Cyprus: The New Cyprus-Latvia Double Taxation Agreement
Negotiations between the governments of Cyprus and Latvia on a new double taxation agreement, which began in 2006, appear to be reaching the final stages. The Latvian authorities have now published the text of the final draft agreement, which requires the approval of the Latvian Cabinet of Ministers before signature. After signature it will need to be ratified by both countries before taxing effect.
The agreement closely follows the form of the latest OECD Model Convention. The key features are outlined below.
Witholding taxes on dividends, interest and royalties
Dividends, interest and royalties paid by a company resident in one contracting state to a resident of the other are subject to zero tax in the contracting state from which they originate as long as the beneficial owner of the dividend, interest or royalty (as the case may be) is a company (but not a partnership) resident in the second contracting state. It this is not the case, tax payable in the first contracting state is limited to 10 per cent of the gross amount in the case of dividends and interest and 5 per cent of the gross amount in the case of royalties.< p/>
As both countries are EU members, the Interest and Royalties Directive and the Parent Subsidiary Directive will also be relevant.
Income or gains derived by a resident of one contracting state from the alienation of immovable property situated in the other contracting state may be taxed in the contracting state in which the property is situated. Gains on disposal of shares or similar interests in a company or other entity deriving more than 50 per cent of its value from immovable property may also be taxed in the contracting state in which the immovable property is situated.
Gains from the disposal of immovable or movable property associated with a permanent establishment may be taxed in the contracting state in which the permanent establishment is located.
Gains derived from the alienation of all other property (including ships or aircraft operated in international traffic) are taxable only in the contracting state in which the alienator is resident.
The draft agreement with Latvia is the first of Cyprus’s agreements to include an article dealing specifically with offshore activities.
Article 21 provides that a resident of one contracting state undertaking activities offshore in the other contracting state for more than 30 days in any 12 month period in connection with the exploration or exploitation of the seabed or subsoil or their natural resources is deemed to be carrying on business in that other contracting state through a permanent establishment.
Profits from offshore supply and transport operations in connection with the exploration or exploitation of the seabed or subsoil or their natural resources of a contracting state are taxable only in that contracting state.
Salaries, wages and the like earned by a resident of one contracting state from employment in the offshore zone of the other contracting state are taxable in the contracting state in which the activities are carried out. However, if the employer is not resident in the contracting state in which the activities take place, and the employment is for less than 30 days in any 12 month period, the remuneration is taxable only in the contracting state 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 contracting state in which the individual is resident.
Gains derived by a resident of one contracting state from:
the alienation of exploration or exploitation rights; or
property situated in the other contracting state and used in connection with the exploration or exploitation of the seabed or subsoil or their natural resources situated in the second contracting state; or
shares deriving their value or the greater part of their value directly or indirectly from such rights or such property,
may be taxed in the second contracting state.
Exchange of information
The exchange of information article reproduces article 26 of the OECD Model Convention verbatim.
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 Department of Inland Revenue. Exchange of information may take place only via the ITRU: direct 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 lengthy legal document. In effect, this means that the authorities requesting the information must already have a strong case even before they request the information. Accordingly, it will not be possible to follow up a suspicion without first gathering significant evidence. As a final safeguard, Cyprus’s Assessment and Collection of Taxes Law requires the written consent of the Attorney General to be obtained before any information is released to an overseas tax authority.
On independence Latvia did not adopt the Cyprus-USSR double taxation agreement of 1982, and there is currently no double taxation agreement in force between the two countries. The Latvian government announced the commencement of negotiations on an agreement with Cyprus in 2006 and it is hoped that the remaining steps in concluding the agreement and bringing it into effect can be achieved quickly. If it takes effect in its current form, the agreement will be Cyprus’s first to include an article dealing with offshore activities, reflecting its newly-discovered energy resources. In the meantime, although there is no agreement in existence, the Cyprus tax authorities will doubtless follow their normal practice of allowing unilateral relief for Latvian taxes paid.