New Cyprus-United Kingdom DTT

A new Double Tax Treaty (DTT) was signed amongst Cyprus and the United Kingdom (UK) on the 22 March 2018. The new DTT will come into effect once both states will officially ratify the DTT. The DTT is intended to further strengthen the economic ties amongst Cyprus and the UK. Obviously, once put into force, the new DTT will replace the existing DTT which was signed on the 20 of June 1974.

The main provisions of the new DTT are outlined below:

Dividends

Withholding tax will not be imposed on dividend payments where the recipient is the beneficial owner of the dividend income.

The above provision applies except when the majority of dividend distributions are paid out of income which is directly or indirectly generated from immovable property via an investment entity that distributes the majority of its income on a yearly basis and that income was exempted from taxation. In such circumstances, where the income will be subject to tax within the country where the paying company is situated and considered as a resident company, the tax imposed will not be more than 15%, unless the beneficial owner of the dividend is a pension fund located in the other State.

Interest

No withholding tax will be imposed on interest payments in cases where the recipient is the beneficial owner of the interest income, except when the interest is obtained from a permanent establishment located in the other State.

Furthermore, the tax exemption will not apply in cases where the interest payment is between related parties and when the interest rate is more than the rate that would have been applied within an arm’s length business transaction. If the rate exceeds the arm’s length rate, the excess amount will be subject to tax in the country the paying company is situated.

Royalties

No withholding tax will be imposed on royalty payments in cases where the recipient is also the beneficial owner of the royalties, except when the royalties paid to a resident company of a Contract State are obtained from a permanent establishment located in the other State.

Additionally, the tax exemption will not apply in cases where the royalty payment is between related parties and when the royalty fee is more than the rate that would have been applied within an arm’s length business transaction. If the fees exceed the arm’s length fee, the excess amount will be subject to tax in the country the paying company is situated.

Capital Gains  

Any capital gains deriving from the disposal of the shares of a company will be subject to tax only in the State where the person disposing the shares is situated, except in cases where more than 50 percent of the shares’ value derives directly or indirectly from immovable property situated in the other State. This will not apply when the disposed shares are traded on a stock exchange.

Limitation of Benefits

The new DTT includes a Limitation of Benefits Clause (Article 23), where the benefits of the treaty are not to be granted in cases where the obtaining of such benefit was one of the main purposes of the arrangement.