Currently pending ratification, the treaty between Cyprus and Barbados (the Treaty) was signed on the 3 May 2017 by Mr Euripides L Evriviades, the High Commissioner of Cyprus in the United Kingdom, and by Mr Guy Hewitt, the High Commissioner of Barbados in the United Kingdom.
Once the domestic ratification procedures are completed and each country notifies the other of the same, the Treaty will enter into force and its provisions will have effect from 1 January 2018.
Based on the Organisation for Economic Co-operation and Development Model Tax Convention for the Avoidance of Double Taxation (the OECD Model Convention), with some minor adjustments, the Treaty will offer prosperity to both contracting states, enhancing economic relations, but also encourage trade with other nations.
The Treaty applies to taxes on income imposed by either country, including taxes on gains from the alienation of movable or immovable property. The taxes which the Treaty specifically covers are:
- Income Tax
- Corporation Tax
- Income Tax
- Corporate Income Tax
- Special Contribution for the Defense of the Republic Tax (SDC Tax)
- Capital gains
The Treaty shall also cover any identical or similar taxes which may be imposed in the future.
Article 5 of the Treaty, which deals with permanent establishments, almost replicates the corresponding article of the OECD Model Convention. Article 5 provides that a building site, a construction, an installation project, or a supervisory or consultancy activity connected with it, shall be deemed to be permanent establishments if they last for more than 6 months, as opposed to the 12 months declared in the OECD Model Convention provision (the Permanent Establishment).
Income from Immovable property
Article 6 of the Treaty deals with income from immovable property and follows the OECD Model Convention’s verbatim word for word. This allows income derived by a resident of one country derived from the immovable property situated in the other country to be taxed in the country in which the property is located.
Article 7 of the Treaty refers to the taxation of business profits. The only difference between the Treaty and the OECD Model Convention on this matter is the fact that the profits of an enterprise can only be taxed by the contracting state in which the enterprise is deemed to be a resident of, with the exception that, if it carries out business in the opposite contracting state via a Permanent Establishment, the profit determinable to the Permanent Establishment may be liable to taxation by the country in which it is located in
The Treaty provides that capital gains derived by a resident of one contracting state from the alienation of immovable property in the other contracting state, in combination with any gains from the alienation of movable property, forming a part of a Permanent Establishment's property, may be liable to tax in the contracting state in which the property is locate.
Moreover, any other capital gains, including the disposal of shares in any companies which are “property rich”, may also be liable to tax in the contracting state in which the alienator is deemed a resident of.
Dividends, within the meaning of the Treaty, means income from shares, mining share, founders shared, or other rights not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income of shares by laws of the contracting state of which the company making distribution is a resident. Dividends paid by a company which is resident of a contracting state to a resident of the other, shall be taxable only in that other state. This however does not apply if the dividends derive from a Permanent Establishment through which the beneficial owner of the income carries on business in the contracting state from which the income is paid.
When it comes to taxation on dividend, interest and royalty payments, a withholding tax rate of 0 per cent has been set, so long as, in the case of interest and royalty payments made from a resident of one contracting state to a resident of the other contracting state, the transaction must remain at arm’s length. Cyprus does not impose any withholding taxes on dividends, interest or royalties (when not used in Cyprus) paid to any non-Cyprus tax resident person.
The Treaty also provides that a resident of one contracting state undergoing activities in the territory of the other contracting state will be treated as a trade or business operation in the latter state through a Permanent Establishment in respect of the activities under the circumstances, unless the overall duration of the activity is less than 30 days.
Relevant business organisations are treated as one for the purpose of evaluating the length of the activity at hand. Profits from maritime or air transport and activities in connection with exploration and the exploitation of resources may be liable to taxation only by the contracting state of which the enterprise concerned is a resident of. Wages and salaries, accompanied by other similar reimbursement acquired by a resident of one country in the field of employment linked with exploration or exploitation of the other contracting state may be taxed by the opposite contracting state.
On the other hand, if the employer is not a resident of the other contracting state and the duration of work amounts to less than 30 days in the 12 month window of that year, the reimbursement is liable to tax only by the state in which the employee is a resident of. Any capital gain received by a resident of one state from the alienation of exploration or exploitation rights/property used with the exploration or exploitation of the sea located in the jurisdiction of the opposite state may be taxed by the state whose jurisdiction the rights/property are located.
Elimination of Double Taxation
The credit method is used to eliminate double taxation in Cyprus as well as in Barbados. The credit against tax in the country of residence is limited to the amount of tax that would be payable on the income concerned in the country of residence.
Exchange of Information
Both contracting states follow the rules of the OECD Model Convention, with the addition of a protocol whereby the information required to accompany a request for information is laid out, in order to display the relevance of the information requested, while at the same time, complying with the Amendment of the Assessment and Collection of Taxes Law 78/2014. The provision also states that any information should not be provided unless the contracting state that made the request reciprocates the actions of this provision or applies administrative practices for the information demanded.
The Treaty will remain into force until terminated by either country by giving notice of termination through diplomatic channels of at least 6 months and not earlier than 5 years after the agreement comes into force. Should this Treaty be ratified and comes into effect on 1 January 2018, it could prove to be a big benefit for the economies of both contracting states, as this Treaty slowly forms Barbados and Cyprus into economic trading and investment hubs in Central America and Europe respectively. Treaties like this are of paramount importance for attracting foreign investment and promoting Cyprus as an international business centre.