Cyprus: Cyprus Oil And Gas Taxation

The Republic of Cyprus is a relative newcomer to the upstream oil and gas industry. For some years there had been indications of likely substantial gas deposits in the Levant Basin, in the South-Eastern Mediterranean area, which were confirmed by the discovery of the Tamar gas field in Israel's exclusive economic zone in the early 2000s. Interest soon spread to the waters off Cyprus, and the government took steps to delineate its Exclusive Economic Zone (EEZ) and initiate a first licensing round for prospecting and exploration. The first license, for Block 12 in the Aphrodite field, was issued in 2008, and in 2012 the licensee announced discovery of a natural gas field with an estimated resource range of between 5 and 8 trillion cubic feet (TCF). The estimate has since been revised to 3.6 to 6 TCF following further exploratory drilling, but even these lower figures will make Cyprus an important energy source.

A second licensing round in 2012 has resulted in the issuing of five further licenses to consortia including the world's largest energy companies. Exploratory drilling in these new blocks is scheduled to begin shortly.

The Government's objective is to make Cyprus not only a hydrocarbons producer, but a gas export hub for the region, taking advantage of its location and its geopolitical stability in a volatile region, and negotiations are under way for the development of an LNG compression and export facility costing several billion euro.

As a member of the EU, Cyprus has aligned its energy policy with the acquis communautaire and transposed all relevant EU Directives into national law. Hydrocarbon exploration and exploitation activities in Cyprus and its EEZ are governed by the Hydrocarbon (Prospection, Exploration and Production) Law (4(I)/2007), which transposed into national law Directive 94/22/EC on the conditions for using authorizations for the prospection, exploration and production of hydrocarbons. The Hydrocarbon Law and the Hydrocarbon (Prospection, Exploration and Production) Regulations (51/2007 and 113/2009) together set out the licensing framework for prospecting, exploration and extraction activities. Successful applicants for a license are required to enter into an Exploration and Production Sharing Contract (EPSC), in the form published by the Ministry of Energy, Commerce, Industry and Tourism, which is the regulatory authority.

The model EPSC includes a tax clause requiring the contractor to comply with the applicable tax lawsnand regulations of Cyprus and the EU but, given that Cyprus's gas reserves were discovered only recently, it is no surprise that there is not yet an established taxation regime in relation to oil and gas companies operating in Cyprus.

The Current Tax Law

Currently, Cyprus resident companies are subject to corporate income tax at a rate of 12.5 percent on worldwide income, after deduction of expenses wholly incurred for the production of income and capital allowances for assets used in the company's trade. There is no withholding tax on interest or dividends paid to non-residents and taxation of capital gains, except to the extent that the gain is derived from immovable property in Cyprus. Nonresident companies are subject to corporate income tax at 12.5 percent on Cyprus-source income or the profits of a permanent establishment in Cyprus.

Current Cyprus tax legislation defines a permanent establishment in the same way as the 2010 OECD Model Convention, as a fixed place of business through which the business of an enterprise is wholly or partly carried on. A permanent establishment includes a place of management, a branch, an office, a factory, a workshop, a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

Double Tax Agreements

Most of Cyprus's double taxation agreements, which number more than 50, defi ne the Republic of Cyprus as including its EEZ and so implicitly bring off shore activities within their scope, but they do not deal specifically with off shore activities. However, the three most recent agreements, with the United Arab Emirates (in force), Latvia (under negotiation) and Norway (under negotiation), include articles regulating this matter.

The Cyprus–UAE agreement merely provides that the contracting states' freedom to apply their domestic laws and regulations related to the taxation of income and profits derived from hydrocarbons and associated activities is not affected by the agreement. However, the draft agreements with Latvia and Norway contain detailed provisions. They both provide that a resident of one contracting state undertaking activities off shore (either on its own account or with associated enterprises) in the other contracting state for more than 30 days in any 12 month period in connection with the exploration or exploitation of the seabed or subsoil or their natural resources is deemed to be carrying on business in that other contracting state through a permanent establishment.

Profits from off shore supply and transport operations in connection with the exploration or exploitation of the seabed or subsoil or their natural resources of a contracting state are taxable only in the contracting state in which the enterprise providing the services is resident.

Salaries, wages and the like earned by a resident of one contracting state from employment in the off - shore zone of the other contracting state are taxable in the contracting state in which the activities are carried out. However, if the employer is not resident in the contracting state in which the activities take place, and the employment is for less than 30 days in any 12 month period, the remuneration is taxable only in the contracting state in which the individual is resident. Salaries, wages and similar remuneration derived from employment aboard ships or aircraft engaged in off shore supply and similar activities may be taxed in the contracting state in which the enterprise providing the services is resident.

Gains derived by a resident of one contracting state

from:

  • the alienation of exploration or exploitation rights (the term is defined in the article); or property situated in the other contracting state and used in connection with the exploration or exploitation of the seabed or subsoil or
  • Their natural resources situated in the second contracting state; or
  • shares deriving their value or the greater part of their value directly or indirectly from such rights or such property,

may be taxed in the second contracting state.

Possible Amendments To The Income Tax Law

In order to bring off shore activities within the scope of taxation, the government is considering amending the Income Tax Law (Law 118(I)/2002) by adding the following text to the definition of the Republic of Cyprus: " and, when used in a geographical sense, includes the national territory, the territorial waters of the Republic of Cyprus, as well as any area outside the territorial waters, including the border zone, the EEZ and continental shelf, which in accordance with international law and the laws of the Republic of Cyprus, is determined as an area in which the Republic of Cyprus exercises sovereign rights or jurisdiction ".

It has also been suggested that the definition of the term "permanent establishment" should be amended to include " off shore activities with respect to mining, exploration, or exploitation of the shelf, subsoil, or natural resources located within the EEZ and continental shelf, or the provision of services related to such mining, exploration or exploitation ". As a matter of interpretation and considering the relevant commentaries of the 2010 OECD Model Convention, such an amendment may not be strictly necessary as a permanent establishment may be deemed to exist without it, but it could serve to eliminate ambiguity.

In summary, Cyprus has in place the legislation needed to deal with current hydrocarbon exploration and exploitation activities in line with the cumulative body of EU laws. However, as hydrocarbon- related activities increase in scope and in volume, fuller and more specific provisions for taxation of oil and gas companies within either the model EPSC or relevant legislation might be necessary in due course.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions