Relief from double taxation may be granted by treaties for the avoidance of double taxation. Cyprus has concluded tax treaties with the following countries:
- Austria
- Bulgaria
- Canada
- China
- Commonwealth of Independent States/ previously USSR
- Czech Republic
- Denmark
- Egypt
- Federal Republic of Germany
- France
- Greece
- Hungary
- India
- Ireland
- Italy
- Kuwait
- Malta
- Norway
- Poland
- Romania
- Slovakia
- Sweden
- Syria
- United Kingdom
- United States
- former Yugoslavia
Other tax treaties signed or under negotiation but not yet ratified are with Armenia, Belgium, Finland, Japan, South Africa, Singapore, Thailand and Ukraine. A new double tax treaty with Norway is under negotiation.
Most treaties follow the OECD Model Convention. In general, double taxation relief will be granted by the exemption method or by reduced withholding tax in the country of source or by ordinary tax credit methods. The tax credit, however, is restricted to the Cyprus tax on the double taxed income. In the absence of a tax treaty, double tax credit relief is given unilaterally under domestic provisions.
Tax sparing credits
In most treaties there are important provisions for tax sparing credits. These provisions are very attractive to foreign investors in that the tax "spared" i.e. exempted in Cyprus, is credited against the investor's tax liability in his country of residence as though it was actually suffered there. Treaties containing tax sparing clauses are with Canada, Czech Republic, Denmark, Federal Republic of Germany, Greece, India, Ireland, Italy, Malta, Romania, Slovakia, Sweden, United Kingdom and Former Yugoslavia. The creditable spared taxes are the following:
- Tax on interest exempted from tax under section 10 of the Cyprus Income Tax Laws, if the competent authority of Cyprus is satisfied that the loan was obtained for the purpose of promoting development in Cyprus (treaties with Canada, China, Czech Republic, Denmark, Federal Republic of Germany, France, India, Italy, United Kingdom). In the case of Denmark and Federal Republic of Germany the tax sparing relief is restricted to 10% of the gross amount of interest
- Tax which would have been payable as Cyprus tax but for an investment deduction allowed under section 12 (2)(b) or (c) of the Cyprus Income Tax Laws, if the enterprise is engaged in the hotel business or in manufacturing and provided the competent authority of Cyprus is satisfied that the capital expenditure was incurred for the purposes of promoting development in Cyprus (treaties with Canada, United Kingdom)
- The Cyprus tax which would have been payable on any profits or interest granted tax incentive exemption or relief in Cyprus but for such tax incentive exemption or relief and also the tax which would have been deductible from any dividend paid out of such profit (treaties with Czechoslovakia, Greece, Ireland, Romania and Former Yugoslavia)
- Tax equal to 15% on dividends, if for the purpose of economic development in Cyprus, dividends are exempt from any tax in Cyprus (treaties with Denmark, Federal Republic of Germany and France).
Applicability of Double Tax Treaty to Offshore Entities
Certain Cyprus tax treaties contain provisions which tend to restrict the benefits in the case of offshore entities. Such treaties are those with Canada, Federal Republic of Germany, France, United Kingdom and the United States. These restrictive measures aim at preventing certain types of foreign-source income from being channelled through Cyprus or accumulated in Cyprus through the use of offshore entities. Despite this, however, Cyprus remains an attractive base for various offshore business operations, because of the other tax advantages as well as the possible uses of these treaties by means of careful tax planning.
The contents of this article are intended to provide a general guide to the subject matter. Specialist advice should be obtained before any action is taken.