New Cyprus –UAE Double Tax Agreement Takes Effect

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New Agreement The new double tax agreement signed between Cyprus and the UAE (United Arab Emirates) came into force from 1st January 2014. For the greater part, the agreement issues the corresponding OECD’s provision on the recent Model Tax Convention. The principal that originates from the OECD model include:

Appraise of the agreement

The agreement is applicant to persons with resident status of one or both contracting states and to taxes on the income imposed on behalf of a contracting state or of the state’s political sub-divisions or local authorities. In UAE’s case, the taxes are inclusive of income tax and corporate tax.

In Cyprus’s, the agreement addresses corporate income tax, income tax, SDC tax (Special Contribution for Defense) as well as capital gains tax.

Residence

The provisions on residence are a replicate of the OECD mode agreement, with the determination of residence being done in accordance to the place where effective management is undertaken from, in addition to specifying that companies that are incorporated in the UAE are defined as residents there, adding that ‘resident’ extends to all central or local government bodies or institutions of either contracting state.

Permanent establishment

Article 5 replicates the OECD model, but clearly states that an offshore drilling site can or may be constituted as a permanent establishment. Project activities should have duration of 1 year (12 months as provided for in the OECD model) for constituting a permanent establishment.

Hydrocarbons

The agreement provides that the freedom of contracting states to apply their domestic legislation in respect to the taxation of income and profits sourced from hydrocarbons as well as associated activities is not interfered with by the agreement.

Business profits

Article 8 highlights that the determination of profits should be done through a formula and that there should be consistency in the mode of determination from year to year). Otherwise, the article is pursuant to the OECD model. corresponding OECD model’s provisions on taxation of profits as well as profits determination of a permanent establishment (as long as

Air transport and shipping

Article 9 of the agreement between the Cyprus and the UAE states that the taxation of such profits can only be done in the contracting state of the business enterprise concerned, whose definition is provided in Article 4 as the state (contracting state) is resident. Therefore, as highlighted above, companies that are incorporated in the UAE are taken to be residents there, and as such the profits of a UAE –incorporated company will only be taxable in the UAE irrespective of the locus of its management and control.

Dividends, royalties and interest

Dividends, royalties and interest are only taxable in the state (contracting state) of residence of the recipient. There is no provision that the recipient of the income should also be the beneficial owner of that income. However, any additional interest or loyalties exceeding the normal commercial amount paid between associated persons shall not be exempted from taxation in the contracting state from which they are sourced from.

The only exception allowed to the general rule is in instances where the beneficial owner is a resident in one of the contracting states but carries out business through a permanent establishment in the other contracting state from where the income is sourced from.

Capital gains

Article 14 provides that any gains made from the alienation of immobile property located in a contracting state by the resident of the other contracting state, or from the alienation of movable property that forms part of a permanent establishment owned by an enterprise in a contracting state may be taxed in the state of location of the property concerned.

Gains sourced by an enterprise resident in a contracting state from the alienation of ships or aircrafts alongside ancillary equipment, are only taxable in that contracting state.

The taxation of all other gains is only done in the alienator’s state of residence.

Information exchange

Basically the information exchange clause replicates the verbatim of the OECD model.

However, a protocol provided for the in the agreement provides for several safeguards against the misuse of abuse of exchange of information by providing that contracting states that request for information to follow the specified procedures for purposes of demonstrating the relevance of the requested information. Particularly, any request for information exchange should be accompanied by:

· The identity of the person whose information is sought;

· A statement highlighting the information being sort with the inclusion of its nature and the preferred form in which it’s being requested;

· Tax purposes for the information being sought;

· Proof that the requested information is in the possession of the requested state or is being controlled by a person in the jurisdiction of the contracted state;

· To the known extent, name and address of any person believed to be holding the requested information;

· A statement that:

· The request falls within the law as well as administrative practices of the contracting state requesting the information;

· A statement providing that the contracting state requesting for the information has exhausted all available means in its disposure to obtain the information.

Enforcement & Termination

As stated earlier, the enforcement of the agreement took place as from 1^st January 2014. The agreement is expected to remain in force until it is terminated by any of the contracting states. If a notice of termination is given before 30^th June, the agreement will become ineffective at the end of the year that the notice is issued. However, the agreement has to be effective for not less than 5 years before notice is given.

Article supplied by Oxford Tax Solutions