Article 23 of OECD Model on Income and Capital deals with juridical taxation. That is taxation of same income, same period, of same person in different countries. For example income from abroad is earned and taxed in Cyprus in tax year 2008. Irrespective of when it is taxed in the foreign country, credit will be given for the tax paid abroad on the specific income that is taxed in Cyprus in 2008. (par 32.8 Page 268 Model 2008). Credit is given after foreign tax has been paid.
Elimination of double taxation is achieved either by exemption in the country of residence and taxation only in the country of source or with the credit of foreign tax by the country of residence.
The credit of tax cannot exceed the tax paid in the source country and cannot exceed the full tax in the country of residence, in case of full credit or the tax on same income in the country of residence in the case of ordinary credit. Furthermore the credit of tax cannot exceed the amount specified in the DTT. For example a DTT provides that withholding tax on interest is 10%. The credit cannot exceed 10%.
Where the provision of the DTT provides for an ordinary credit s.35 of Income Tax Law (ITL) specifies how to calculate the credit to be given. In accordance with s.35 “the amount of credit shall not exceed the amount which would be ascertained if the amount of the income were computed in accordance with the provisions of this Law and charged to tax at a rate ascertained by dividing the tax chargeable (before any credit is given under DTT) on the total income of the person entitled to the income, by the amount of his total income”. Total income means total taxable income.
Total income includes worldwide income but does not include income exempt by either domestic law or by the treaty or income that is taxed only in the state of source. If the treaty provides, income exempt by the treaty but taxed under domestic law, can be included in total income for the purpose of ascertaining the tax on remaining income (exemption by progression).
In computing the amount of the income no deduction shall be allowed in respect of foreign tax whether in respect of the same or any other income. Likewise where the tax chargeable depends on the amount received in the Republic, such amount shall be increased by the appropriate amount of the foreign tax. (s.35 (5) (a) (b) ITL).
Income that is exempt under the treaty but taxed under domestic law, but is exempt in both the country of source and country of residence as a result of different interpretation of income in domestic laws, then the country of residence does not have to exempt the income.
Furthermore if under the domestic laws of the two states the interpretation of income differs and the country of residence considers that under the treaty no credit or different amount of credit must be given, to avoid any double taxation, the country of residence needs to follow the interpretation of country of source.
If there is a difference of opinion on the interpretation of income this is solved by Mutual Agreement Procedure.
If there is no DTT between Cyprus and another state s.36(1) of ITL provides for an ordinary credit and s. 36(2) of ITL that the credit is calculated in the same way, so far as practicable, as described in s.35.
In the case of dividends received, if a DTT provides that foreign tax not chargeable directly or by deduction on the dividends has to be taken into account in considering whether any credit is to be given against tax in respect of such dividends e.g. underlying tax, (tax paid on profits by company paying the dividend), s.35(5)(c) of Income Tax Law (ITL) specifies that the amount of income shall be increased by the amount of the foreign tax not so chargeable, which has to be taken into account in computing the amount of the credit.
Irrespective of provisions 35(5) (a), (b), (c), there shall be deducted from the deemed amount of the foreign income any amount by which the foreign tax exceeds the respective credit.
If dividends are received from an EU resident company then credit is given in line with the EU parent-subsidiary directive which was transposed into domestic legislation with effect from tax year 2005 and not per DTT as EU aquis is superior to the treaty. In Cyprus, tax year is same as calendar year.
S.36(7) of ITL provides “Notwithstanding any other provisions of this Law, when a company which is resident in the Republic or a company which is not resident in the Republic but has a permanent establishment in the Republic, receives dividends from a company which is resident in another member state and such dividends are subject to tax under this Law, the tax on such dividends paid in the other member state, which is given as a credit against the tax payable under this law, includes the fraction of the corporation tax related to those profits of the dividend paying the company and any lower tier subsidiary of the dividend paying company, out of which the dividend is paid.
The credit in respect of the corporation tax on the profits of the dividend paying company is not given where the distribution of the profits in the form of dividend is made by reason of liquidation.
Per s 3(9) of Special Contribution for Defense Law (SCDL), relief of foreign tax from SCD on income subject to this Law, that is investment interest and dividends, is given per s. 35 and s.36 of ITL. So above applies to income subject to SCD. If income, that is rents, is subject to both IT and SCD then credit is given against both taxes, if income tax is not sufficient for relief from double taxation.
Bear also in mind that as regard our domestic legislation dividends are exempt from income tax. Dividends are also exempt from SCD unless the company paying the dividend engages directly or indirectly more than 50% in activities which lead to investment income and the foreign tax burden on the income of the company paying the dividend is substantially lower than the tax burden of the resident company or the permanent establishment of the non-resident company receiving the dividend. It has been decided by the Director of the Department that substantially lower means the ratio of (foreign tax / taxable income) is less than 5%.
Special Contribution for defense on dividends in Cyprus is at a flat rate of 15% and on investment interest is at a flat rate of 10%. Investment interest is exempt from ITL where as business interest, (as a result of trading), is exempt from SCD but subject to 10% Corporation Tax.
Section 35(7) of Income Tax Law provides that “where the DTT provides that, in relation to dividends of some classes but not in relation to dividends of other classes, foreign tax not chargeable directly or by deduction in respect of dividends is to be taken into account in considering whether any credit is to be given against tax in respect of such dividends and dividends are paid which are not of a class for which such provision has been made in the DTT, then if the dividends are paid to a company which controls, directly or indirectly, not less than 50% of shares with voting rights of the company paying the dividends, credit shall be allowed as if the dividends were of a class for which such provision has been made in the convention”.
Section 35(9) of ITL provides that “claims for an allowance by a way of credit shall be made not later than six years after the end of the year of assessment and in the event of any dispute as to the amount allowable, the claim shall be subject to objection and recourse in like manner as an assessment”.
For claims for an allowance by a way of credit under s. 36(1) of ITL i.e. where there is no DTT, s 36(3) of Assessment and Collection of Taxes Law (ACTL) provides that “where under the provisions of the Law imposing the tax a claim for relief in respect of tax paid or payable in a reciprocating country could be made, such claim shall be made not later than six years after the end of the year of assessment to which the claim relates or within six months from the date on which the relevant amount of tax in the reciprocating country has been ascertained”.
In practice no test of reciprocity is made for the grant of foreign tax relief where a DTT has not been concluded.
Section 35(10) of ITL provides that if in the case of tax adjustments in either state party to a DTT, the credit of tax is rendered excessive or insufficient as a result of any adjustments, any assessments and claims must be made within six years from the year in which the adjustments were made.
Per s 35(8) a person can elect for a specific tax year not to claim the foreign tax credit relief under a treaty.
A substantial number of double tax treaties of Cyprus with other states provide for tax sparing credits. Some treaties provide for tax sparing credits in favour of Cyprus, (i.e. tax sparing credit given by other state), some in favour of both states. A tax sparing credit is a tax incentive given to foreign investors for the purpose of attracting foreign investment.
Tax sparing provisions can either take the form of a credit where although income in source state has been exempt or taxed at a reduced rate, the country of residence gives credit the tax that the source state could have imposed in accordance with its general legislation or give credit the amount limited by convention or an amount fixed at a higher rate as specified in the treaty as a counterpart for the tax reduction in the state of source, or the state of residence exempts the income which has benefited from tax incentives in the state of source. (par 74 page 281 OECD Model 2008).
Considering that since tax year 2003 only the gains from the sale of immovable property in Cyprus and the gains from the sale of shares of a company not quoted in a recognized stock exchange with immovable property in Cyprus and only to the extend of the immovable property, are subject to Capital Gains Tax (CGT), i.e. foreign immovable property is not under the scope of domestic CGT law, there is no claim of double tax relief for foreign tax paid on the capital profit made.
Double Tax Treaties made by Cyprus can be found on our website which is www.mof.gov.cy/ird Our Laws can also be found on the same website but these are only in Greek.
Other Matters
By order of the Minister of Finance as from 1.1.2010 the interest rate charged by government on any amounts due, including tax due is 5.35%. At the beginning of every year the Minister of Finance decides the interest rate to be applied, on any amounts due to the government.