Cyprus and the United Kingdom sign Double Tax Treaty

On 22 March 2018, the new double tax treaty between Cyprus and the United Kingdom was signed (the New Treaty). The New Treaty is pending certain legal proceedings by both contracting states following which it shall take full effect on 1 January 2019 in Cyprus. In the UK for withholding taxes for amounts paid or credited the New Treaty shall take full effect on or after 1 January 2019, for income tax and capital gains tax it shall take full effect from 6 April 2019, and for corporation tax for any financial year beginning it shall take full effect on or after 1 April 2019.

The New Treaty was signed in Nicosia by the Cyprus Minister of Finance Harris Georgiades and the British High Commissioner Matthew Kidd. The New Treaty updates the one signed by the two countries in June 1974 which came into effect in March 1975 and is based on the Organisation for Economic Co-operation and Development Model Tax Convention for the avoidance of double taxation on income and capital. 

 

Taxes covered

The specific taxes which the New Treaty covers are as follows:


UK: 

  • Income tax
  • Corporation Income tax
  • Capital gains tax


Cyprus: 

  • Income tax
  • Corporation Income tax
  • Capital gains tax
  • Special Contribution for Defence of the Republic tax

 

Withholding Taxes

The New Treaty provides for 0 per cent withholding tax rate on payments of dividends, interest and royalties (with the exception of dividends paid by certain investment vehicles out of income derived, directly or indirectly, from tax exempt immovable property income, in such cases a 15 per cent withholding tax rate applies).

 

Capital gains

For capital gains, Cyprus retains the exclusive taxing right on the disposal of shares made by Cyprus tax residents, except in the following cases:

  1. Where the shares derive more than 50 per cent of their value (directly or indirectly) from immovable property situated in the UK. This does not apply to shares in which there is substantial and regular trading on a Stock Exchange.
  2. Where the shares derive their value or the greater part of their value (directly or indirectly) from certain offshore rights/property relating to exploration or exploitation of the seabed or subsoil or their natural resources located in the UK.


Cyprus also retains the exclusive taxing rights on pension income of Cyprus tax resident individuals, with the exception of certain cases of UK Government service pensions. 

 

Conclusion

The New Treaty incorporates the 'Principal Purpose Test' (PPT), which is a minimum standard under the Base Erosion and Profit Shifting project. The PPT provides that a double tax treaty benefit shall not be granted, under conditions, if obtaining that benefit was one of the principal purposes of an arrangement or transaction. This measure is designed to tackle “treaty shopping” and puts a strong emphasis on ensuring that operations are supported by appropriate substance and reflect a principal commercial rationale.