NEW UK / CYPRUS Double tax agreement
This may be of interest to many members, especially if you have a military pension or a civil service pension...…I know it does affect me due to a Military Pension BUT it works to my advantage
Cyprus and the United Kingdom recently signed a new double tax agreement (18 March 2018). Once it has been ratified by both parties, it will replace the current agreement, which dates back to 1974 and is one of the oldest tax agreements still in force in Cyprus.
MAIN POINTS
Personal remuneration
Most of the new provisions on personal remuneration do not alter the existing arrangements. One exception is the taxation of pensions paid in respect of national or local government service (eg, pensions paid to retired civil servants or military personnel). Under the 1974 agreement, all pensions, including those payable in respect of government service, are taxed only in the country in which the recipient is resident.. Under the new agreement, pensions payable in respect of national or local government service will be taxable only in the country from which they are paid, unless the recipient is both a national and resident of the other country, in which case the pension is taxable only in the country in which the recipient is resident. This aligns the provisions of the Cyprus-UK agreement regarding such pensions with the United Kingdom's other double tax agreements
Offshore activities
The new agreement includes comprehensive provisions regulating the taxation of offshore hydrocarbon exploration and exploitation activities, which are 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 establishment and business profits. Special rules are required because of the short duration of some of these activities.
A resident of one country undertaking activities offshore in the other country for more than 30 days in any 12-month period in connection with the exploration or exploitation of the seabed, subsoil or natural resources is deemed to be carrying out business in that other country through a permanent establishment.
Profits from offshore supply and transport operations connected with the exploration or exploitation of the seabed, subsoil or natural resources of a country are taxable only in that country. The corresponding article also includes rules for determining when the 30-day threshold has been exceeded in respect of offshore activities undertaken by associated enterprises.
Salaries and wages earned by a resident of one country employed in an offshore zone of the other are taxable in the country in which the activities are carried out. However, if the employer is not resident in the country in which the activities take place, and the employment is for less than 30 days in any 12-month period, remuneration is taxable only in the country in which the individual is resident.
Salaries, wages and similar remuneration derived from employment aboard ships or aircraft engaged in offshore supply and similar activities are taxable in the country in which the individual is resident.
Gains derived by a resident of one country from the alienation of exploration or exploitation rights, or of property situated in the other country and used in connection with the exploration or exploitation of the seabed, subsoil or natural resources situated in the second country, or shares deriving more than half of their value directly or indirectly from such rights or such property, may be taxed in the second country.
Elimination of double taxation
In the United Kingdom, Cyprus tax that is payable, whether directly or by deduction, on profits, income or chargeable gains from sources within Cyprus will be credited against any UK tax computed by reference to the same amounts. The profits of Cyprus-based permanent establishments of UK-resident companies and dividends paid by Cyprus-resident companies to UK-resident companies are exempt from UK tax, subject to satisfying the conditions for exemption under UK law. In the case of a non-exempt dividend paid to a UK-resident company which controls 10% or more of the voting power of the company paying the dividend, relief from Cyprus taxation will be given under the credit method, taking account of the Cyprus tax payable by the company on the profits out of which the dividend is paid.
In Cyprus, credit will be given for UK tax payable, up to the amount of the Cyprus tax on the income concerned.
Entitlement to benefits
The new agreement includes a principal purpose test anti-abuse rule identical to that set out in Paragraphs 1 and 4 of Article 7 of the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting.
Entry into force and termination
The new agreement will enter into force once both countries have completed their respective domestic ratification procedures. It will take effect in Cyprus from the beginning of the following calendar year. In the United Kingdom it will take effect from the same date in respect of taxes withheld at source. In respect of corporation tax, it will take effect from April 1 following its entry into force and in respect of income and capital gains tax it will take effect from April 6 following its entry into force.
The agreement will remain in force until terminated by either country via written notice of termination through diplomatic channels at least six months before the end of any calendar year, but no earlier than five years after the agreement has entered into force. The agreement will cease to have effect in Cyprus from the beginning of the following calendar year. In the United Kingdom, it will cease to have effect:
•six months after the date on which the notice of termination is given for taxes withheld at source;
•from April 1 following the date on which the notice of termination is given for corporation tax; and
•from April 6 following the date on which the notice of termination is given for income tax and capital gains tax.
Comment
The current tax agreement between Cyprus and the United Kingdom is one of the oldest that is still in force in Cyprus. The changes introduced will have little direct effect on the tax liability of most taxpayers, but the modernisation of the agreement will provide clarity.
