As we approach the turn of the year it is an appropriate time to summarize the various changes that have taken place to date in 2017 and look forward to the changes on the horizon.
In this Part I of a two-part series, I review the double taxation agreements and direct taxation developments in Cyprus during 2017. In Part II, I shall reflect on value-added tax and tax administration developments.
Double Taxation Agreements (DTAs)
Deferral of new provisions regarding taxation of gains on disposal of shares in companies holding immovable property in Russia
One of the most important developments on the DTA front took place as 2016 drew to a close, with the announcement by the Cyprus Ministry of Finance that the Russian government had agreed to defer the introduction of source-based taxation of capital gains on shares in "property-rich" Russian companies (companies whose assets mainly comprise real estate), which was due to take effect from the beginning of 2017.
Under the 1998 DTA between Cyprus and Russia, gains on disposals of shares are taxable only in the country of residence of the person disposing of the shares. Since Cyprus does not impose any capital gains tax on disposals of shares in companies unless they own immovable property in Cyprus, this makes Cyprus a very advantageous location for holding shares in Russian companies. Most modern DTAs make an exception for gains on disposal of shares in companies which derive their value principally from immovable property (so-called "property-rich" companies), allowing such gains to be taxed in the country in which the property is physically located. The Cyprus–Russia DTA did not make any such distinction, making Cyprus even more attractive as a jurisdiction for holding shares in companies owning or developing real estate in Russia.
However, the 2010 Protocol to the DTA amended the DTA to provide that gains on the disposal of shares in companies which derive their value principally from immovable property in Russia would be subject to tax in Russia from January 1, 2017. Shares in other companies were not affected.
The application of this provision of the Protocol has now been deferred until similar provisions are introduced into Russia's DTAs with other European countries. As a result, disposals of shares in property-rich companies will continue to be taxable only in the country of residence of the person disposing of the shares, in the same way as other shares. At the time of the announcement it was announced that an additional Protocol was being prepared to formalize the deferral, but nothing has been published to date.
Entry into effect of DTAs with Bahrain, Georgia, India, and Latvia
At the beginning of 2017 new DTAs with Bahrain, Georgia, India, and Latvia entered into effect.1 The agreement with India2 took effect as regards Indian taxes three months later, on April 1, 2017, the beginning of the Indian tax year.
Like Cyprus's other DTAs, all four agreements closely follow the 2010 OECD Model Tax Convention. The agreements with Bahrain, Georgia and Latvia are brand new, and the agreement with India replaces an earlier DTA which had been in force since 1994. Ratification of the revised DTA with India was completed in record time. The agreement was signed on November 18, 2016, and entered into force less than a month later.
As was widely expected following similar changes to India's agreements with Mauritius and Singapore, the new DTA provides for source-based taxation of gains from the alienation of shares. However, investments undertaken before April 1, 2017 are grandfathered, with taxation rights over gains on the disposal of such shares at any future date remaining solely with the disponor's state of residence.
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Previously published in Global Tax Weekly
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