On 2 February 2022, the Cyprus Tax Authority issued a circular (Circular 2/2022) informing that the legal procedures for the entry into force of the Cyprus – Germany Double Tax Treaty Protocol signed on 19 February 2021 (the “Protocol”) have been completed in both jurisdictions.
The Protocol entered into force on 8 December 2021 and has an effective date of 1 January 2022.
The main changes to the Cyprus – Germany Double Tax Treaty (2011) (the “Treaty”) effected by the Protocol is the introduction of the Base Erosion and Profit Shifting (“BEPS”) minimum standards and amendments to Article 7 “Business Profits” in line with the OECD Model Tax Convention (2017).
Below is a summary of the main amendments to the Treaty effected by the Protocol:
The preamble has been amended to reflect the intent of the Contracting States for the Treaty not to create opportunities for non-taxation or reduced taxation through tax evasion or avoidance (e.g. through treaty-shopping arrangements).
Article 7 “Business Profits” has been amended in line with the OECD Model Tax Convention (2017). This Article allocates taxing rights with respect to business profits of an enterprise of a Contracting State to the extent that these profits are not subject to different rules under other Articles of the Treaty.
More specifically, it incorporates the principle that unless an enterprise of a Contracting State has a permanent establishment situated in the other State, the business profits of that enterprise may not be taxed by that other Sate unless these profits fall into special categories of income for which other Articles of the Treaty give taxing rights to that other State.
Entitlement to benefits
Article 27 “Application of the Agreement in Special Cases” has been amended so that a benefit under this Treaty shall not be granted, in respect of an item of income, if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes (Principal Purpose Test) of the arrangement or transaction that resulted directly or indirectly in that benefit.