Details of the new double tax treaty between Cyprus and Denmark have now been released. The new treaty was signed on 11 October 2010 and will take effect when it has been ratified by both countries. Until then the existing 1981 treaty will continue in effect.

Withholding tax rates

The new treaty eliminates withholding tax on dividends where the beneficial owner is a company directly holding at least 10% of the capital of the distributing company for an uninterrupted period of at least 12 months; otherwise the rate is 15% (subject to certain exemptions granted to governmental bodies and qualifying pension funds). The new treaty also eliminates the 10% withholding tax rate on interest applied in the old treaty. The article on royalties continues to provide for a nil rate of withholding tax.

However, since both Denmark and Cyprus have implemented the EU Parent-Subsidiary Directive and the Interest and Royalties Directive, a nil withholding tax rate will be available in most cases in any event.

Permanent establishment

Under the new treaty a building site or construction or installation project must last for 12 months in order to give rise to a permanent establishment, compared with six months in the 1981 treaty.

Profits from international shipping operations

Article 8 of the new treaty gives exclusive taxing rights over profits derived by an enterprise of a contracting state from ships operating in international traffic to the state of the enterprise, in contrast to both the 1981 treaty and the current OECD Model Convention, which give the exclusive taxing rights to the state in which the place of effective management of the enterprise is situated.

In practice this should not make a difference, since tax residence in both countries is based on the place of management and control.

Pensions and social security

Under the 1981 treaty exclusive taxing rights over pensions, annuities and social security payments are given to the source country. The new treaty gives the exclusive taxing right over non-state pensions to the country in which the recipient is resident, unless tax relief was previously obtained in the source country or where the contributions by the employer made in the source country are tax free for the beneficiary in that country.

Underlying tax credit on dividends

The provision of the 1981 treaty which allowed an underlying tax credit on dividends paid by a company resident in Denmark to a Cyprus tax resident company with a direct shareholding of at least 25% has been eliminated. This should not have any adverse effect because the Cyprus tax authorities allow unilateral relief for foreign underlying tax.

Directors' fees

As with the 1981 treaty directors' fees may be taxed in the country of residence of the company paying them.

Independent personal services

As with the Slovenia and Kuwait treaties, income from independent personal services is dealt with under the article on business profits.

Other amendments

The articles on mutual agreement procedures and exchange of information have been aligned with the equivalent provisions of the current OECD Model Convention and the obligations and powers of the contracting states have been clarified.

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.