On the 7th of June 2017 Cyprus signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”). The MLI will implement tax treaty measures in order to reduce opportunities for tax avoidance by multinational companies.
Article 6 and 7 as the main impact on Cyprus Companies
The main impact on Cyprus companies will be Article 6 and 7 which relate to treaty abuse. As a result, Cyprus will implement in its double tax treaties principle purpose test (PPT) and a limitation of benefit clause (LoB). Consequently, it is essential that Cyprus companies owners examine the impact of these changes and ensure that they have sufficient substance in Cyprus. Failure to do so could lead to significant tax implications.
The treaty, based on the OECD model treaty, provides for the following maximum withholding tax rates on dividends, interest and royalty payments:
- Dividends: No withholding tax on dividends paid to a company that holds directly at least 10% of the capital of the dividend paying company.
Otherwise, the rate will be 5%. - Interest and royalties: No withholding tax on interest and royalties paid to a resident of the other contracting state.
Who does the tax treaty apply to?
For the purposes of the treaty, a collective investment vehicle will be considered a resident of a contracting state if, under the domestic law of that state, it is liable to tax therein by reason of its domicile, residence, place of management or any other criterion of a similar nature. Collective investment vehicle will be considered as liable to tax if it is subject to the tax laws of that contracting state irrespective if it is exempt from tax.
The treaty also includes provisions for the exchange of financial and other information. The treaty will enter into force after formal ratification and with respect to taxes will have effect on or after 1 January following the date the treaty enters into force.
On the 3rd of May 2017 Cyprus signed double tax treaty with Barbados.
Nil withholding tax on dividends, interest and royalty payments
The treaty is based on the OECD Model Convention and provides nil withholding tax on dividends, interest and royalty payments. The treaty will enter into force after formal ratification and with respect to taxes will have effect on or after 1st January following the date the treaty enters into force.
A Convention to avoid double taxation and the prevention of fiscal evasion with respect to taxes on income was signed in Brussels on the 24th of May 2016 and it is based on the OECD Model Convention for the Avoidance of Double Taxation on Income and Capital. The Treaty enters into force as of 1st of January 2017.
Following Taxes are Included:
- Latvian personal and corporate income tax,
- Cyprus personal and corporate income tax, capital gains, special contribution (SDC tax).
The main provisions of the Double Tax Treaty include
Tax withholding rates
- Dividends and Interest: 0% withholding tax will apply to dividend/interest payments to a resident company in the other contracting state that is the beneficial owner of the company. In case where the recipient company is not the beneficial owner of the dividend/interest the withholding tax rate is 10%.
- Royalties: 0% withholding tax will apply to dividend payments to a resident company in the other contracting state that is the beneficial owner of the company. In case where the recipient company is not the beneficial owner of the dividend the withholding tax rate is 5%.
Capital Gains
Income and/or Profits incurred by a Cyprus Resident or the contracting state from the alienation of immovable property situated in Latvia may be liable for tax in Latvia or the contracting state in which the property is situated. Profits derived by a Cyprus Resident from the disposal of shares in a company deriving more than 50% of their value directly or indirectly from immovable property situated in Latvia or any other contracting state may also be taxed in Latvia. Profits derived by a Cyprus Resident from the disposal of shares other than those referred to above will be taxable only in Cyprus being the country of tax residence of the person disposing the shares.
Other important provisions
Article 5 of the DDT – Permanent Establishment – provides for a 9-month period that a building site, construction or assembly or installation project or a connected supervisory or consultancy activity must exist in order to constitute a permanent establishment.
Exchange of Information: Compliant with OECD exchange information provisions.
