Cyprus: Double Tax Treaties

Last Updated: 27 April 2000

Introduction

Cyprus has concluded an impressive and expanding number of treaties for the avoidance of double taxation of income earned in any of the treaty countries.

The withholding taxes relating to the 27 treaties currently in place are outlined in the table of double tax treaties.

The existence of these treaties combined with the low tax paid by international business entities offer tremendous possibilities for international tax planning through Cyprus, in the light of the following:

  • Any tax paid in a country with which Cyprus has a treaty is deducted from the Cyprus tax payable on the same income.
  • International business entities are not required to withhold tax on payments made from Cyprus, in respect of dividends, interest and royalties.
  • Cyprus is one of the few countries in the world, which has concluded tax treaties with almost all East European countries.
  • Cyprus is not considered as a tax haven by most tax jurisdictions and thus free from suspicion usually associated with tax haven operations.

Tax sparing Credits

A number of Cyprus double tax treaties contain provisions for tax sparing credits. Tax sparing credit means the tax credit not only in respect of tax actually paid in Cyprus but also the tax, which would have been otherwise payable had it not been for the incentives granted in Cyprus which result in exemption or reduction in tax.

The tax sparing credit provisions of the Cyprus double tax treaties can be viewed by country.

The existence of tax advantages in Cyprus for international business entities maximises the tax credit to be granted in the other Contracting State, except where the treaties contain anti-avoidance provisions.

Anti-avoidance provisions

A number of Cyprus double tax treaties contain special anti-avoidance provisions that exclude Cyprus International business entities from the benefits of these treaties. These provisions are contained in the treaties with Canada, France, Germany, United Kingdom and the U.S.A.

The anti-avoidance provisions of the Cyprus double tax treaties can be viewed by country.

Even under these treaties, the limitations are such that they affect only flows of income from these countries to Cyprus and not income flow from Cyprus to these countries. Hence these treaties can still be used with some creative and careful tax planning, especially in the following cases:

  • Companies incorporated in countries that have no treaties with Eastern Europe.
  • Companies in countries where, although a dividend from foreign subsidiaries is taxable, there is either no tax on undistributed profits of such subsidiaries or tax at a rate lower than normal.
  • Companies in countries which do not tax at all, or in full, dividends emanating from foreign subsidiaries

Through the establishment of a Cyprus international subsidiary the benefits of the Cyprus Treaties with Eastern Europe will be secured. Moreover, the use of a Cyprus international subsidiary might prove advantageous either because of different withholding rates in the respective treaty provisions or by converting an interest or royalty income emanating from Eastern Europe into a dividend income to be distributed through a Cyprus subsidiary.

Cyprus double tax treaties-Table of withholding tax

 

Received in Cyprus

Paid from Cyprus (1)

 

Dividends

Interest

Royalties

(2). Dividends

Interest

Royalties

Treaty Countries

%

%

%

%

%

%

Austria

10

0

0

10

0

0

Belgium

15/10 (3)

10/0 (20)

0

0

10

0

Bulgaria

0

0

0

0

0

0

Canada

15

15/0 (15)

10/0 (21)

15

15/0 (15)

10/0 (21)(22)

China

10

10

10

10

10

10 (22)

Czech Republic (28)

10

10/0 (16)

5/0 (23)

10

10/0 (16)

5/0 (23)

Denmark

15/10 (3)

10/0 (17)

0

15/10 (3)

10/0 (17)

0

Egypt

15

15

10

15

15

10 (22)

France

15/10 (4)

10/0 (17)

0/5 (24)

15/10 (4)

10/0 (17)

0/5 (24)

Germany

10-27 (5)

10/0 (16)

0/5 (24)

15/10 (5)

10/0 (16)

0/5 (24)

Greece

25 (6)

10

0/5 (25)

25 (6)

10

0/5 (25)

Hungary

15/5 (7)

10/0 (16)

0

0

10/0 (16)

0

India

15/10 (4)

10/0 (16)

15

15/10 (4)

10/0 (16)

15 (22)

Ireland

0

0

0/5 (25)

0

0

0/5 (25)

Italy

15

10

0

0

10

0

Kuwait

10

10/0 (16)

5/0 (23)

10

10/0 (16)

5/0 (23)

Malta

35 (8)

10/0 (16)

10

15

10/0 (16)

10 (22)

Norway (31)

5/0 (9)

0

0

0

20/25 (19)

0

Poland

10

10/0 (16)

5

10

10/0 (16)

5

Romania

10

10/0 (16)

5/0 (23)

10

10/0 (16)

5/0 (23)

Slovak Republic (28)

10

10/0 (16)

5/0 (23)

10

10/0 (16)

5/0 (23)

South Africa

0

0

0

0

0

0

Sweden

15/5 (7)

10/0 (16)

0

15/5 (7)

10/0 (16)

0

Syria

15/0 (10)

10/0 (16)

15

15

10/0 (16)

15/10(22)(26)

Russia (Old treaty) (29)

0

0

0

0

0

0

Russia (New treaty)

5/10 (13)

0

0

5/10 (13)

0

0

United Kingdom

15 (11)

10

0/5 (24)

0

10

0/5 (24)

United States

15/5 (12)

10/0 (18)

0

0

10/0 (18)

0

Yugoslavia (former) (30)

10

10

10

10

10

10 (22)

Non Treaty Countries

N/A

N/A

N/A

20

20 (19)

10 (24)

1.SPECIAL NOTES

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

  3. 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.
  4. 10% when the recipient company holds directly at least 25% of the capital of the paying company.
  5. 10% when the recipient company holds directly at least 10% of the capital of the paying company.
  6. 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%.
  7. This is the maximum rate of tax to be deducted on the gross dividend.
  8. 5% when the recipient company holds directly at least 25% of the capital of the paying company.
  9. 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%.
  10. Nil when the recipient company controls, directly or indirectly, not less than 50% of the voting power in the paying company.
  11. Nil when the recipient company holds directly at least 25% of the capital of the paying company.
  12. 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.
  13. 5% if the recipient corporation holds at least 10% of the voting shares of the paying corporation.
  14. 10% if dividend paid by a company in which the beneficial owner has invested less than US$100,000.
  15. Interest

  16. 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.
  17. Nil if paid to a Government or for export guarantee.
  18. Nil if paid to the Government of the other state.
  19. 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.
  20. Nil if paid to the Government, Banks or Finance Institutions.
  21. 25% on the excess amount of annual payments over C£40,000.
  22. 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

  23. Nil on literary, dramatic, musical or artistic work.
  24. 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%.
  25. Nil on literary, artistic or scientific work, film and television royalties.
  26. 5% on film and television royalties.
  27. 5% on film royalties.
  28. 10% on literary, artistic or scientific work, film and television royalties.
2 OTHER NOTES
  1. Business Profits: In the absence of permanent establishment in the other treaty country, business profits are only taxable in the country of residence of an enterprise. The only exception is the Romanian Treaty, which provides for a withholding tax of 5% on commissions payable from Romania to a Cyprus resident company or individual.
  2. Shipping profits: Shipping profits, in general, are only taxable in the place of the effective management of the enterprise, irrespective of the existence of a permanent establishment, except in the case of:
      • Greece and Poland, taxable only in the place of registration of the ship
      • Denmark, France and Germany in certain special circumstances and
      • United States where certain Cyprus ship-owning companies may not be entitled to benefit from the Treaty.
  3. The new countries of Czech Republic and Slovakia have agreed to be bound by the treaty, which was entered into with Czechoslovakia.
  4. The treaty with the former USSR remains in effect for the Members of the Commonwealth of Independent States (CIS) except Kazakhstan, which ceased to recognise it as from 1 January 1995. It is also doubtful whether certain other member states such as Azerbaijan, Turkmenistan and Uzbekistan recognise the treaty.
  5. To date, the status of the treaty with Yugoslavia is uncertain as a result of the break-up of this country.
  6. In addition to the treaties in force, treaties with the following countries have reached the following stage:

Awaiting ratification: Belarus, Mauritius

Ready for signature: Thailand

Negotiations in progress: Singapore, Finland, Algeria, Spain, Sri Lanka, Ukraine

Negotiations will commence soon: Estonia, Holland, Lithuania, Latvia

New agreement being negotiated: Norway and the CIS Republics of Armenia and Kazakhstan

Tax sparing credit provisions

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

Canada

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.

Czechoslovakia

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.

Denmark

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.

Egypt

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.

Germany

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.

Greece

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.

India

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%.

Ireland

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.

Italy

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.

Malta

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%.

Poland

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%.

Romania

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.

Syria

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%.

United Kingdom

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.

Yugoslavia

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.

Anti-avoidance provisions

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

Belgium

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.

Canada

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.

France

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.

Germany

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.

United Kingdom

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

United States

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.

To receive more information on offshore services or to discuss the particulars of your international tax planning needs please contact the authors.

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