizations and corporations coming under the common control) on other than the terms of arm’s-length transaction.
The removal of paragraph 2 of Article 9 has taken place. It has ultimately been replaced with a new paragraph. The new paragraph which has been included now makes it clear that the other state which is contracting must make relevant alterations to the tax amount which has been on those particular profits. In addition to this, the requirement which needs the contracting state to be justified in principle along with the concerned amount that requires changes for carrying out this action has also been removed by the inclusion of a new paragraph.
Moreover, another change is regarding a new paragraph 3, which is integrated into Article 9, which indicates that a contracting state should not incorporate in the profits of the business' profits after the period of six years from the conclusion of the taxable year in which the profits would have been accrued to the business. The provision as mentioned above in paragraph 3 should not be applied if the wilful default, gross negligence, or fraudulent behavior takes place.
Article 26: Mutual agreement procedure
Article 26's first sentence regarding the mutual agreement procedure (MAP) has been removed and replaced with a new sentence.
As per the MAP procedure's modified paragraph 1, where an individual adjudges that the actions of either one or both of the contracting states will ultimately end up for him in taxation, not in compliance with the treaty's provision, in that scenario, the person no matter what the remedies have been given in the domestic law of those particular states, put forward their case to the relevant higher authorities of any of the contracting states. In erstwhile paragraphs, the individual can only set forth such a type of claim in the particular country he has been a resident of.
Article 28A: Entitlement to benefits
In Article 28A, a new paragraph has been incorporated concerning the agreement's application in special cases. More precisely, the principal purpose test (PPT) is executed and implemented by the treaty. This, along with various other things, is one of the mechanisms utilized in order to attack treaty shopping arrangements with regards to the BEPS Action Plan 6.
By incorporating the restriction and limitations of the benefits clause in Article 28A, it has been clarified that no kind of perks or benefits should be provided to the taxpayer. It has been stated under this particular agreement:
“if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit unless the taxpayer establishes that granting that benefit was in accordance with the object and purpose of the tax treaty.”
As a consequence, the taxpayer must be in a situation where they can establish that any tax treaty benefit provided is in compliance with the treaty's purpose and object and not for the purpose of avoiding tasks, treating shopping cases, or evading.
Entry into force
The publication of the protocol under discussion in the Official Gazette of Cyprus refers to the protocol which has been ratified by Cyprus. The amendments made in the tax treaty would be put into effect from January 1, 2022, in case both nations approve the protocol by the end of 2021.
The establishment of BEPS minimum standards concerning treaty shopping improves and strengthens the position of tax authorities to oppose the transactions that usually do not involve economic activities. For that reason, the taxpayers are required to take into account all of the elements with regards to the economic substance for the purpose of tackling these types of risks associated with the tax.
In Article 7, the new paragraph has been incorporated in order to resist the contracting state from making any kinds of changes to the PE profits following the period of six years from the conclusion of the taxable year.
In a similar manner, Article 9, which is concerned with the adjustment of profits among the associated corporations, asserts that no adjustment or alteration of the profit is pertinent after the period of six years from the point of earmarking of profit.
Therefore, in order to corroborate the profits accountable to the associated corporations and permanent establishment, a TP study is recommended, which ultimately will help in avoiding the profit being taxed more than one time.
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