On May 18, 2018, Cyprus and Andorra signed a double taxation agreement, the first between the two countries. The agreement is closely based on the latest OECD Model Convention and, in line with the OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, also includes a preamble making clear that it is not designed to create opportunities for double non-taxation or reduced taxation through evasion or avoidance, and 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 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 dividends are 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 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 in respect of 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 may be taxed in the country in which the property is situated. Gains from the disposal of shares in a company which derive more than half 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 two 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 concerned at any time in the twelve-month period 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 DTAs, the agreement with Andorra includes comprehensive provisions regulating the taxation of offshore hydrocarbon exploration and exploitation activities, intended 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 because of the short duration of some of these activities.
A resident of one country carrying on offshore exploration or exploitation activities on the territory (including the territorial sea or exclusive economic zone) of the other is deemed to be carrying on business through a permanent establishment there if the activities are carried out for an aggregate of 30 days or more in any 12 months.
Gains derived by a resident of a country from the alienation of assets (either tangible or intangible) deriving 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 exchange of tax information, based on the OECD Model Convention. Its provisions are further elaborated in the protocol to the agreement, which makes clear that that the standard of “foreseeable relevance” is intended to provide for exchange of information in tax matters to the widest possible extent, but that the contracting states are not at liberty to engage in “fishing expeditions” or to request information that is unlikely to be relevant to the tax affairs of a given taxpayer. In addition, 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: direct informal exchange of information between tax officers bypassing the competent authority is prohibited. As a final safeguard, the law requires the written consent of the Attorney General to be obtained 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, having regard to all relevant facts and circumstances, that obtaining that 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 the two governments inform one another that the requisite constitutional procedures have taken place. Its provisions will have 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 through diplomatic channels of at least six months no earlier than five years after the agreement entered into force, and its provisions will cease to apply from the beginning of the following calendar year.
Financial and business services are a significant contributor to the economies of both countries, and the conclusion of the double taxation agreement will strengthen economic and commercial relations between them. It is therefore to be hoped that the remaining steps in concluding the agreement and bringing it into effect can be achieved quickly.