On July 11 2016 Cyprus and Jersey signed a double tax agreement.(1) It is the first comprehensive double tax agreement between the two countries and will come into force once it has been ratified in accordance with domestic legal procedures. The 2004 agreement between Cyprus and Jersey on the taxation of savings income will remain in force, but the double tax agreement will be more beneficial to taxpayers.
The new agreement closely follows the 2010 Organisation for Economic Cooperation and Development (OECD) Model Tax Convention, with only minor modifications. The protocol to the agreement clarifies the information exchange provisions.
The agreement covers all taxes on income levied by either state or their local authorities, including taxes on capital appreciation and gains from the alienation of movable or immovable property. The specific taxes to which the agreement applies are:
- income tax in the case of Jersey; and
- income, corporate income, special contribution for defence, capital gains and immovable property tax in the case of Cyprus.
The agreement will also apply to any identical or substantially similar taxes that are imposed in future, in addition to, or in place of, existing taxes.
Since the agreement was signed, immovable property tax has been abolished in Cyprus with effect from January 1 2017. Since that is the earliest date on which the agreement could enter into force, it will not apply to immovable property tax in practice.
Article 4 of the agreement replicates the OECD Model Tax Convention provisions regarding residence verbatim, with the 'tie-break' criteria for determining residence for individuals who are resident in both countries being in descending order, the individual's:
- permanent home and centre of vital interests; and
- country of habitual residence and nationality.
If neither of these criteria is decisive, residence will be settled by mutual agreement between the two countries' tax authorities.
For legal persons, the place of residence is where the effective management of the enterprise is situated.
Article 5 of the agreement – which deals with permanent establishment – also replicates the OECD Model Tax Convention provisions verbatim, with the list of ancillary activities that prima facie do not give rise to a permanent establishment including:
- the storage and display of goods;
- the maintenance of stocks for processing by a third party;
- a purchasing or information-gathering facility; and
- a facility for preparatory or auxiliary purposes.
A building site, a construction, an assembly or installation project or a supervisory or consultancy activity connected with any of the above will be deemed to be a permanent establishment if it lasts for more than 12 months.
If an enterprise has a representative in the territory of a party that has, and habitually exercises, authority to conclude contracts in the name of the enterprise, the enterprise concerned will be deemed to have a permanent establishment regarding the activities that the person undertakes for the enterprise. As in the OECD Model Tax Convention, the double tax agreement provides that an independent broker or agent that represents the enterprise in the ordinary course of business will not be caught by this provision. Particular care needs to be taken regarding the issuing of general powers of attorney, so as not to risk unintentionally creating a permanent establishment with potential adverse consequences.
Income from immovable property
As in the OECD Model Tax Convention, income from immovable property may be taxed in the territory of the party where the property is situated.
Article 7 of the double tax agreement replicates the corresponding article of the OECD Model Tax Convention verbatim. An enterprise's profits are taxable only by the contracting state in which it is resident, unless it carries out business in the territory of the other state through a permanent establishment, in which case the profit attributable to the permanent establishment may be taxed by the contracting state in which it is located.
International shipping and transport
An enterprise's profits from the operation of ships or aircraft (including income from containers, trailers and related equipment) in international traffic are taxable only by the contracting state in which the enterprise is resident.
Dividends paid by a resident of one contracting state to a resident of the other contracting state are taxable only by the contracting state in which the recipient is resident.
Interest arising in one contracting state and paid to a resident of the other contracting state is taxable only by the contracting state in which the recipient is resident.
Natural persons who are Cyprus-resident and receive interest income from Jersey will be subject to a lower tax charge if they disclose the interest and opt for taxation in Cyprus, rather than the imposition of withholding tax in Jersey under the 2004 taxation of savings income agreement.
Royalties arising in one contracting state and paid to a resident of the other contracting state are taxable only by the contracting state in which the recipient is resident.
Gains derived by a resident of one contracting state from the alienation of immovable property situated in the territory of the other contracting state – or from the disposal of immovable or movable property associated with a permanent establishment situated in the other state – may be taxed by the contracting state in which the immovable property or the permanent establishment is situated. There is no provision in the agreement for gains on the disposal of shares in companies that derive more than half their value from immovable property to be taxed by the contracting state in which the immovable property is situated.
Gains derived from the disposal of all other property are taxable only by the contracting state in which the disponor is resident.
Like Cyprus's other recent double tax agreements, the Cyprus-Jersey agreement includes an article dealing specifically with offshore activities. It provides that a resident of one contracting state undertaking activities in the territory (including the territorial sea or exclusive economic zone) of the other contracting state will be treated as exercising a trade or business in the latter territory through a permanent establishment in respect of the activities concerned, unless the aggregate duration of the activities is no more than 30 days in the fiscal year concerned. Associated companies are treated as one for the purpose of assessing the duration of their activities.
Profits from maritime or air transport, towing, mooring, refuelling and similar activities in connection with offshore exploration and the exploitation of resources are taxable only by the contracting state in which the enterprise concerned is a resident.
Salaries, wages and similar remuneration derived by a resident of one contracting state from employment in connection with the exploration or exploitation of undersea resources of the second contracting state may be taxed by the second contracting state. However, if the employer is not a resident of the second contracting state and the employment amounts to less than 30 days in any 12-month period starting or ending in the fiscal year concerned, the remuneration is taxable only by the state in which the employee is resident.
Remuneration regarding employment aboard a ship or aircraft engaged in the transportation of supplies or personnel in connection with the exploration or exploitation of undersea resources is taxable by the contracting state in which the enterprise providing the services is resident.
Gains derived by a resident of one contracting party from the alienation of exploration or exploitation rights – or property used in connection with the exploration or exploitation of the seabed situated in the territory of the other contracting state –may be taxed by the contracting state in whose territory the rights or property are located. The same applies to shares deriving the greater part of their value directly or indirectly from such rights or property.
Elimination of double taxation
The agreement eliminates double taxation by the credit method. Credit is limited to the amount of tax that would be payable on the income concerned in the country of residence.
The agreement replicates the corresponding article of the OECD Model Tax Convention verbatim.
Mutual agreement procedure
The agreement replicates the corresponding provisions of the OECD Model Tax Convention, with a reference to arbitration to settle issues that cannot otherwise be resolved.
Exchange of information
The exchange of information article replicates Article 26 of the OECD Model Tax Convention verbatim. However, unusually, the exchange of information provisions will take effect eight tax years before the agreement's entry into force.
The protocol to the agreement provides robust safeguards against abuse of the information exchange provisions by requiring the contracting state that requests information to fulfil specified procedures to demonstrate the foreseeable relevance of the information to the request. No request can be submitted unless the state making the request has reciprocal procedures and means of obtaining similar information, and every request must be accompanied by the following details in writing:
- the identity of the person under examination or investigation;
- the period covered by the request;
- the nature of the information sought and the form in which the requesting party wishes to receive it;
- the tax purpose for which the information is sought;
- the reasons for believing that the information requested is foreseeably relevant to the tax administration and the enforcement of the party requesting it, with respect to the named person;
- the grounds for believing that the information requested is held or in the possession or control of, or obtainable by, a person within the jurisdiction of the request recipient;
- to the extent known, the name and address of anyone believed to be in possession of or able to obtain the requested information;
- a statement that:
- the request conforms with the law and administrative practices of the party requesting it;
- if the requested information were within its jurisdiction, the requesting party would be able to obtain the information under its laws or in the normal course of administrative practice;
- the request conforms with the double tax agreement; and
- a statement that the contracting party requesting the information has pursued all reasonable means available in its own territory to obtain the information.
In effect, this means that the authorities requesting the information must:
- have a prima facie case before they request the information; and
- make a reasoned request for disclosure.
These provisions are in line with the robust safeguards against abuse of the exchange of information provisions contained in Cyprus's Assessment and Collection of Taxes Law. Requests for exchange of information are dealt with by a specialist unit and the informal exchange of information between tax officers bypassing the competent authority is prohibited. A request must be much more than a brief email containing the name and identifying information of the individual concerned. Rather, a detailed case must be made, with the criteria set out in a formal, reasoned document. In effect, this means that the authorities requesting the information must already have a strong case, even before they request the information. As a final safeguard, the written consent of the attorney general must be obtained before any information is released to an overseas tax authority.
Assistance in collection of taxes
The double tax agreement includes no provisions regarding assistance in the collection of taxes.
Entry into force and termination
The agreement will enter into force when the two governments inform one another that the requisite constitutional procedures have been completed. Its provisions will have effect in the territories of both contracting parties from the beginning of the following year.
Termination of the agreement will require written notice by either party given at least six months before the end of any calendar year, whereupon the agreement will cease to have effect from the beginning of the following year. Notice may be given only after the agreement has been in force for five years.
Jersey is an important financial centre and the double tax agreement will be a valuable addition to Cyprus's extensive treaty network. It is hoped that the remaining steps required to bring it into effect can be completed quickly.