Cyprus: The Cyprus-Iran Double Taxation Treaty Has Now Entered Into Force And Will Come Into Effect As From The 1st January 2018

Historical events

  • The Nuclear Agreement

The Iran nuclear deal framework was a preliminary framework agreement reached in 2015 between the Islamic Republic of Iran and a group of world powers: the P5+1 (the permanent members of the United Nations Security Council—the United States, the United Kingdom, Russia, France, and China—plus Germany) and the European Union.

  • The signing of the Treaty

Following the decision of the international community to lift sanctions imposed over Iran and pursuant to the signing of the above agreement, on the 4th of August 2015, Cyprus and Iran signed a Double Taxation (DTT) Treaty in Nicosia, Cyprus. The DTT was yet to be ratified and/or come into force.

  • The ratification of the Treaty

On the 3rd of January 2017, the President of Iran signed a law ratifying the DTT.

  • The Treaty enters into force

On the 5th of March 2017, the said DTT entered into force and it shall apply as from the 1st January 2018.

Remarks

This is a tax treaty/agreement based on the OECD Model Convention for the Avoidance of Double Taxation on Income and on Capital and the prevention of fiscal tax evasion and applies to taxes imposed on behalf of each contracting state or of its political subdivisions or its local authorities, irrespective of the manner in which they are levied.

Its application will further develop and strengthen the fiscal, economic and business relationships between the two countries by creating and enhancing new opportunities for both.

The Cyprus business world, in particular, welcomes the official enactment of this agreement and anticipates that the future will be bright. Cyprus expects that as a result of the agreement new and important investments will be made in Cyprus especially in the areas of real estate, energy and trade but also in the area of shipping. In fact Iran has a very large tanker fleet which perhaps the Cyprus flag could benefit from.

It would certainly not be an exaggeration to say that Cyprus will probably serve as the country bridging the distance between Iran and the rest of the EU.

Main provisions of the Treaty

Permanent Establishment:

The permanent establishment definition included in the treaty is in line with the definition provided in the OECD Model Tax Convention. More specifically, the term includes a place of management, a branch, an office, a factory, a workshop, a mine, an oil or gas, a quarry or any other place of exploration, exploitation and /or extraction of natural resources. A building site, a construction, assembly or installation project or supervisory activities in connection therewith, constitutes a 'permanent establishment' only where such site, project or activities continue for a period of more than twelve (12) months.

Furthermore, where a person (other than an agent, broker, general commission agent  or any other agent of independent status) is acting in a contracting state on behalf of an enterprise and has, and habitually exercises, in a contracting state an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that state in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are according to the agreement related to the use of facilities for the storage and display of goods or merchandise belonging to the enterprise, the maintenance of a stock of goods or merchandise belonging to the enterprise for the purpose of storage or display or of processing by another enterprise, the maintenance of a fixed place of business for the purpose of purchasing goods or merchandise or for collecting information for the enterprise, the maintenance of a fixed place of business for the purpose of advertising, and/or scientific research, for that enterprise and/or carrying on any other activity of a preparatory or auxiliary character, the maintenance of a fixed place of business for any combination of the above activities, provided that the overall activity of the fixed place of business resulting from this combination is of preparatory  or auxiliary character.

Income from immovable property

Income derived by a resident of a contracting state from immovable property (including income from agriculture or forestry) situated in the other contracting state may be taxed in that other state.

Withholding tax rate on dividends payments

Dividends paid by a company which is a resident of a contracting state to a resident of the other state may be taxed in that other state. If, however, the recipient of the dividends is the resident of the other contracting state and the beneficial owner of the dividends, the tax so charged shall not exceed

  • maximum 5% withholding tax on dividends paid, if the beneficial owner of the dividends is a company (other than a partnership) holding directly at least 25% of the capital of the company paying the dividend;
  • maximum 10% withholding tax on dividends paid , in all other cases;

The above applies for payments from Iran to Cyprus. Payments from Cyprus to Iran or other foreign persons or entities do not carry any withholding tax due to Cyprus local tax law provisions.

Withholding Tax rate on Interest

Interest arising in a contracting state and paid to a resident of the other contracting sate may be taxed in that other contracting state. It can, however, be taxed in the contracting state in which it arises, but in this case, if the recipient is the resident of the other state and the beneficial owner of the interest the tax so charged shall  not exceed 5% of the gross amount of the interest. The above applies for payments from Iran to Cyprus. Payments from Cyprus to Iran or other foreign persons or entities do not carry any withholding tax due to Cyprus local tax law provisions.

Withholding Tax rate on Royalties

Royalties arising in a contracting state and paid to a resident of the other contracting state may be taxed in that other contracting state. However, such royalties may also be taxed in the contracting state in which they arise but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed 6% of the gross amount of the royalties.

The above applies for payments from Iran to Cyprus. Payments from Cyprus to Iran or other foreign persons or entities do not carry any withholding tax due to Cyprus local tax law provisions.

Capital gains Taxation from the disposal of immovable property

The taxation of capital gains arising from the disposal of immovable property can be taxed in the country where the immovable property is situated.

Capital gains Taxation from the disposal of shares

The taxation of capital gains arising from the disposal of shares in a company, which exceed 50% of its value deriving directly from immovable property located in the other contracting state, can be taxed in the resident country, in which the property is situated.

Important to note

It is important to note that, irrespective of the country of residence of the recipient or whether a relevant tax treaty exists, there is no withholding tax on outgoing payments from Cyprus in the form of dividends in cases where the recipient/s of the income are non Cyprus tax resident shareholder/s (companies or individuals) or to Cyprus tax resident/s individual/s who are not Cyprus Domiciled.

Furthermore, of crucial importance is the fact that, irrespective of the country of residence of the recipient or whether a relevant tax treaty exists, there is no withholding tax on interest paid from Cyprus as well as on royalties paid from Cyprus to any company or individual in respect of intellectual property exploited outside Cyprus.

The competent authorities of the contracting states shall exchange and shall treat as secret (shall be disclosed only to persons or authorities i.e. courts and administrative bodies involved in the assessment or collection of, enforcement or prosecution in respect of or the determination of appeals in relation to the taxes covered by the agreement) such information as is necessary for carrying out the provisions of the tax treaty between them or of the domestic laws concerning taxes covered by the agreement.

©Democritos Aristidou & Co, April 2017

Democritos Aristidou & Co Law Firm is a partnership registered In the Republic of Cyprus, Registered Office: 80 Griva Digheni str. 3101 Limassol, CYPRUS. We use the word partner to refer to a member of Democritos Aristidou & Co or members and directors. Democritos Aristidou & Co is authorized and regulated by the Cyprus Bar Association member of the Council of Bars and Law Societies of Europe and all of the lawyers are individually registered and licensed with the Bar Association of Cyprus to practice law in Cyprus and Europe as European lawyers. Democritos Aristidou & Co as well as all of the lawyers practicing law hold a professional indemnity insurance and are all qualified to the highest standards.

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.

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