Cyprus: Double Tax Treaties

1. Dividends, interest and royalties are paid by a Cyprus International Business Company without any withholding tax in all cases.

Dividends

2. Under the Cyprus legislation there is no withholding tax on dividends paid by a Cyprus local company to a foreign company. The tax withheld on dividends payable by a Cyprus local company to a foreign company is refunded on application by the foreign corporation. The application must be made within six years from the receipt of the dividend. An individual is entitled to a refund of that part of the tax on dividends that exceeds his personal tax liability in Cyprus.
   In the absence of a treaty, there is withholding tax of 20% on dividend payments to foreign individual shareholders. In the presence of a treaty its provisions prevail so the lower treaty rate is used for withholding.
3. 10% when the recipient company holds directly at least 25% of the capital of the paying company.
4. 10% when the recipient company holds directly at least 10% of the capital of the paying company.
5. 10% if received by a company holding 25% or more of the capital and 15% in all other cases. However, if German corporation tax on distributed profits is lower than that on undistributed profits and the difference between the two rates is 15% or more, the withholding tax is increased to 27%.
6. This is the maximum rate of tax to be deducted on the gross dividend.
7. 5% when the recipient company holds directly at least 25% of the capital of the paying company.
8. Malta retains the right to tax dividends at a rate not exceeding that paid by the company in question on the profits out of which the dividends are distributed. This rate is currently 35%.
9. Nil when the recipient company controls, directly or indirectly, not less than 50% of the voting power in the paying company.
10. Nil when the recipient company holds directly at least 25% of the capital of the paying company.
11. If received by a company controlling less than 10% of the voting power, it is entitled to a refund of excess Advance Corporation Tax deducted in the UK. If the Company controls more than 10% of the voting power it is not entitled to the refund.
12. 5% if the recipient corporation holds at least 10% of the voting shares of the paying corporation.
13. 10% if dividend paid by a company in which the beneficial owner has invested less than US$100,000.

Interest

14. Exemption from tax on interest is given on interest on bank deposits emanating from capital imported from abroad and in respect of interest on foreign loans to the Republic or on foreign loans for local investment, under certain conditions. In these cases the tax provisions of the treaties of the countries involved become inapplicable.
15. Nil if paid to a Government or for export guarantee.
16. Nil if paid to the Government of the other state.
17. Nil if paid to the Government of the other state, in respect of bank loans, in connection with sale on credit of any industrial commercial or scientific equipment or any merchandise.
18. Nil if paid to the Government, Banks or Finance Institutions.
19. 25% on the excess amount of annual payments over C£40,000.
20. Interest shall be exempted from tax in the Contracting State in which it arises if it is:
• interest paid to the other Contracting State, a political subdivision or a local authority of that State or any institution the capital of which is wholly owned by that State or the political subdivisions or local authorities of that State;
• interest on deposits not represented by bearer instruments – with banking enterprise.

Royalties

21. Nil on literary, dramatic, musical or artistic work.
22. Under the Cyprus domestic legislation the withholding tax on royalties is 10% with the exception of film royalties on which the withholding tax is 5%.
23. Nil on literary, artistic or scientific work, film and television royalties.
24. 5% on film and television royalties.
25. 5% on film royalties.
26. 10% on literary, artistic or scientific work, film and television royalties.

2 OTHER NOTES

The Cyprus double tax treaties contain the following tax sparing credit provisions:

There are tax sparing credit provisions in Canada in respect of Cyprus tax, which would have been payable or deductible in Cyprus on profits or interest but for certain tax incentive exemptions or relief in Cyprus.

In Czechoslovakia, there are tax sparing credit provisions in respect of Cyprus tax which would have been payable on profits and interest in Cyprus but for tax incentive exemption or relief in Cyprus, and in respect of Cyprus tax which would have been deductible from any divided paid out of profits granted such incentive exemption or relief.

In Denmark, there are available tax sparing credits of 15% for dividends and 10% for interest from Cyprus, if for purposes of promoting the economic development of Cyprus there is an exemption from or reduction of tax below the above percentages.

There are tax-sparing provisions in respect of tax which would have been payable but reduced or waived under the legal provisions of either contracting State for tax incentives.

In Germany, tax sparing credits of 15% for dividends and 10% for interest are available, if there is an exemption from or reduction of tax below the above percentages, as a result of incentives for promoting economic development in Cyprus.

In both countries, tax sparing credits are available for the whole of any tax which would be payable in respect of any profits or interest for which relief or exemption from tax is allowed as a tax incentive, and in respect of any tax, which would be withheld from any dividends, paid out of profits for which relief or exemption from tax is allowed as a tax incentive.

In both countries, tax sparing credits are available for the whole of any tax which would be payable but for incentive relief designed to promote economic development. Withholding tax shall be deemed to have been paid on the gross amount of: dividends at 10% or 15%, as the case may be, interest at 10%, royalties and fees for included services at 15% and technical fee at 10%.

In both countries, tax sparing credits are available for profits, interest and dividends which are exempt from tax or taxed at reduced rates due to tax incentive provisions of each State. In addition, in Ireland there are tax sparing provisions in respect of profits from the operation of ships under the Cyprus flag.

Tax wholly relieved or reduced for a limited period of time under the laws of either contracting State shall be deemed to have been paid for tax credit purposes in the other State. In the case of Italy, these would include the full tax exemption in the case of operations of ships under the Cyprus flag and Cyprus international companies.

In both countries tax sparing credits are available for the whole of any tax which would be payable but for incentive relief. Withholding tax shall be deemed to have been paid on the gross amount of: dividend at 15%, interest and royalties at 10%.

In both countries tax sparing credits are available for the whole of any tax which would be payable but for incentive relief. Withholding tax shall be deemed to have been paid on the gross amount of: dividends and interest at 10%, and royalties at 5%.

In Romania, there are tax sparing credit provisions in respect of Cyprus tax which would have been payable in Cyprus on profits or interest but for tax incentive exemption or relief in Cyprus, and in respect of Cyprus tax which would have been deductible from any dividend paid out of profits granted tax incentive exemption or relief in Cyprus but for such tax incentive exemption or relief.

In both countries tax sparing credits are available for the whole of any tax which would be payable but for incentive relief. Withholding tax shall be deemed to have been paid on the gross amount of: dividends and royalties at 15% and interest at 10%.

In the UK tax sparing credits are available in respect of tax saved as a result of tax incentives given in Cyprus on interest paid, provided the loan was made for the purposes of promoting development and in respect of investment allowances on capital expenditure for specific types of investment.

There are tax sparing credit provisions in respect of tax, which would have been payable but reduced or waived under the legal provisions of either contracting State for tax incentives.

The Cyprus double tax treaties contain the following special anti-avoidance provisions:

The provisions on withholding taxes on dividends, interest and royalties do not apply to persons entitled to special income tax benefits under income tax law provisions:

• sections 5 (2) (c) (I),
• sections 8 (w) and (y) and
• section 28A

Offshore companies therefore cannot avail themselves of the reduced withholding taxes on dividends, interest and royalties flowing from Belgium to Cyprus.

International companies branches and partnerships cannot enjoy the benefits of the treaty. This exclusion does not apply to Cyprus companies owning ships under the Cyprus flag and enjoying full tax exemption in Cyprus.

The articles of the treaty in respect to dividends, interest and royalties do not apply to Cyprus international companies or branches or partnerships, unless the shareholders of such companies are residents of Cyprus. Profits of a Cyprus ship-owning company, of which non-residents own more than 25% of the capital are taxable in France, if the ship-owning company has a permanent establishment in France.

A protocol to the treaty imposes restrictions on the provisions of the article on the elimination of the double taxation. As a result dividends received in Germany from a Cyprus International Business Company are taxable in Germany and a tax credit is given for the tax paid in Cyprus.

International business entities are excluded from obtaining relief under the treaty in respect of dividends, interest and royalties received from the UK.

Relief under the treaty is not available where the recipient of income is subject to tax in Cyprus at substantially reduced rates as compared to the rates in the country of his residence. This provision prevents Cyprus international and ship-owning companies from availing themselves of any benefits under the Treaty.

The content of this article is intended only to provide general guidelines related to this particular matter. For your specific circumstances, full specialist advice is recommended.

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