SUMMARY OF THE NEW DOUBLE TAX TREATY BETWEEN THE REPUBLIC OF CYPRUS AND THE CZECH REPUBLIC

On 28 April, 2009, the Republic of Cyprus (“Cyprus”) announced the signing of a new double tax treaty between Cyprus and the Czech Republic (the “New Treaty”) to replace the agreement between Cyprus and the former Czechoslovak Socialist Republic signed on 15 April, 1980 (the “Old Treaty”).

The New Treaty was ratified by the House of Representatives of Cyprus on 13 November, 2009, and will enter into force on 01 January, 2010.

The main amendments concern the tax treatment of the following:

(a) capital gains,

(b) dividends,

(c) interest and,

(d) royalties.

(I). Capital Gains

1. The treatment of capital gains has been significantly amended.

2. The New Treaty maintains the familiar tax rule that the right to tax income from the alienation of shares is conferred to the country of residence of the seller, noting however, that this has been changed in certain cases.

3. Thus, capital gains derived from the disposal of shares in a company holding property will be taxed in the country where such property is located.

4. Accordingly, the new Article 13, indicates that gains realized by a resident of one contracting state from the disposal of shares deriving more than 50% of their value from immovable property situated in the other contracting state may be taxed in that other state.

(II). Dividends

1. Article 10 of the Old Treaty provided for a 10% withholding tax on dividends paid by a company resident in one country to an investor resident in the other country.

2. Article 10 of the New Treaty, provides that a 0% withholding tax will be imposed on the dividends if the beneficial owner of the said dividends (the “Owner”) satisfies the following 3 criteria:

(i) the Owner is a company (partnerships are thus expressly excluded),

(ii) the Owner holds at least 10% of the share capital of the company where dividends have derived therefrom and

(iii) the Owner holds his ownership interest as per (ii) above for an uninterrupted period of at least 1 year.

3. If the conditions in (2) above are not satisfied, the withholding tax will be 5%.

(III). Interest

1. Article 11 of the Old Treaty provided for a 10% withholding tax on interest paid by a resident of one country to a resident of the other country.

2. Article 11 of the New Treaty, eliminates the withholding tax at source and provides that interest will be taxed only in the recipient's country of residence.

(IV). Royalties

1. Article 11 of the Old Treaty imposed a 5% withholding tax for the use of or the right to use of any patent, trade mark, design or model, computer software and other intellectual property rights.

2. Article 12 of the New Treaty increases this tax to 10%.

3. It should be noted that pursuant to a protocol signed on 28 April, 2009 between the Czech Republic and Cyprus, the former pledged that in the case that it signs with any other EU member State an agreement which will limit the taxation of royalties arising in the Czech Republic to a rate effectively lower, than the provided for in (2) above, then that lower rate will automatically be applicable for the purposes of Article 12 of the New Treaty.

(V). Permanent establishment

1. Article 5 of the New Treaty significantly expands the definition of a “permanent establishment” to include that a permanent establishment will be deemed to exist if services are provided in the territory of the other contracting state for any period exceeding 6 months in any 12-month period.

(VI). Method of eliminating double taxation

1. The Old Treaty entitled the then former Czechoslovakia to use either the credit method or the exemption method.

2. Article 21 of the New Treaty allows the use of only the credit method to reduce double taxation.

(VII). Limitation of benefits

1. Under the New Treaty, the authorities of the contracting states may, by mutual agreement, deny treaty benefits if they conclude that the basic objective of a given transaction is to obtain benefits that would not otherwise be available.