Global Tax Alert | 20 January 2014

Cyprus expands treaty network as of 1 January 2014

  • Share

Executive summary

Cyprus’ Double Tax Treaty network has been significantly extended with five new treaties becoming effective as of 1 January 2014. These include treaties with Portugal, Estonia, Ukraine, Finland and Kuwait.

In addition, Cyprus also concluded treaties with Spain and Lithuania in 2013. These treaties await ratification and are not yet in force.

All of the new treaties concluded by Cyprus are generally based on the OECD Model Tax Convention framework with a number of modifications. It is worth noting that each treaty contains an article providing for exchange of information which is based on article 26 of the 2010 Model Tax Convention on Income and on Capital.

Detailed discussion

Treaty with Portugal

The Treaty applies to taxes on income as well as on gains from alienation of movable or immovable property. In the case of Portugal, the Treaty covers personal and corporate income taxes and surtaxes on corporate income. In the case of Cyprus, it covers personal and corporate income taxes, the so-called Defense Tax and capital gains tax.

The Treaty provides for a 10% withholding tax on dividends, interest and royalty payments. However, as per the protocol, which is an integral part of the Treaty, it is understood that the provisions of the dividend, interest and royalties articles shall not affect the application of legal acts of the European Community meaning that the withholding tax rates can be eliminated in accordance with relevant EU directives.

The capital gains tax article allocates taxation rights to the source state for gains arising on the sale of shares in real estate rich companies (i.e., shares deriving more than 50% of their value directly or indirectly from immovable property).

Treaty with Estonia

The Treaty applies to taxes on income as well as on gains from alienation of movable or immovable property. In the case of Estonia, the Treaty covers only income taxes, whereas in the case of Cyprus, it also covers the so-called Defense Tax and capital gains tax in addition to corporate and personal income taxes.

The Treaty provides for zero withholding tax on dividends, interest and royalty payments. Moreover, the capital gains tax article allocates taxation rights to the source state for gains arising on the sale of shares in real estate rich companies (i.e., shares deriving more than 50% of their value from immovable property).

Treaty with Ukraine

The Treaty replaces the 1982 Cyprus-USSR treaty which has been honored by the two countries through 31 December 2013.

The Treaty applies to taxes on income as well as on gains from alienation of movable or immovable property. In the case of Ukraine, the Treaty covers the tax on profits of enterprises and the individual income tax, whereas in the case of Cyprus, it also covers the so-called Defense Tax and capital gains tax in addition to corporate and personal income taxes.

The Treaty provides for a 5% withholding tax on dividends provided the beneficial owner holds at least 20% of the capital of the paying company or has invested in the acquisition of shares an amount of at least €100,000 (15% in all other cases). In addition, there is a 2% withholding tax on interest payments and a 5% withholding tax on royalties in respect of any copyright of scientific work, any patent, trade mark, secret formula, process or information concerning industrial, commercial or scientific experience (10% for other royalties).

Capital gains derived by a resident of Cyprus or Ukraine are not taxable in the country of investment (except of gains relating to immovable property and gains from the alienation of movable property of a permanent establishment). In particular, any gains arising from the sale of shares will only be taxed in the country of residence of the seller of the shares. The right of the residence state to tax such gains is extended to shares of real estate rich companies.

Treaty with Finland

The Treaty applies to taxes on income as well as on gains from alienation of movable or immovable property. In the case of Finland, the Treaty covers the state income taxes, the corporate income tax, the communal tax, the church tax, the tax withheld at source from interest and the tax withheld at source from nonresidents’ income. In the case of Cyprus, it covers personal and corporate income taxes, the so-called Defense Tax and capital gains tax.

The Treaty provides for a 5% withholding tax on dividends provided that the recipient is a company (other than a partnership) which controls directly at least 10% of the voting power in the company paying the dividends (15% dividend withholding tax in all other cases). However, the dividend withholding tax rate can be eliminated in accordance with the relevant EU Directive in case certain conditions are met. No withholding tax is levied on interest and royalty payments.

The Treaty provides that gains derived by a resident of Cyprus or Finland from the alienation of shares or corporate rights in a company deriving more than 50% of their value in assets from immovable property situated in the other Contracting State may be taxed in that State.

Treaty with Kuwait

The Treaty replaces the previous treaty concluded by the two countries in 1984 which was effective since 1 January 1986.

The Treaty applies to taxes on income as well as on gains from alienation of movable or immovable property. In the case of Kuwait, the Treaty covers the corporate income tax, the contribution from the net profits of the Kuwaiti shareholding companies payable to the Kuwait Foundation for Advancement of Science (KFAS), the Zakat Tax and the tax subjected according to the supporting of national employee law. In the case of Cyprus, it covers personal and corporate income taxes, the so-called Defense Tax and capital gains tax.

The Treaty provides for zero withholding tax on dividends and interest while there is a 5% withholding tax on royalty payments. Capital gains derived by a resident of Cyprus or Kuwait are not taxable in the country of investment (except of gains relating to immovable property and gains from the alienation of movable property of a permanent establishment). In particular, any gains arising from the sale of shares will only be taxed in the country of residence of the seller of the shares. The right of the residence state to tax such gains is extended to shares of real estate rich companies.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Cyprus Limited, Limassol
  • Phillippos Raptopoulos
    +357 25 209 999
    philippos.raptopoulos@cy.ey.com
Ernst & Young Cyprus Limited, Nicosia
  • Petros Liassides
    +357 22 209 999
    petros.liassides@cy.ey.com

EYG no. CM4116