The double taxation agreement between Cyprus and Spain, which
was signed in Nicosia on 14 February 2013, has taken another step
towards ratification. On 2 August the Spanish cabinet approved the
agreement and forwarded it the Spanish parliament for
consideration. The new agreement follows the OECD Model Convention
and applies to taxes on capital and income. It will enter into
force three months after the two countries have exchanged formal
notifications that their respective domestic ratification
procedures have been completed and will apply to the tax year
beginning on the following 1 January and subsequent tax
years.
The agreement applies to taxes on income and capital and follows
the latest OECD Model Tax Convention. It provides for a
maximum withholding tax rate of 5% on dividends, provided the
beneficial owner is a resident of the other contracting state.
Dividends paid by a company resident in one state to a company
resident in the other state are exempt from withholding tax
provided the recipient company's capital is wholly or partly
divided into shares and provided that it directly holds at least
10% of the capital of the company paying the dividends.
Interest and royalties paid by a resident of one contracting state
to another are taxable only in the state of residence of the
recipient, provided the recipient is the beneficial owner.
Capital gains on disposals of immovable property and on unlisted
shares in companies deriving more than 50% of their value from
immovable property may be taxed in the country in which the
immovable property is situated. Gains on disposals of ships and
aircraft engaged in international traffic are taxable only in the
country in which the place of effective management of the
enterprise is situated. Other gains are taxable only in the country
in which the alienator is resident. As Cyprus does not impose tax
on such gains this gives rise to tax planning opportunities.
The exchange of information article reproduces the corresponding
article of the OECD Model verbatim. It should be noted that
Cyprus's Assessment and Collection of Taxes Law provides robust
safeguards against abuse of exchange of information provisions by
requiring requests for information to be adequately supported by
evidence demonstrating the foreseeable relevance of the request, by
channelling all requests through a specialist unit and forbidding
peer-to-peer information exchange by tax officials on the ground,
and by requiring the approval of the Attorney General for the final
release of information.
The Protocol to the agreement introduces a measure to prevent
treaty shopping or other abuse by providing that the agreement will
not be interpreted to mean that a contracting state is prevented
from applying its domestic legal provision on the prevention of tax
evasion or tax avoidance.
For several years up to 2009 Cyprus-resident companies were
ineligible for certain Spanish tax benefits and exemptions on
account of Cyprus being included in the Spanish authorities'
so-called black list of tax havens, despite complying with all
relevant information exchange requirements. In 2009 the Spanish
authorities removed the restrictions and progress in the
negotiations regarding the double taxation agreement resumed. The
conclusion of the agreement normalises tax relations between the
two countries and has already led to a significant expansion of
economic ties and reciprocal investment between them.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
