Cyprus - Germany Double Tax Treaty Update

The Double Tax Treaty (DTT) with Germany which was in place since 1974 has been replaced with a new DTT, which is more favourable.

WHAT HAS THE NEW AGREEMENT CHANGED?

Article 5 (Permanent Establishment). In relation to permanent establishments (PE), a building site or construction or even any supervisory activities in connection with the aforementioned will be considered as a PE when it lasts more than 12 (previously 6) months. Furthermore, the term PE is further restricted by the exclusion of any preparatory or auxiliary activity as PE.

Article 8 (Shipping, inland waterways transport and air transport). Significant additions have been established on shipping. Profits from the operation of boats engaged in inland waterways transport are going to be taxed in the Contracting State in which the enterprises' effective management is situated. Profits have also been extended to include profits from rentals of ships, aircrafts, the use or rental of containers, as well as tasks performed for the operation of the ship.
Moreover, the new DTT abolishes the provision according to which Germany could tax profits of a Cyprus resident company or partnership, owed more than 25% by a non-Cypriot-resident, if it could not prove that the tax appropriate is equal to Cyprus tax.

Article 10 (Dividends). An amendment on dividends has been established according to which, where the dividends are taxed in the State in which the company paying the dividends is a resident and the beneficial owner of those dividends is company and a resident of the other State, then the charge should not exceed 5% of the gross amount of the dividends if the Beneficial owner holds directly at least 10% of the capital of the company paying the dividends.

Article 11 (Interest).The provision on interest is made absolute by stating that interest derived from a Contracting State shall only be taxed in the other Contracting State where its beneficial owner is a resident. The exemption from tax on interest paid to governmental institutions is abolished. The term interest is slightly extended but the penalty charges for late payment are excluded for interest purposes.

Article 12 (Royalties). The term royalties has been extended to include new provisions, while the special case of royalties taxed from the right to use cinematograph films is abolished. Furthermore, a specification is introduced on which royalties shall be taxed in the Contracting State of which a PE related to the royalties paid is established, irrespectively of whether the person paying the royalties is a resident of a Contracting State or not.

Article 13 (Capital Gains). According to the new Agreement, gains of a resident of a Contracting State from alienation of shares, which derive more than 50% of their value from immovable property, may be taxed in the State where the property is situated. It is, also, provided that gains from the alienation of boats in inland waterways transport shall be taxable in the State where the enterprises' place of effective management is situated.

The new DTT Cyprus is applicable as of January 1, 2012.