The Luxembourg tax authorities have published the text of the Convention between the Grand Duchy of Luxembourg and the Republic of Cyprus for the elimination of double taxation with respect to taxes on income and on capital and the prevention of tax evasion and avoidance as concluded on May 8, 2017 (Hereafter: the DTA).
Although the DTA has been signed, it has not entered into force yet. For the DTA to enter into force, the respective ratification procedures have to have been finalized in both countries.
Below we will discuss a selection of provisions included in the DTA of which we think they might interest our readers.
Preamble
The preamble to the DTA reads as follows:
“The Government of the Grand Duchy of Luxembourg and the Government of the Republic of Cyprus
Desiring to further develop their economic relationship and to enhance their co-operation in tax matters,
lntending to conclude a Convention for the elimination of double taxation with respect to taxes on income and on capital without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this Convention for the indirect benefit of residents of third States)
Have agreed as follows:”
Taxes covered
Based on Article 2, Paragraph 3 of the DTA (“TAXES COVERED”), the existing taxes to which the DTA shall apply are in particular:
a) in the Grand Duchy of Luxembourg:
(i) the income tax on individuals;
(ii) the corporation tax;
(iii) the capital tax; and
(iv) the communal trade tax;
b) in the Republic of Cyprus:
(i) the income tax;
(ii) the corporate income tax;
(iii) the special contribution for the Defence of the Republic; and
(iv) the capital gains tax.
Article 2, Paragraph 4 subsequently arranges that the DTA shall apply also to any identical or substantially similar taxes that are imposed after the date of signature of the DTA in addition to, or in place of, the existing taxes.
Residency
Article 4, Paragraph 3 of the DTA (“RESIDENT”) arranges that where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective management is situated.
Permanent establishment
Article 5, Paragraph 3 of the DTA (“PERMANENT ESTABLISHMENT”) arranges that a building site, construction or installation project or any supervisory activities in connection with such site or project, constitute a permanent establishment only if they last more than twelve months.
Immovable property
Article 6, Paragraph 1 of the DTA (“INCOME FROM IMMOVABLE PROPERTY”) arranges that income derived by a resident of a Contracting State from immovable property (including income from agriculture or forestry) situated in the other Contracting State may be taxed in that other State.
With respect to immovable property Article 13, Paragraph 1 of the DTA (“CAPITAL GAINS”) arranges that gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State.
Article 13, Paragraph 4 of the DTA subsequently arranges that gains derived by a resident of a Contracting State from the alienation of shares in a company, deriving more than 50 per cent of their value directly from immovable property situated in the other Contracting State may be taxed in that other State.
Associated enterprises
Article 9, Paragraph 2 of the DTA (“ASSOCIATED ENTERPRISES”) contains a so-called appropriate adjustment clause.
Dividends
If the beneficial owner of the dividends is a resident of the other Contracting State, Article 10, Paragraph 2 of the DTA (“DIVIDENDS”) maximizes the withholding tax a Source State is allowed to withhold over dividends to:
a) 0 per cent of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 10 per cent of the capital of the company paying the dividends;
b) 5 per cent of the gross amount of the dividends in all other cases.
Interest
With respect to interest Article 11, Paragraph 1 of the DTA (“INTEREST”) arranges that subject to the legal acts of the European Union, interest arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable only in that other State.
Royalties
With respect to interest Article 12, Paragraph 1 of the DTA (“ROYALTIES”) arranges that royalties arising in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in that other State.
Offshore Activities
The DTA contains an article containing regulations applicable to certain offshore activities (Article 20 of the DTA).
Article 20, Paragraph 2 arranges that a person who is a resident of a Contracting State and carries on activities offshore in the other Contracting State in connection with the exploration or exploitation of the seabed or subsoil or their natural resources situated in that other State shall, subject to paragraphs 3 and 4 of this Article, be deemed in relation to those activities to be carrying on business in that other State through a permanent establishment situated therein.
Article 20, Paragraph 3 subsequently arranges that the provisions of paragraph 2 and sub-paragraph b) of paragraph 5 shall not apply where the activities are carried on for a period not exceeding 30 days in the aggregate in any twelve months period commencing or ending in the fiscal year concerned. However, for the purposes of this paragraph:
a) Activities carried on by an enterprise associated with another enterprise shall be regarded as carried on by the enterprise with which it is associated if the activities in question are substantially the same as those carried on by the last-mentioned enterprise;
b) Two enterprises shall be deemed to be associated if:
(i) An enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or
(ii) The same person or persons participate directly or indirectly in the management, control of at least 30% of the capital of both enterprises.
Article 20, Paragraph 4 arranges that profits derived by an enterprise of a Contracting State from the transportation of supplies or personnel to a location, or between locations, where activities in connection with the exploration or exploitation of the seabed or subsoil or their natural resources are being carried on in a Contracting State, or from the operation of tugboats and other vessels auxiliary to such activities, shall be taxable only in the Contracting State of which the enterprise is a resident.
Article20, Pargraph 6 reads as follows:
“Gains derived by a resident of a Contracting State from the alienation of:
a) Exploration or exploitation rights; or
b) 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 that other State; or
c) Shares deriving their value or the greater part of their value directly or indirectly from such rights or such property or from such rights and such property taken together,
may be taxed in that other State.
In this paragraph "exploration or exploitation rights" means rights to assets to be produced by the exploration or exploitation of the seabed or subsoil or their natural resources in the other Contracting State, including rights to interests in or to the benefit of such assets.”
Entitlement to benefits
Article 28 of the DTA (“ENTITLEMENT TO BENEFITS”) contains a.o. a so-called Principal Purpose Test.
Other
Furthermore the DTA contains a.o. provisions regarding a Mutual Agreement Procedure (Article 25) and regarding the Exchange of Information (Article 26).
Click here to be forwarded to the text of the DTA as available on the website of the Luxembourg tax authorities.
Are you looking for other DTAs? Then check our section DTAs & TIEAs, a very efficient way to locate numerous DTAs.
Copyright – internationaltaxplaza.info
Follow International Tax Plaza on Twitter (@IntTaxPlaza)
and
Follow International Tax Plaza on Facebook
