Cyprus – Luxembourg DTT has entered into force

The Double Taxation Treaty (DTT) between Cyprus and Luxemburg entered into force in May 2018 and will be applicable to the contracting parties as of January 2019. The DTT aims to further expand and boost the trade and economic relationship between the two countries.

The DTT is in accordance to the most recent international standards concerning exchange of information and avoidance of double taxation. The DTT complies completely with the Organisation for Economic Co-operation and Development (OECD) model and the Base Erosion and Profit Shifting (BEPS) recommendations.

The DTT refers to the elimination of double tax concerning income and capital gains tax. It also includes the prevention of tax evasion and tax avoidance, via reduced or non-taxed income, effected by treaty shopping.

The DTT applies to the following taxations:

Cyprus: Income Tax, Corporate Income Tax, Capital Gains Tax, Special Contribution for the Defence of the Republic

Luxembourg: Income Tax, Corporation Tax, Capital Gains Tax, Communal Trade Tax

Important sections covered in the DTT include:

Based on the DTT, the term “resident of a Contracting State” is defined as any individual who based on the law of the specific state, is subject to tax due to his residence, domicile, place of management or any other similar reason.

Capital Gains Tax: Any income a resident of a Contracting State obtains from the disposal of immovable property (including income derived from agriculture or forestry) located in the other Contracting State is subject to tax in that other State.

Withholding Tax on Interest Payments: there is no withholding tax imposed on interest payments. The beneficiary of the interest is subject to tax only in his/her country of residence.

Withholding Tax on Dividend Payments: there is no withholding tax imposed on dividends paid by a legal entity, which is considered a resident in the Contracting State, to a legal entity which is a resident to the other Contracting State, in cases where the beneficial owner is a legal entity that directly owns 10% or more of the share capital in the legal entity that is paying the dividend. In all other cases, a 5% withholding tax is imposed on the gross amount of dividend paid.

Withholding Tax on Royalty Payments: there is no withholding tax imposed on royalty payments.

Offshore Activities: A resident company of a Contracting State that conducts offshore activities in the other Contracting State for 30 days or more within a 12-month period, relating to the exploitation or exploration of subsoil or seabed or natural resources, will be viewed as conducting business within the other Contracting State via a permanent establishment located in the Contracting State. Also, any profits obtained in relation to the transportation of supplies or staff to a specific location or between locations, where any of the abovementioned activities are conducted will be subject to tax within the Contracting State where the company is considered a resident.

Non-Discrimination: the DTT includes provisions regarding non-discrimination in accordance to the OECD Model Convention article 24.

Mutual Agreement Procedure: The DTT includes a mutual agreement procedure in accordance to the OECD Model Convention article 25. However, this does not include the probability of submitting unresolved issues in relation to arbitration.

Exchange of Information: The DTT includes an exchange of information provision in accordance to the OECD Model Convention article 26.

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