New Double Tax Treaty between Cyprus and the United Kingdom
On 22 March 2018, a new agreement for the avoidance of double taxation was signed between Cyprus and the UK to strengthen and further develop the economic relations between the two countries. The new agreement will enter into force once ratified by each country. Once the new agreement will come into effect, it will replace the existing double tax treaty between Cyprus and the UK which was signed on 20 June 1974 (as amended by the 1980 protocol).
The most significant provisions of the new agreement are highlighted below:
Dividends: 0% withholding tax on dividend payments provided that the recipient is the beneficial owner of the dividends however, if the dividends are paid by certain investment vehicles out of income derived directly or indirectly from tax exempt immovable property income, a 15% withholding tax applies.
Interest and Royalties: 0% withholding tax applies.
Capital Gains: With respect to capital gains, Cyprus retains the exclusive taxing right on the disposal of shares made by Cyprus tax residents, except in the following cases:
• Where the shares (other than shares in which there is substantial and regular trading on a Stock Exchange) derive more than 50% of their value directly or indirectly from immovable property situated in UK; or
• Where the shares derive their value or the greater part of their value directly or indirectly from certain offshore rights/property relating to exploration or exploitation of the seabed or subsoil or their natural resources located in the UK.
Limitation of Benefits
The agreement provides a Limitation of Benefits clause in accordance with the OECD/G20 Base Erosion and Profit Shifting project Action 6 report “Principal Purpose Test” which is a minimum standard and provides that a double tax treaty benefit shall not be granted in the instance where the obtaining of that benefit was one of the principal purposes of the arrangement or transaction.