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22 July, 2020

Cyprus and Switzerland have changed their double taxation agreement

The representatives of Switzerland and Cyprus signed a protocol amending the Double Taxation Agreement (DTA) with respect to taxes on income and capital. The protocol is designed to implement the standards for DTA under the BEPS plan.

Cyprus and Switzerland amend DTT
Photo: Adobe Stock

The Double Tax Agreement covers taxes on income and capital that are levied in Cyprus and Switzerland.

Amendments to DTA were made in Nicosia on June 20, 2020. The protocol was signed by Constantinos Petrides, Minister of Finance of Cyprus, and Pierre-Yves Fux, Ambassador of Switzerland to Cyprus.

The document introduces the Organization for Economic Cooperation and Development (OECD) Minimum Standards for Basic Erosion and Profit Shifting (BEPS) in DTA. In addition, provisions relating to benefit rights have been added to DTA.

In this way, Cyprus and Switzerland are fighting tax evasion.

Constantinos Petrides noted that the environment, where there is certainty in the tax issue, stimulates investment growth and creates jobs.

Pierre-Yves Fux said the protocol will help create a more secure environment for financial transactions. He expressed hope that the DTA amendments will contribute to the development of trade and commercial relations between Cyprus and Switzerland.

Increased transparency in taxation contributes to the fact that Cyprus jurisdiction is less and less often associated with the notion of offshore. Thus, the “weight” of the country in the international economic system is growing. It is important to take into account investors who receive a Cyprus passport in order to live and do business in countries with developed economies.

Cyprus tax system is in compliance with EU standards

The EU government has repeatedly criticized Cyprus for its low tax rates. Now Cyprus is preparing to amend its tax legislation in accordance with the recommendations of the European Union.

The country plans to introduce an incorporation test as one of the criteria for granting tax residency. Another possible innovation is taxes on payments to states from the list of non-cooperative countries.

DTA with Russia

Cyprus seeks to strengthen DTA with all partner countries. However, such an agreement with Russia has been jeopardized.

Earlier we said that the Russian government initiated a revision of DTA with Cyprus. The goal is to raise the withholding tax rates on interest and dividends paid abroad.

Cyprus proposed to maintain the previous tax rates but to tighten control over foreign branches of Russian companies. However, Moscow insists on raising the rates and threatens to terminate the DTA in the fall of 2020 if Nicosia does not meet the requirements.

The dissolution of the agreement between Cyprus and Russia will increase the tax burden for some individuals. Tax residents of Cyprus, who own shares in Russian companies and receive dividends from them, will pay 15% to the Russian budget. In accordance with the current DTA, they will have preferential rates of 5% and 10%.

In addition, after the agreement is cancelled, the profit tax privilege on interest payments on loans of Russian debtors will be eliminated. For the current DTA between Cyprus and Russia, the tax rate was zeroed.

The change in the Russian policy towards DTA has not only affected Cyprus. Russia also plans to review all existing DTA, including Malta. Cancellation of agreements will affect two categories of investors:

  • tax residents of these countries who are withdrawing money from Russia;
  • tax residents of Russia, who receive income from investments in these countries.

However, we believe that Russia’s revision/cancellation of DTA will not affect the popularity of EU investment programs.

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Cyprus and Switzerland have changed their double taxation agreement