Cyprus – UK Revised Double Tax Treaty

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A revised Double Tax Treaty between Cyprus and the United Kingdom was signed in Nicosia on 22 March 2018. The revised Treaty and its Protocol, which updates the previous one that was signed in June 1974, will enter into force upon completion of the formal legal procedures required in both countries. Its provisions will have full effect in Cyprus as of 1 January of the year following the year in which the Treaty will enter into force. In the case of the UK, the Treaty will have effect as follows:

•    For withholding taxes, for amounts paid or credited on or after 1 January following the date on which the Treaty will enter into force
•    For income tax and capital gains tax, for any year of assessment beginning on or after 6 April following the date on which the Treaty will enter into force
•    For corporation tax, for any financial year beginning on or after 1 April following the date on which the Treaty will enter into force

The Treaty is based on the OECD Model Convention for avoidance of double taxation, and incorporates the recommendations of the Base Erosion and Profit Shifting (BEPS) project Action 6 (treaty abuse) and Action 14 (making dispute resolution mechanisms more effective). The revised Treaty is expected to further strengthen and develop the economic relationships between Cyprus and the UK, and to enhance cooperation in tax matters.

Withholding taxes

There shall be no withholding tax on dividends, interest and royalties, provided that the recipient is the beneficial owner of the income. The only exception is in the case of dividends paid by certain investment vehicles which derive income directly or indirectly from immovable property; in such cases, a withholding tax rate of 15% will apply.

Capital gains

Capital gains arising from the disposal of shares are taxed exclusively in the country of residence of the alienator, except in the below cases, where the taxing rights are assigned to the source country:

•    Shares deriving more than 50% of their value directly or indirectly from immovable property situated in the other country. This does not apply for shares in which there is substantial and regular trading on a Stock Exchange.
•    Shares deriving their value, or the greater part of their value, directly or indirectly from certain offshore activities connected with the exploration or exploitation of the seabed and subsoil and their natural resources situated in the other country.

Limitation of benefits

A limitation of benefits clause is incorporated in the revised Treaty, in the form of a ‘principal purpose test’. Benefits shall not be granted in cases where it is reasonable to conclude that obtaining such benefits was one of the principal purposes of any arrangement or transaction. The purpose of this clause is to prevent treaty abuse, in line with the BEPS Project Action 6.

Pensions

Pensions and other similar remuneration paid to a resident of one of the two contracting states shall be taxable only in that state, with the exception of certain cases of government service pensions.
 

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