The double taxation avoidance treaty between the Republic of Cyprus and Kazakhstan, signed on the 15th of May 2019 (hereafter referred to as the “Treaty”), has been published in the National Gazette of the Republic of Cyprus on the 24th of May 2019. By providing privileges to tax residents of the two countries, the Treaty is expected to stimulate and further develop trade and economic relations between Cyprus and Kazakhstan, as well as with other jurisdictions.
It is expected to enter into force as of the 1st of January 2020 provided that the ratification process is completed by both countries during 2019.
The now published text is largely based on the 2017 Organisation for Economic Co-operation and Development Model Convention on Income and Capital (hereafter referred to as the “OECD Model”). Below is a brief summary of the key provisions of the Treaty.
In Cyprus, the Treaty applies to income tax, corporate income tax, the special contribution for the defense of the Republic and the capital gains tax.
In Kazakhstan, the Treaty applies to corporate income tax and individual income tax.
Individual Tax Residency: Under Article 4(1) of the Treaty, a resident of a contracting state means any person who, under the laws of that state is liable to tax therein by reason of his domicile, place of registration or incorporation, residence, place or management or any other criterion of a similar nature. If an individual is a resident of both contracting states, then his status shall be determined by his permanent home or the centre of vital interests or the habitual abode or where he is a national. If none of the above are applicable, the competent authorities of the contracting states shall settle the matter by mutual agreement.
Permanent establishment: Article 5 of the Treaty reproduces the OECD Model definition of permanent establishment (hereafter referred to as “PE”) providing that a PE means a fixed place of business through which the business of an enterprise is wholly or partly carried on. This includes specifically:
- A place of management;
- A branch;
- An office;
- A factory;
- A workshop;
- A mine, a pit, an oil or gas well, a quarry, an installation, a structure (including drilling rig or ship) or any other place for extracting natural resources as well as supervisor services connected therewith.
- A building site, construction, assembly or installation project or any supervisor activity in connection with such site or project for a period of more than six months within any twelve-month period.
Article 5(2)(b) of the Treaty provides that a PE also includes the furnishing of services, including consultancy services, by a resident through employees or other personal engaged by the resident for such purpose or through a related party, but only where activities of that nature continue (for the same or a connected project) within the contracting state for a period or periods aggregating more than 183 days in a twelve-month period.
The treaty provides the following withholding tax rates:
- Dividends: 5% withholding tax if the beneficial owner is a company (other than a partnership) which holds directly at least 10% of the capital of the company paying the dividends and 15% withholding tax in all other cases.
- Interest: 10% withholding tax on interest payments, provided that the recipient is the beneficial owner of such interest.
Additionally, interest arising in a contracting state shall be exempt from tax in that contracting state if the beneficial owner of the interest is the Government of the other contracting states, a political subdivision, a central or local authority, the Central Bank or any other financial institution wholly owned by the Government of the other contracting state.
- Royalties: 10% withholding tax on royalty payments, provided that the recipient is the beneficial owner of such interest.
Capital gains: Article 13 of the Treaty provides that gains derived by a resident of a contracting state from the alienation of shares or comparable interests in the capital of a company deriving more than 50% of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other contracting state.
Offshore activities: Article 21 of the Treaty provides that any enterprise of a contracting state that carries on offshore activities in the other contracting state shall be deemed to have a permanent establishment in the other. This shall not apply where the offshore activities are carried on in the other contracting state for a period or periods not exceeding in the aggregate 30 days in any 12-month period beginning or ending in the fiscal year concerned.
General provision: Article 22 of the Treaty provides that any income not addressed specifically in any other article of the Treaty should be taxed only in the state of residence of the recipient of income.
Elimination of double taxation:
The Treaty additionally provides that, in the case of Cyprus, subject to the provisions of Cyprus tax law regarding credit for foreign tax, there shall be allows as a Credit against Cyprus payable in respect of any item of income or gain derived from Kazakhstan. It is specified that the credit shall not exceed that part of the Cyprus tax which is appropriate to such items of income or gain.
In the case of Kazakhstan, where a resident derives income which may be taxed in Cyprus, Kazakhstan shall allow as a deduction from the tax on the income or gain of that resident, an amount equal to that paid in Cyprus.
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