The new Protocol which was signed on June 4th, 2009 has been ratified by Italy on May 3rd, 2010, while it now awaits the ratification by Cyprus in order to be enforced. The new protocol amends the existing income tax treaty of 1974, between Cyprus and Italy (amended once again in the past, during 1980) and shall become effective upon mutual agreement of the authorities of both countries.

Details of the protocol have recently been published and brief outlines of the new protocol are provided hereunder:

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").

Respectively, 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 Double Taxation (Art. III)

The existing Article 23 "Allowance of deduction or credit" shall be replaced in its entirety by a new article on the "Elimination of Double Taxation". The new provisions define the way to calculate the tax credit to be granted, as the 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, whereas the tax credit allowed cannot exceed the Italian tax obligations attributed to the specific income. Not withstanding the above, Italy imposes another limitation according to which the tax credit relates to the pro-rata amount corresponding to the foreign income which is included in the aggregate income.

Furthermore, Italy does not extend the 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 a tax credit against the Cyprus tax payable with respect to taxes imposed in Italy on any income deriving from Italy, whereas such tax credit cannot exceed the Cyprus tax obligations attributed to the specific income.

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

Article IV

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

Upon entry into force of the Protocol, Italy has committed to remove Cyprus from the Italian Tax Haven list, so called black list. However, the removal of Cyprus from the Italian black list will only be symbolic given that Cyprus is already included in OECD' white list.

The Ratification of the new protocol is expected to further enhance the economic corporation between the two countries. The great benefits of Cyprus Tax regime coupled with the extensive double tax treaty network, may establish Cyprus as a main gateway for Italian investors planning to invest in Eastern European, Russian and other markets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.