Cyprus is known to have very close financial and political bonds with the UK; As a matter of fact, on November 1st of 1974 came into force the first Double Taxation Convention between the two countries, which was amended and signed on April 2nd of 1980. The treaty in question concerned the Corporation Tax for any year of assessment as of April 1st of 1973 and the Income Tax for any year of assessment as of April 6th of 1973.
Recently, following the upcoming Brexit event, the two Contracting States renewed their cooperation by signing a new Double Taxation Treaty on March 22nd in Nicosia, which entered into force on January 1st of 2019. This new tax treaty concerns physical and moral persons who have their residence, domicile, place of management or place of incorporation, both in the Republic of Cyprus as well as in the United Kingdom and are subject to a conflict of tax liability. The Convention sheds light into the gray areas of the previous legislation, making it easier for the citizens to establish their tax residence country.
PERMANENT ESTABLISHMENT:
The article 5 of the Treaty defines the term “permanent establishment” as the fixed location where the company carries out its activities, wholly or partly.
TAX RESIDENCY:
If a company is established in both Contracting States, the tax residency will be determined by the following factors:
- The location of the central management
- The nature of the economic ties of the company to each member state
- The location of the board of directors’ meetings
- The location of the company’s headquarters
INCOME FROM IMMOVABLE PROPERTY:
- According to the article 6 of the Convention, the income from immovable property is taxed in the State where the property is situated.
- The term “immovable property” is interpreted according to the Laws of the Contracting State where the property is situated. Any extra accessories or equipment directly linked to the property is included in the definition.
- The taxation will apply to income derived from direct use, letting or any other from of using the property
- The income deriving from the immovable property may belong to a physical or a legal person.
BUSINESS PROFITS:
Any profits made by a company resident of one Contracting State are subject to taxation in that State, unless it operates through a Permanent Establishment in the other Contracting State.
DIVIDENDS:
The article 10 of the Treaty states that the term “dividends” refers to “income from shares, or other rights, not being debt-claims, participating in profits”.
- According to the new legislation, dividends paid by a company-resident of one Contracting State to a resident of the opposite State, may be taxed in the latter.
- If the beneficial owner of the company’s dividends is a resident of one Contracting State and the company is resident of the other State, those dividends are exempt from withholding tax. However, if the dividends derive from an income from unmovable property, contributing most of that income annually and exempted from tax, the withholding tax will be limited to a 15% of the gross dividends.
- In case the beneficial owner of the dividends is a pension scheme residing in the other State, there will be no withholding tax applied. This provision only concerns the UK, as the Republic of Cyprus does not impose withholding tax on dividends.
- Dividends paid by a UK based company to a resident of the Republic of Cyprus are taxable either in Cyprus or the UK.
- Gains from property sales are taxable in the Contracting State where the property is located. This does not apply to shares traded on the stock market.
INTEREST:
- The term is interpreted in alignment with the OECD model tax convention, but the effects remain as in the previous Treaty.
- Interest created in one Contracting State but owned by a resident of the other, is taxed in the latter.
- Interest created in one country but paid to a resident of the other, is exempt from withholding tax.
- If the interest derived from a permanent establishment in the State where the interest is paid, the withholding tax exemption does not apply.
CAPITAL GAINS:
The new Treaty has made a significant change regarding the taxation of capital gains. The 1974 Convention had no provisions on this matter; However, the 2018 agreement states that the gains of a resident of one Contracting State, from the alienation of immovable property, located in the other, may be taxed in the other State.
According to the article 6 of the Convention, the Republic of Cyprus holds the exclusive taxing right on the disposal of shares by its tax residents, with the following exceptions :
- If the shares derive more than 50% of their value from property located in the UK, with the exception of shared subject to regular trading on a Stock Exchange.
- If the shares derive all or most of their value from offshore property or rights in connection with exploitation or exploration of the seabed or subsoil or their natural resources situated in the UK.
The Republic of Cyprus holds the exclusive taxing rights on pensions coming from Cyprus tax residents. This exclusivity does not apply to UK Government Service Pensions.
ROYALTIES:
The article 12, regarding the Royalties, has been considerably shortened and simplified, in alignment with the OECD Model Tax Convention.
- The withholding tax (5%) on movie films and television media is no longer applicable.
- If the beneficial owner of royalties paid by a resident of one State is a resident of the other, they are exempt from withholding tax.
- The royalty exemption is not valid for royalties deriving from a permanent establishment in the Contracting State where the interest is paid and where the beneficial owner of it holds his business activities.
PERSONAL REMUNERATION:
The provisions regarding the personal remuneration, such as any employment income, director’s fees, pensions etc, remain the same, with one exception; The new Treaty states that pensions deriving from national or local government service are hereinafter taxable only in the State that issues them, unless the recipient is a national and resident of the other. In that case, it will be taxable only in the Contracting State where the recipient has his residence.
ELIMINATION OF DOUBLE TAXATION :
- Cyprus tax payable in the UK, directly or by deduction, from Cypriot sources, is credited against any UK tax by reference to equal amounts.
- Profits of UK resident companies with Permanent Establishments situated in Cyprus are exempt from UK tax.
- A non-exempt dividend paid to a UK resident company, controlling at least 10% of the voting within the company, relief from Cyprus taxation is granted under the credit method.
OFFSHORE ACTIVITIES :
- Any offshore activity operated from a resident of one State in the other for a longer period than thirty (30) days in a twelve-month (12) period , regarding the exploration or exploitation of the seabed, subsoil, or natural resources, must go through a permanent establishment.
- Profits of offshore activities are taxable in the State where they are operated.
- If the employer is not resident of the Contracting State where the offshore activities are performed and these activities last less than thirty (30) days in a twelve-month (12) period, the taxation is applicable in the State where the employer is resident.
- Salaries and remuneration from offshore activities aboard ships or aircrafts are taxed in the State where the employee is resident.
- Gains of an offshore activity operated in one Contracting State, but derived from a resident of the other State, are taxed in the country where the activity is executed.
- In conclusion, it is safe to observe that the differences between the old Treaty and the new one are very few. However, the conclusion of the 2018 Convention is important, as it brings clarity to the little nuances that were unclear up until recently.
By N. Kalifatidou
Advocate – Legal Consultant
For Arsen Theofanidis LLC