The new double tax agreement between Cyprus and Barbados

The new double taxation agreement between Cyprus and Barbados, which was signed on May 3, 2017, was published in the Official Gazette on May 12. It will enter into force once each country has notified the other that their domestic ratification procedures have been completed and its provisions will have effect from the following 1 January.

The agreement closely follows the 2014 version of the Organisation for Economic Cooperation and Development Model Agreement (OECD Model).

Permanent establishment

Article 5 of the DTA, which deals with permanent establishment, reproduces the provisions of the OECD Model almost word for word.

A building site, a construction, assembly or installation project or a supervisory or consultancy activity connected with it will be deemed to be a permanent establishment if it lasts for more than six 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 is deemed to have a permanent establishment in respect of any activities which the person undertakes for the enterprise. As in the OECD Model, the DTA 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, income from immovable property may be taxed in the territory of the party where the property is situated.

Business profits

Article 7 of the DTA reproduces the corresponding article of the OECD Model almost word for word.

The profits of an enterprise are taxable only by the country in whose territory it is resident unless it carries on business in the territory of the other party through a permanent establishment there, in which case the profit attributable to the permanent establishment may be taxed by the country in whose territory it is located.

International shipping and transport

Profits of an enterprise from the operation of ships or aircraft (including income from containers, trailers and related equipment) in international traffic are taxable only in the country in which the  effective management of the enterprise is exercised.

Withholding taxes

The DTA eliminates withholding taxes on dividends, interest and royalties paid by a resident of one country to a resident of the other, as long as the amounts of any royalties and interest are no more than would apply on an arm’s length basis.

Capital gains

Capital gains derived by a resident of one country from the alienation of immovable property situated in the other, together with gains from the alienation of movable property forming part of the business property of a permanent establishment, may be taxed in the country in which the property is located. Gains on disposal of ships or aircraft operated in international traffic are taxable only in the country in which the place of effective management of the enterprise is situated. Other capital gains, including gains on the disposal of shares in “property-rich” companies, are taxable only in the country in which the alienator is resident.

Offshore activities

Like several other recent Cyprus DTAs, the Cyprus-Barbados agreement includes an article dealing specifically with offshore activities. It provides that a resident of one country undertaking activities on the territory (including the territorial sea or exclusive economic zone) of the other will be treated as exercising a trade or business in the latter territory through a permanent establishment there 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 exploitation of resources are taxable only by the country of which the enterprise concerned is a resident.

Salaries, wages and other similar remuneration derived by a resident of one country in respect of employment in connection with exploration or exploitation of sub-sea resources of the other country may be taxed by the second country. However, if the employer is not a resident of the second country and the employment amounts to less than 30 days in any twelve-month period starting or ending in the fiscal year concerned, the remuneration is taxable only by the country in which the employee is resident.

Gains derived by a resident of one country 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 country may be taxed by the country in whose territory the rights or the property are located. The same applies to shares deriving the greater part of their value directly or indirectly from such rights or property.

Relief against double taxation

Relief against double taxation is given under the credit method. The credit is limited to the amount of tax that would be payable on the income concerned in the country of residence.

Exchange of information

The exchange of information provisions in the agreement replicate those of the OECD Model but are supplemented by a Protocol setting out the information required to accompany a request for information, in order to demonstrate the foreseeable relevance of the information requested, in line with Cyprus’s Assessment and Collection of Taxes Law. The Protocol also provides that information should not be provided unless the contracting state that made the request has reciprocal provisions or applies appropriate administrative practices for the provision of the information requested.

Termination

Either Contracting State may terminate the DTA by giving at least six months’ written notice no earlier than five years after DTA entered into force, and the DTA will cease to have effect from the beginning of the next calendar year.

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