An Agreement between the Republic of Cyprus and the Kingdom of Denmark for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income was signed on 11 October 2010 in Copenhagen.
According to an official announcement, the new Agreement will contribute greatly to the further development of trade and economic relations between Cyprus and the Kingdom of Denmark.
On the date the new Agreement enters into force, the provisions of the existing treaty dated 1981 between the Government of the Republic of Cyprus and the Government of the Kingdom of Denmark will expire.
The new treaty eliminates withholding tax on dividends where the beneficial owner is a company directly holding at least 10% of the capital of the distributing company for an uninterrupted period of at least 12 months; otherwise the rate is 15% (subject to certain exemptions granted to governmental bodies and qualifying pension funds). The new treaty also eliminates the 10% withholding tax rate on interest applied in the old treaty. The article on royalties continues to provide for a zero rate of withholding tax.
Nevertheless, since both Denmark and Cyprus have implemented the EU Parent-Subsidiary Directive and the Interest and Royalties Directive, a nil withholding tax rate will be available in most cases in any event.
CAPITAL GAINS TAX
Cyprus law provides an exemption for capital gains derived from the sale of shares listed in any recognized stock exchange as well as from the disposal of any immovable property held outside Cyprus.
The new treaty provides that gains from immovable property (including income derived from the direct use, letting or use in any other form of immovable property) situated in one of the Contracting states will be taxed where the immovable property is situated. Movable property being part of PE will be subject of taxation in the state where the immovable property is located. Gains derived from selling of ships and airplanes will be taxed in the state where the selling company has it management seat. Gains derived from the alienation of containers used for transport of goods in international traffic will be taxable in the state where the alienator is a resident.
PERMANENT ESTABLISHMENT (PE)
For the purposes of the treaty the term permanent establishment (PE) is defined as a fixed place of business through which the business of an enterprise is wholly or partly carried on. PE is considered to be a place of management, a branch, an office, a workshop, a mine, an oil or gas well, or any other place of extraction of natural resources.
Under the new treaty a building site or construction or installation project constitutes a PE only if it last for more than 12 months , compared with 6 months in the old treaty. Same applies for installation or drilling rig or ship used for the exploration of natural resources.
According with the provisions of the Treaty, when determining the profits of PE , there shall be allowed deduction of expenses which are incurred for the purpose of PE, including executive and general administrative expenses, whether in the State in which the PE is situated or elsewhere.
The articles on mutual agreement procedures and exchange of information have been aligned with the equivalent provisions of the current OECD Model Convention equivalent provisions and the obligations and powers of the contracting states have been clarified.
The provision of the old treaty which allowed an underlying tax credit on dividends paid by a company resident in Denmark to a Cyprus tax resident company with a direct shareholding of at least 25% has been eliminated. This should not have any adverse effect because the Cyprus tax authorities allow unilateral relief for foreign underlying tax.
Under the old treaty exclusive taxing rights over pensions, annuities and social security payments are given to the source country. The new treaty gives the exclusive taxing right over non-state pensions to the country in which the recipient is resident, unless tax relief was previously obtained in the source country or where the contributions by the employer made in the source country are tax free for the beneficiary in that country.
The above is intended to provide a brief guide only. It is essential that appropriate professional advice is obtained.