On March 22 2018 Cyprus and the United Kingdom signed a new double tax agreement. Once it has been ratified by both parties, it will replace the current agreement, which dates back to 1974. The wording of the new agreement closely follows that of the 2014 Organisation for Economic Cooperation and Development (OECD) Model Tax Convention for the Avoidance of Double Taxation on Income and on Capital. In terms of their effect, most of the new agreement's main provisions are substantially the same as those in the 1974 agreement. However, the new agreement introduces modern standards on the exchange of tax information and base erosion and profit shifting.
The article on dividends has been considerably shortened and simplified to align with the OECD model tax convention. If the beneficial owner of dividends paid by a company which is a resident of one country is a resident of the other, the dividends are exempt from withholding tax, unless they are paid out of income (including gains) derived directly or indirectly from immovable property by an investment vehicle:
- which distributes most of this income annually; and
- whose income from such immovable property is exempted from tax, in which case withholding tax is limited to 15% of the gross dividends.
However, if the beneficial owner of the dividends is a pension scheme established in the other country, no withholding tax is payable. These provisions are relevant only to dividends paid from the United Kingdom, since Cyprus does not impose withholding tax on dividends.
The dividend exemption does not apply if the dividends derive from a permanent establishment in the country from which the dividends are paid, through which the beneficial owner of the income (which is also a resident in one of the contracting states) carries out business.
The wording of the article on interest has been aligned with the OECD model tax convention, but its effects are unchanged. Interest that arises in one contracting state and is paid to a resident of the other which is its beneficial owner is exempt from withholding tax. This exemption is limited to interest calculated on an arm's-length basis. It does not apply if the interest derives from a permanent establishment in the country from which the interest is paid through which the beneficial owner of the interest (which is also a resident in one of the contracting states) carries out business.
The article dealing with royalties has been considerably shortened and simplified to align with that of the OECD model tax convention. The withholding tax of up to 5% on films for cinematic release and media for television provided for in the 1974 agreement has been removed.
Under the new agreement, if the beneficial owner of royalties paid by a resident of one country is a resident of the other country, the royalties are exempt from withholding tax. This exemption is limited to royalties calculated on an arm's- length basis, but does not apply if the royalties derive from a permanent establishment in the country from which the interest is paid through which the beneficial owner of the interest (which is also a resident in one of the contracting states) carries on business.
The 1974 agreement includes no provisions regarding the taxation of capital gains. Under the new agreement, gains derived by a resident of one country from the alienation of immovable property (or of moveable property associated with a permanent establishment) situated in the other, or from the alienation of unlisted shares deriving more than 50% of their value directly or indirectly from immovable property situated in the other country, may be taxed in the country in which the property is situated. Gains derived from the alienation of all other property (including ships or aircraft operated in international traffic) are taxable only in the country in which the alienator is resident.
Most of the new provisions on personal remuneration do not alter the existing arrangements. One exception is the taxation of pensions paid in respect of national or local government service (eg, pensions paid to retired civil servants or military personnel). Under the 1974 agreement, all pensions, including those payable in respect of government service, are taxed only in the country in which the recipient is resident. Under the new agreement, pensions payable in respect of national or local government service will be taxable only in the country from which they are paid, unless the recipient is both a national and resident of the other country, in which case the pension is taxable only in the country in which the recipient is resident. This aligns the provisions of the Cyprus-UK agreement regarding such pensions with the United Kingdom's other double tax agreements.
The new agreement includes comprehensive provisions regulating the taxation of offshore hydrocarbon exploration and exploitation activities, which are intended to ensure that each state's taxation rights in respect of offshore activities are preserved in circumstances where they might otherwise be limited by other provisions of the agreement, such as those dealing with permanent establishment and business profits. Special rules are required because of the short duration of some of these activities.
A resident of one country undertaking activities offshore in the other country for more than 30 days in any 12-month period in connection with the exploration or exploitation of the seabed, subsoil or natural resources is deemed to be carrying out business in that other country through a permanent establishment.
Profits from offshore supply and transport operations connected with the exploration or exploitation of the seabed, subsoil or natural resources of a country are taxable only in that country. The corresponding article also includes rules for determining when the 30-day threshold has been exceeded in respect of offshore activities undertaken by associated enterprises.
Salaries and wages earned by a resident of one country employed in an offshore zone of the other are taxable in the country in which the activities are carried out. However, if the employer is not resident in the country in which the activities take place, and the employment is for less than 30 days in any 12-month period, remuneration is taxable only in the country in which the individual is resident.
Salaries, wages and similar remuneration derived from employment aboard ships or aircraft engaged in offshore supply and similar activities are taxable in the country in which the individual is resident.
Gains derived by a resident of one country from the alienation of exploration or exploitation rights, or of property situated in the other country and used in connection with the exploration or exploitation of the seabed, subsoil or natural resources situated in the second country, or shares deriving more than half of their value directly or indirectly from such rights or such property, may be taxed in the second country.
Elimination of double taxation
In the United Kingdom, Cyprus tax that is payable, whether directly or by deduction, on profits, income or chargeable gains from sources within Cyprus will be credited against any UK tax computed by reference to the same amounts. The profits of Cyprus-based permanent establishments of UK-resident companies and dividends paid by Cyprus-resident companies to UK-resident companies are exempt from UK tax, subject to satisfying the conditions for exemption under UK law. In the case of a non-exempt dividend paid to a UK-resident company which controls 10% or more of the voting power of the company paying the dividend, relief from Cyprus taxation will be given under the credit method, taking account of the Cyprus tax payable by the company on the profits out of which the dividend is paid.
In Cyprus, credit will be given for UK tax payable, up to the amount of the Cyprus tax on the income concerned.
Entitlement to benefits
The new agreement includes a principal purpose test anti-abuse rule identical to that set out in Paragraphs 1 and 4 of Article 7 of the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting.
Entry into force and termination
The new agreement will enter into force once both countries have completed their respective domestic ratification procedures. It will take effect in Cyprus from the beginning of the following calendar year. In the United Kingdom it will take effect from the same date in respect of taxes withheld at source. In respect of corporation tax, it will take effect from April 1 following its entry into force and in respect of income and capital gains tax it will take effect from April 6 following its entry into force.
The agreement will remain in force until terminated by either country via written notice of termination through diplomatic channels at least six months before the end of any calendar year, but no earlier than five years after the agreement has entered into force. The agreement will cease to have effect in Cyprus from the beginning of the following calendar year. In the United Kingdom, it will cease to have effect:
- six months after the date on which the notice of termination is given for taxes withheld at source;
- from April 1 following the date on which the notice of termination is given for corporation tax; and
- from April 6 following the date on which the notice of termination is given for income tax and capital gains tax.
The current tax agreement between Cyprus and the United Kingdom is one of the oldest that is still in force in Cyprus. The changes introduced will have little direct effect on the tax liability of most taxpayers, but the modernisation of the agreement will provide clarity.
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.