On 1 June 2021, the Kingdom of the Netherlands and the Republic of Cyprus signed the Convention for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance (treaty) in Nicosia. Cyprus was the last member of the European Economic Area with which the Netherlands did not yet conclude a double tax treaty.
The objective of the treaty between Cyprus and the Netherlands is to further strengthen cross-border cooperation and to promote cross-border investments. The wording of the treaty generally follows the model treaty of the Organisation for Economic Co-operation and Development (OECD) and contains the standard provisions to avoid double taxation of income and capital.
In order to implement the Base Erosion and Profit Shifting (BEPS) measures on dispute resolution and anti-tax avoidance, the treaty contains a Mutual Agreement Procedure (MAP) to resolve disputes (including dual tax residency of entities) and introduces a principal purpose test (PPT), which allows tax authorities to disallow the application of treaty benefits if the application of those benefits was one of the principal purposes of an arrangement or transaction.
It is noteworthy that the newly signed tax treaty will provide for full relief of withholding taxes on dividend payments to corporate investors, provided they hold directly at least 5% of the capital of the company paying the dividends throughout a 365-day period. This exemption also applies for certain recognized pension funds which are generally exempt under the corporate tax laws of the contracting jurisdictions. Combined with the 0% withholding tax rate for interest and royalties, the Cyprus-Netherlands tax treaty presents a beneficial legal framework for cross-border investments.
Currently, no official date has been published as to when the treaty will enter into force, since the legal framework first needs to be formally adopted by the Dutch Parliament. In the case of Cyprus, the ratification process has been completed. At the earliest, the treaty may come into force in 2022, but only if the ratification and notification procedures in both countries are completed prior to 1 December 2021.
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.