On 22 March 2018, Cyprus and the UK have signed a Double Tax Treaty (DTT). Once in force and effective, the treaty will replace the existing DTT between the two parties of 1974.
The new treaty is generally based on the OECD Model Tax Convention framework, albeit with some modifications.
The treaty applies to taxes on income as well as on gains from alienation of movable or immovable property.
In the case of Cyprus the treaty covers the corporation tax, the income tax, the special contribution for the defense and the capital gains tax. For the UK it covers the corporation tax, the income tax and the capital gains tax.
Withholding tax rates
The new treaty is significantly more advantageous than the current one for what concerns withholding tax rates.
The treaty provides for the following withholding tax rates, under the condition that the recipient is the beneficial owner of the relevant income – the equivalent rates applicable in the existing DTT are presented in brackets:
Dividends: Nil (Current DTT: Nil/15% if received by individual shareholders regardless of their percentage of shareholding and by companies controlling less than 10 per cent of the voting shares of the company paying the dividend).
An exception applies where dividends are paid out of income (including gains) derived directly or indirectly from immovable property owned by an investment vehicle, which distributes most of this income annually and whose income from such immovable property is exempted from tax. In such a case a withholding tax of 15% is applied, unless the beneficial owner of the dividends is a pension scheme established in the other contracting state in which case no withholding tax is applied.
Interest: Nil (Current DTT: 10%).
Royalties: Nil (Current DTT: Nil/5 per cent on film and TV royalties).
Gains from sale of property rich companies
Gains from the sale of shares in companies which derive the majority of their value from immovable property (property rich companies) are taxed in the country where the property is located. An exception applies for companies the shares of which are traded in a recognised stock exchange.
Limitation of Benefits
The DTT includes a Limitation of Benefits provision, which states that no benefit will be granted in respect of an item of income or a capital gain if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit.
Determination of tax residency of companies
For companies which are tax resident in both countries the following should be considered by the tax authorities of the two states in determining where such a company will be taxed:
a) the place where the senior management is carried on;
b) the place where the meetings of the board of directors or equivalent body are held;
c) the place where the headquarters are located;
d) the extent and nature of the economic nexus to each state and;
e) whether determining that such a company is a resident of only one of the contracting states would carry the risk of an improper use of the convention or inappropriate application of the domestic law of either state.
The above list is not exhaustive, however in the absence of Point e, the remaining group of factors above will generally be considered as decisive.