1 Introduction

1.1 On 22 March 2018, Cyprus and the United Kingdom signed a Double Tax Treaty Agreement (the "Treaty") which will come into force in due course once both countries have completed their parliamentary procedures and exchanged diplomatic notes.

1.2 The Treaty is based on the OECD Model Convention on the Avoidance of Double Taxation on Income but it also aims to the prevention of tax evasion by the introduction of exchange of bank information and data in line with the relevant provisions of the Treaty.

2 Main Provisions of the Treaty

2.1 Directors' Fees and Other Payments: Directors' fees and other similar payments derived by a resident in one of the two countries of the Treaty in his capacity as a member of the board of a company which is resident of the other country may be taxed in that other country.

2.2 Pensions: Subject to any relevant provisions of the Treaty, pensions and other similar remuneration paid to a resident in one of the two countries of the Treaty shall be taxable only in that country.

2.3 Interest: No withholding tax shall be levied on interest payments made where the recipient is the beneficial owner of the interest, unless the interest is derived from a permanent establishment situated in the other country. The exemption does not apply where the interest paying and receiving entities maintain a special relationship (i.e. are connected parties), and the interest rate exceeds the rate that would be applied in an arm's length transaction. Any excess over and above the arm's length rate would remain chargeable under the domestic legislation in which the interest paying company is a resident.

2.4 Royalties: No withholding tax shall be levied on royalty payments where the recipient is the beneficial owner of the royalties. The exemption from withholding tax will not apply where such royalties paid to a resident of the one country are derived by a permanent establishment of that entity in the other country. The exemption does not apply where the royalty paying and receiving entities maintain a special relationship (i.e. are connected parties), and the royalties exceed the charge that would be applied in an arm's length transaction. Any excess over and above the arm's length charge would remain chargeable under the domestic legislation in which the royalty paying company is a resident.

2.5 Dividends: No withholding tax shall be levied on dividend payments made in the instance where the recipient is the beneficial owner of the dividend. This is unless most of the dividend is paid out of income derived directly or indirectly from immovable property by an investment vehicle which distributes most of its income annually and such income was exempted from taxation. In the instance where such income was so derived and will be taxed by the State in which the dividend paying company is a resident, such tax may not exceed 15%, except where the beneficial owner of such dividend is a pension fund in the other country to the Treaty, in which case the exemption still applies.

2.6 Capital Gains Tax: Capital gains arising from the alienation of the shares of a company will be taxable only in the country of residency of the alienator, unless more than 50% of the value of such shares is derived directly or indirectly from immovable property situated in the other country. In such a case, taxation will be levied in the country where the immovable property is situated, unless the alienated shares are traded on a stock exchange.

2.7 Income from immovable property: Income derived by a resident in one of the two countries from immovable property situated in the other country may be taxed in that other country.

2.8 Business profits: Profits of an enterprise located in one of the two countries shall be taxable only in that country unless the enterprise carries on business in the other country through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits that are attributable to the permanent establishment may be taxed in that other country.

2.9 Shipping and air transport: Profits of an enterprise located in one of the two countries from the operation of ships or aircraft in international traffic shall taxable only in that country.

2.10 Income from employment: Subject to other provisions of the Treaty, salaries, wages and other similar remuneration derived by a resident in one of the two countries in respect of an employment shall be taxable only in that country unless the employment is exercised in the other country.

2.11 Other income: Items of income beneficially owned by a resident in one of the two countries, wherever arising, not specifically dealt with in any of the articles of the Treaty shall be taxable only in that country.

Originally published April 2018

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.