Cyprus: Double Tax Treaties
Cyprus has entered into almost 50 double-tax treaties (unusually for a low-tax jurisdiction). The general effect of these treaties is that Cyprus-registered offshore entities that have tax exemptions in Cyprus will have the same exemptions in the treaty countries (see Tax-Sparing Provisions below).
Cyprus has entered into almost 60 double-tax treaties, an unusually high number for a low-tax jurisdiction. The general effect of these treaties is that Cyprus-registered offshore entities that have tax exemptions in Cyprus will have the same exemptions in the treaty countries (see Tax-Sparing Provisions below).
Most of Cyprus's treaties follow the OECD Model Convention, although the US Treaty follows the most recent model of United States Agreements. Normally speaking, therefore, the country of residence will give a credit for taxes paid in the other treaty country. The Cyprus offshore entity qualifies for treaty protection under all the extant treaties except those with Canada, France, the UK and the USA, and even in those cases the limitations only apply to flows of income to Cyprus, and not to income flows from Cyprus to the countries concerned.
Revisions to Cyprus's corporate tax regime resulting from its accession to the EU, and the abolition of the 'offshore' sector as such, have made Cyprus more rather than less attractive as a tax treaty partner, and the island has found itself needing to revise many of its treaties and enter new treaties with additional countries.
In September 2010, Panama’s President, Ricardo Martinelli met with his Cypriot counterpart, Demetris Christofias, to discuss improving economic cooperation, including the signing of a convention for the avoidance of double taxation and fiscal evasion.
On 18 February 2011, Cyprus signed a revised double taxation agreement with Germany. This allows for the exchange of information on tax matters between the two countries’ tax authorities, in accordance with Article 26 of the OECD model convention. The agreement corresponds with the 20003 OECD model and allows the respective countries' tax authorities to request information pertaining to tax crimes, and in civil tax matters. The Ministry’s statement recognized Cyprus’s commitment to implementing the internationally-agreed standard.
Cyprus has signed a number of other double taxation prevention treaties in recent years (see the table below for a list of tax agreements signed by Cyprus).
In April 2016, Ukraine and Cyprus announced the changes that the two countries had made to the text their existing double tax treaty. The change closes a loophole by which income from immovable property in the Ukraine was not taxed in the Ukraine. From now on, income that Cypriot residents receive from the sale of shares or other corporate rights will be subject to tax in the Ukraine if more than 50% of the value is linked to immovable property in Ukraine.
In addition, that minimum tax rate on dividends has been raised from 2% to 5%. This lower rate only applies if the recipient holds more than 20% of the company’s shares and invested at least €100,000 to acquire that holding. Otherwise, the standard rate of 10% applies.
In January 2017, a double tax treaty between Cyprus and Iran was ratified. This treaty will come into force on 1 January 2018. The treaty is based on the OECD Model Convention for the Avoidance of Double Taxation on Income and on Capital. The most important effects of the treaty is likely to be on immovable property and shipping. It will also provide Iranian business people with access to the EU market.
On 11 July 2016, the Bailiwick of Jersey signed a double taxation agreement with Cyprus. Jersey’s Minister for External Relations, Philip Bailhache, said at the time: "The signing of the DTA with Cyprus continues Jersey's firm and longstanding commitment to the international standards of transparency and information exchange." Referring to both Cyprus and Jersey’s financial importance, he added: “The signing of a DTA with Cyprus is particularly welcome because we have a great deal in common as international finance centres.”
On 16 December 2016, India removed Cyprus from its blacklist of non-cooperative foreign tax jurisdictions. This rescinded the executive order of India’s Central Board of Direct Taxes that was made on 1 November 2013. This reflected a trend that has seen cooperation between India and Cyprus grow stronger in recent years.
On 1April 2017, a revision of the double tax treaty between Cyprus and India was brought into force. The revised text, signed on 18 November 2016, enables capital gains arising from the sale or otherwise disposal of shares to be taxed at source. Investments made before the revision came into force will not be subject to its tenets.
Additionally, the withholding tax rate on royalties has been reduced from 15% to 10%. Furthermore, the definition of the term ‘permanent establishment’ has been expanded, and the article on the exchange of information has been updated to conform with the latest international standards.
In London on 3 May 2017, Cyprus and Barbados signed a double taxation prevention treaty for the first time. Its full title was ‘Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income between the Republic of Cyprus and Barbados’. The treaty is based on the OECD Model Tax Convention for the Avoidance of Double Taxation. The treaty was ratified by Cyprus in 12 May and is likely to come into effect on 1 January 2018.
The treaty provides for a 0% withholding tax rate on dividends, interest and royalties. Regarding capital gains tax on Cyprus tax residents selling shares in Barbadian companies, Cyprus will normally retain the right to impose tax.
On 8 May 2017, an ‘Income and Capital Tax Treaty’ was signed between Cyprus and Luxembourg. This means that Cyprus has now signed double tax treaties with all 28 EU member countries. The treaty conforms to the latest international standards regarding exchange of information and is fully compliant with the OECD’s Base Erosion and Profit Shifting (BEPS) recommendations. It confirms the definition of ‘permanent establishment’ and defines what is meant by residence.
Dividends paid by a company resident in Cyprus or Luxembourg will generally be subject to a withholding tax of 5%. However, if the beneficial owner is a company (not a partnership) that directly holds at least 10% of the capital of the dividend-holding company, no withholding tax will be charged. The treaty also provides that there will be no withholding tax payable on interest or royalties. Furthermore, capital gains derived from the sale of shares in a company that originates more than 50% of its value from immovable property will be taxed where the immovable property is situated.
On 19 May 2017, Cyprus and San Marino signed a protocol, amending their double taxation prevention treaty. The Cypriot Ministry of Finance stated: “The text agreed between the two contracting states will contribute to further develop trade and economic links between Cyprus and San Marino while enabling the enhancement of links with other jurisdictions.” The Ministry added that expanding and improving existing double tax agreements is of great economic and political importance to the island.
In October 2010, Russia and Cyprus signed a protocol to their double taxation agreement which allows for extensive exchange of tax information and removes Cyprus from the notorious Russian 'blacklist' of jurisdictions which did not demonstrate a sufficient level of cooperation with the Russian tax authorities.
The most important change in the treaty relates to source-state taxation of capital gains in companies which predominantly hold real estate as their main activity. Where more than half the company’s assets comprise Russian immovable property, Russia will be able to apply its domestic capital gains tax. This conforms to articles contained in the standard OECD model tax convention. Prior to this change, capital gains taxing rights were applied in the country of residence of the selling company. In addition, real estate investment trusts and funds will have their dividends treated as being income from real estate for the purposes of the treaty.
This protocol was finally ratified by the Russian Duma on 15 February 2012, and went into force at the start on 2013.
The following countries are among those which have double-tax treaties with Cyprus, although not all are in effect at the time of writing: