Cyprus and Germany Double Tax Treaty Amendment

On February 19 2021, the existing tax treaty between Cyprus and Germany was amended and a new protocol was signed.  The signed protocol was issued in the Official Gazette of Cyprus following the Council Minister decision on 23 October 2019. The protocol was issued according to the provisions of Article 169.3 of the Cyprus Constitution.

The original double tax convention with the German Federation was not covered by the Multilateral Convention and the Base Erosion and Profit Shifting (BEPS) actions were not automatically included in that convention. The new protocol presents minimum standards of the BEPS actions of the Organization for Economic Co-operation and Development (OECD).

The amendments included in the protocol signed are analysed below:

  • Replacement of wording in the Preamble of the double tax treaty

The new preamble wording specifies that the main target of the double tax treaty is to “eliminate double taxation with respect to the taxes on income and capital, without creating opportunities for non-taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this agreement for the indirect benefit of residents of third States)”.  The new wording is in line with the OECD’s minimum standard in BEPS Action 6.

  • Introduction of Principle Purpose Test (PPT)

Article 27: Entitlement to Benefits – The Principle Purpose Test has been added to the existing Article 27, which acts as a shield against treaty shopping.  The PPT ensures that no benefit is granted on item of income or capital, if the benefit was the purpose of the transaction or arrangement, unless it can be proven that the granting of the benefit was in accordance with the purpose of the tax treaty. Taxpayers must be able to demonstrate that the benefit is in line with the purpose of the treaty and that there is no tax evasion or treaty shopping.

  • Alignment of business profits with OECD Model Tax Convention

The text of “Article 7 Business Profits” has been amended by the protocol to ensure that the text is in line with the wording included in latest 2017 version of OECD Model Tax Convention. As per article, taxing rights to business profits of an enterprise are allocated to the Contracting State to the extent that profits are not subject to different rules under other Articles of the double tax treaty.

The main purpose behind the protocol is to introduce the BEPS minimum standards on the Cyprus- Germany tax treaty, ensuring that both countries are taking actions against treaty shopping and transactions that lack economic substance. Such double tax agreements aim to build and attract investments while promoting Cyprus as an international business centre.

Provided that both parties ratify the protocol by the end of 2021, the protocol will be effective as of 01 January 2022.

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