Double taxation treaties
Cyprus has concluded double taxation treaties covering the following countries:
Cyprus has concluded double taxation treaties covering the following countries:
Treaties are under negotiation, or awaiting ratification, with the following countries:
All the treaties provide relief from double taxation by applying the credit method to the taxation of dividends and interest. Cyprus residents’ liability for Cyprus income tax and SDC is reduced by tax paid or payable in the other country, so that the taxpayer only pays the higher of the two rates of tax and is not taxed twice on the same income.
Even where there is no double tax treaty in place the Cypriot tax authorities will allow unilateral relief in the form of a tax credit against Cyprus tax in respect of foreign tax on the same income charged in the country of origin.
Advantages
The double taxation treaty network of Cyprus allows international transactions to be structured in a number of tax-efficient ways, particularly when combined with the Cypriot holding company and the fiscally beneficial entities described in the following section of this document. A Cypriot corporate structure may beneficially be used:
Where tax has been paid on income from a foreign country with which a double taxation treaty is not in force and such income is subject to Cypriot tax, unilateral relief from Cypriot tax not exceeding the amount of tax paid in the foreign country will be granted by means of exemption, credit or deduction.
Russia and Eastern Europe
The Eastern European country treaties (many of which are a carry-over of the double tax agreement with the former Soviet Union ) give Cyprus companies a considerable advantage in joint venture activities in Eastern Europe, primarily because of the reduction in the impact of withholding taxes on the distribution of joint venture profits.
For example, the taxation of joint ventures in what was the Soviet Union involves a corporation tax liability and a withholding tax liability on profit distributions. The standard withholding tax on distributions to joint venture partners is 15%, reducible by double tax treaties. The current Cyprus/Russia restricts the withholding tax to 5% on dividends where the beneficial owner has directly invested not less than the equivalent of US$100,000 and 10% in the case of smaller investments. The Russian tax authorities apparently accept that profit distributions from a joint venture will be treated as dividends subject to 5% withholding tax.
Assuming that the CFC provisions do not apply, dividends from a Russian subsidiary are subject to SDC at 15%, subject to credit for any Russian tax. Under the Cyprus/Russia treaty, the credit will take into account both the Russian withholding tax and the underlying tax, i.e. the Russian corporation tax on the profit out of which the dividends are paid. As this exceeds the 15% SDC liability, dividends paid from Russia would not suffer any tax in Cyprus.
Even where there is no double tax treaty in place the Cypriot tax authorities will allow unilateral relief in the form of a tax credit against Cyprus tax in respect of foreign tax on the same income charged in the country of origin.
Advantages
The double taxation treaty network of Cyprus allows international transactions to be structured in a number of tax-efficient ways, particularly when combined with the Cypriot holding company and the fiscally beneficial entities described in the following section of this document. A Cypriot corporate structure may beneficially be used:
- as an intermediary for joint venture or other participations, particularly in Eastern European countries, to avoid or reduce withholding taxes;
- to finance joint venture or other acquisitions so as to reduce or eliminate withholding taxes and extract profits that would otherwise be subject to significant foreign taxation;
- as a holding company whose income may be exempt, subject to the CFC provisions;
- as an operating company able to claim treaty protection to avoid the creation of a permanent establishment in a foreign country, with the facility of having an office in that country to perform limited functions;
- as a Cyprus international trust entitled to benefit from treaty protection in some circumstances;
- to operate shipping companies from Cyprus with treaty protection.
Where tax has been paid on income from a foreign country with which a double taxation treaty is not in force and such income is subject to Cypriot tax, unilateral relief from Cypriot tax not exceeding the amount of tax paid in the foreign country will be granted by means of exemption, credit or deduction.
Russia and Eastern Europe
The Eastern European country treaties (many of which are a carry-over of the double tax agreement with the former Soviet Union ) give Cyprus companies a considerable advantage in joint venture activities in Eastern Europe, primarily because of the reduction in the impact of withholding taxes on the distribution of joint venture profits.
For example, the taxation of joint ventures in what was the Soviet Union involves a corporation tax liability and a withholding tax liability on profit distributions. The standard withholding tax on distributions to joint venture partners is 15%, reducible by double tax treaties. The current Cyprus/Russia restricts the withholding tax to 5% on dividends where the beneficial owner has directly invested not less than the equivalent of US$100,000 and 10% in the case of smaller investments. The Russian tax authorities apparently accept that profit distributions from a joint venture will be treated as dividends subject to 5% withholding tax.
Assuming that the CFC provisions do not apply, dividends from a Russian subsidiary are subject to SDC at 15%, subject to credit for any Russian tax. Under the Cyprus/Russia treaty, the credit will take into account both the Russian withholding tax and the underlying tax, i.e. the Russian corporation tax on the profit out of which the dividends are paid. As this exceeds the 15% SDC liability, dividends paid from Russia would not suffer any tax in Cyprus.