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New Protocol Amends Tax Treaty Between Cyprus and Italy


The new Protocol, signed on 4 June 2009, was ratified by Italy on 3 May 2010. It now awaits ratification by Cyprus to be enforced. The new protocol amends the existing income Tax Treaty of 1974 between Cyprus and Italy (amended only once before in 1980) and shall become effective upon mutual agreement of the authorities of both countries. Taxand Cyprus examines the details of the protocol



Taxes covered (Art. I)

Article 1 of the protocol addresses the changes to be made on paragraph 3 of Article 2 of the Treaty ("Taxes covered").

The scope of application of the Tax Treaty is enhanced, by the addition of taxes to which the Tax Treaty will have application. Regarding Cyprus, reference to "income tax" shall be replaced by a specific list of taxes, covering, apart from income tax, special contribution to the defence as well as capital gains tax. With respect to Italy "the regional tax on productive activities" is added to the already existing list of taxes.

General Definitions (Art. II)
Article 3 of paragraph 1 shall be supplemented with two new subparagraphs (a) and (b) defining the territorial limits of Italy and Cyprus respectively.

Elimination of Double Taxation (Art. III)
The existing Article 23 "Allowance of deduction or credit" shall be replaced by a completely new article on the "Elimination of Double Taxation". The new provisions define calculations for tax credit to be granted as a means of avoiding double taxation.

Italy provides for a tax credit against Italian tax payable with respect to Cyprus taxes imposed on income which is taxable in Cyprus - the tax credit allowed cannot exceed the Italian tax obligations attributed to the specific income. Italy imposes another limitation according to which tax credit relates to the pro-rata amount corresponding to the foreign income which is included in the aggregate income.

Italy does not extend tax credit to income subject to a substitute tax or final withholding tax, or substitute taxation at the same rate as the final withholding tax in Italy.

Cyprus provides for tax credit against the Cyprus tax payable with respect to taxes imposed in Italy on any income deriving from Italy - such tax credit cannot exceed the Cyprus tax obligations attributed to the specific income.

The tax sparing credit provisions incorporated under paragraph 4 shall no longer apply to the replacement of the entire Article.

Article IV
Exchange of information (Art.26 of the treaty) is replaced with provisions which are now in line with the standards prescribed by OECD under Art. 26 of the OECD Model Convention.

Taxand's Take

Upon entry into force, Italy commits to remove Cyprus from the Italian Tax Haven list, Italy's black list. However, the removal of Cyprus from the Italian black list will only be a symbolic move since Cyprus is already included on the OECD white list.

Ratification of the new protocol is expected to further enhance the economic cooperation between the two countries. Italian investors looking to invest in Eastern Europe, Russia and other markets could benefit from this treaty using Cyprus as a gateway for planning.

Your Taxand contact for further queries is:
Eylem Philippou

Sophie Stylianou

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