On 18 May 2018 Cyprus and Andorra signed a double tax agreement, which is the first between the countries. The agreement is closely based on the latest Organisation for Economic Cooperation and Development (OECD) Model Convention. In line with the OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS), the agreement includes a preamble which makes clear that it is not designed to create opportunities for double non-taxation or reduced taxation through evasion or avoidance, as well as a principal purpose test-based general anti-avoidance rule. A protocol to the agreement sets out residence provisions for pension and investment funds and elaborates on the provisions regarding exchange of information.
Dividends paid by a company resident in one country to a resident of the other are taxable only in the country in which the recipient is resident, provided that the beneficial owner of the dividends is a resident of the second country. As neither country imposes withholding tax on dividends paid to shareholders resident overseas, the provisions regarding such dividends are merely academic.
Interest and royalties
Interest and royalties paid by a resident of one country to a resident of the other are taxable only in the country in which the recipient is resident, provided that the beneficial owner of the income is a resident of the second country.
The amounts qualifying for exemption are limited to what would be payable on an arm's-length basis, and the exemptions are not available for interest or royalties deriving from a permanent establishment through which the beneficial owner of the income (who is also a resident of one of the countries) carries on business in the country from which the income is paid.
Gains derived by a resident of one country from the alienation of immovable property (or of moveable property associated with a permanent establishment) situated in the other are taxed in the country in which the property is situated. Gains from the disposal of shares in a company which derive more than half of their value directly from immovable property situated in the other country may be taxed in the state in which the property is situated, unless:
- the shares are listed on a recognised stock exchange in one of the countries or in a member of the European Economic Area; and
- the person disposing of the shares directly or indirectly held no more than 25% of the capital of the company at any time in the 12 months preceding the disposal.
Gains derived from the alienation of all other property (including ships or aircraft and ancillary equipment) are taxable only in the country in which the alienator is resident.
Like many of Cyprus's recent double tax agreements, the agreement with Andorra includes comprehensive provisions regulating the taxation of offshore hydrocarbon exploration and exploitation activities. This is to ensure that each state's taxation rights in respect of offshore activities are preserved in circumstances where they might otherwise be limited by other provisions of the agreement, such as those dealing with permanent establishments and business profits. Special rules are required due to the short duration of some of these activities.
Where a resident of one country carries on offshore exploration or exploitation activities in the territory (including the territorial sea or exclusive economic zone) of the other for an aggregate of 30 days or more in any 12 months, it is deemed to be carrying on business through a permanent establishment.
Gains derived by a resident of a country from the alienation of assets (either tangible or intangible), which derive the majority of their value from exploration or exploitation rights in the second country or its exclusive economic zone, may be taxed in the second country.
Exchange of information
The agreement includes comprehensive regulations regarding the exchange of tax information, based on the OECD Model Convention. Its provisions are elaborated in the protocol to the agreement, which clarifies that that the standard of "foreseeable relevance" is intended to provide for exchange of information in tax matters to the broadest possible extent. However, the contracting states may not engage in fishing expeditions or request information that is not relevant to the tax affairs of a given taxpayer.
Further, Cyprus's Assessment and Collection of Taxes Law provides robust safeguards against abuse of any exchange of information provisions. Requests for exchange of information are dealt with solely by the International Tax Relations Unit (ITRU) of the Tax Department. Exchange of information may take place only via the ITRU and direct informal exchange of information between tax officers bypassing the competent authority is prohibited. As a final safeguard, the law requires the attorney general's written consent before any information is released to an overseas tax authority.
Entitlement to benefits
The agreement includes a principal purpose test-based general anti-avoidance rule based on the wording of the OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS. It provides that benefits under the agreement should be withheld if it is reasonable to conclude that obtaining the benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit.
Entry into force and termination
Article 28 provides that the agreement will enter into force when both governments confirm that the requisite constitutional procedures have taken place. Its provisions will come into effect in both contracting states from the beginning of the following year. The agreement will remain in force until it is terminated; either country may terminate the agreement by giving written notice of termination of at least six months through diplomatic channels. The agreement may be terminated no sooner than five years after it enters into force and its provisions will cease to apply from the beginning of the following year.
Financial and business services are a significant contributor to the economies of both countries and the double taxation agreement will strengthen economic and commercial relations between them. It is therefore hoped that the agreement will be concluded and brought into effect quickly.
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.