Details Of The New Double Tax Treaty Between Cyprus And The Czech Republic.

The text of the new double taxation treaty between Cyprus and the Czech Republic, which was signed in April 2009, is now available. The treaty will take effect only after ratification by the legislatures of both countries: if it is ratified before the end of 2009 it will take effect from 1 January 2010. When it takes effect it will replace the 1980 agreement between Cyprus and the former Czechoslovak Socialist Republic.

The main changes introduced by the new treaty are as follows:

Taxation Of Gains On Investments In Real Estate Companies The new treaty preserves the general rule that the right to tax income from the disposal of shares is given to the country of residence of the seller, but modifies it in certain specific circumstances. In particular, the right to tax capital gains derived on the sale of shares in a property rich company will be vested in the country where such property is located.

Accordingly, gains realised by a resident of one contracting state from the disposal of shares deriving more that 50% of their value from immovable property situated in the other contracting state may be taxed in that other state.

Creation Of A "Service" Permanent Establishment Article 5 of the new treaty widens the definition of a permanent establishment by providing that a permanent establishment is created if services are rendered on the territory of the other contracting state for more than six months in any 12-month period.

Removal Or Reduction Of Withholding Tax On Dividends The 1980 treaty provides for a 10% withholding tax on dividends paid by a company resident in one country to an investor resident in the other country. Under the new treaty, subject to the investor holding at least 10% of the equity of the investee for at least a year, there will be no withholding tax. If the minimum investment condition is not satisfied, the withholding tax will be 5%.

Removal Of Withholding Tax On Interest Similarly, the 1980 treaty provides for a 10% withholding tax on interest paid by a resident of one country to a resident of the other country. Under the new treaty, interest will be taxed only in the country of residence of the recipient, and there will be no withholding tax..

Withholding Tax On Royalties And Licence Fees The new treaty increases the withholding tax on industrial licence fees (for the use of patents, know-how, software and similar intellectual property) to 10% (compared with 5% under the 1980 treaty). The Czech Republic has undertaken that if it concludes a double tax treaty with another EU state providing for a lower rate of withholding tax on licence fees, it will reduce the rate in the Cyprus treaty to match it. Royalties remain tax-exempt in the source country, and are taxed only in the country of residence of the recipient.

Method Of Eliminating Double Taxation In contrast to the 1980 treaty, which entitled the Czech Republic to use both the credit and exemption methods, the new treaty allows the use of only the credit method to reduce double taxation,.

Anti-Abuse Provisions The authorities of the contracting states may, by mutual agreement, withhold treaty benefits if they conclude that the principal objective of a transaction is to obtain benefits that would not otherwise be available.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mr Elias Neocleous

Andreas Neocleous & Co LLC

Neocleous House

199 Arch. Makarios III Avenue

P.O. Box 50613

Limassol

CY-3608

CYPRUS

URL: www.neocleous.com

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