TREATY BETWEEN GERMANY AND CYPRUS ENTERS INTO FORCE
The Cyprus - Germany Tax Treaty (2011) entered into force on 16 December 2011. The treaty generally applies from 1 January 2012.
The main changes are outlined below:
The Agreement's appliance on taxes has been expanded to include further forms of tax such as the Cyprus corporate income tax and the capital gains tax.
A new definition is also provided on the Protocol to the Agreement according to which the 'place of effective management' will be considered as the place where the key management decisions are taken, that is where the senior partner/s make such decisions.
ARTICLE 5 - PERMANENT ESTABLISHMENT: 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. Furthermore, the term PE is further restricted by the exclusion of any preparatory or auxiliary activity as PE.
ARTICLE 6 - INCOME FROM IMMOVABLE PROPERTY: The new Article considers income deriving from agriculture or forestry as an income of immovable property but excludes income from immovable property used for the performance of professional services, which was included on the old Treaty.
ARTICLE 10 - DIVIDENDS: According to the new Treaty, withholding tax on dividends should not exceed 5% of the gross amount of the paid dividends (before 10%), if the Beneficial owner directly holds at least 10% (before 25%) of the capital of the distributing company.
Withholding tax on dividends will not be imposed in cases where a company of a contracting state derives income or profit from the first State, unless dividends paid to a company of the other Contracting State is effectively connected with a PE in that other Contracting State.
However, Parent Subsidiary Directive may eliminate such withholding tax since according to the directive dividends paid by a subsidiary company to its parent company are exempted from withholding tax.
The limitation on the German tax on dividends paid to a Cypriot company by a German company is abolished. The tax rate for companies is the same regardless whether the profits are kept within the company or distributed to the shareholders as dividends.
ARTICLE 11 - INTEREST: Interest derived from a Contracting State by a resident of the other Contracting State shall only (previously may) be taxed in that other Contracting State.
ARTICLE 12 - ROYALTIES: The term royalties has been slightly extended to include new provisions and royalties taxed from the right to use cinematograph films has been abolished. Royalties deriving from a PE shall be taxed in the Contracting State which the PE is established.
ARTICLE 13 - CAPITAL GAINS: Gains from the alienation of shares, which derive more than 50% of their value from immovable property, may be taxed in the State where the property is situated.
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