Cyprus has concluded an impressive
network of double taxation agreements. The existence
of these agreements distinguishes Cyprus from the
other international business centers and is one of
the main reasons why Cyprus has become a very popular
jurisdiction. Many of the well known offshore tax
jurisdictions impose even lower or zero tax on the
company profits, but the problem with these jurisdictions
is that they do not have double tax treaties to avoid
taxation in both countries.
The purpose of the double tax treaties is the protection
of income derived in one country and remitted to another,
from being subject to taxation in both jurisdictions.
Treaties usually provide for a tax credit to the recipient
of the income for the amount of tax that has already
been paid in the country where the income has originated.
The typical forms of income which fall within the
scope of the treaties are dividends, interest and
royalties. Tax is normally deducted from the gross
income by the remitting party in the form of withholding
tax so that a net amount is transferred to the recipient.
The latter will then claim a tax credit for the amount
of withholding tax paid in the originating country.
Cyprus has concluded double tax treaties with the
following countries:
• Austria
• Belarus
• Belgium
• Bulgaria
• Canada
• China
• Czech Republic
• Egypt
• Denmark
• France
• Germany
• Greece
• Hungary
• Ireland
• Italy
• Malta
• Kuwait
• Norway
• Poland
• Romania
• Russia and CIS Republics (excl. Kazakhstan and Turkmenistan)
• Slovak Republic
• South Africa
• Syria
• Sweden
• United Kingdom
• United States of America
• Yugoslavia
Explanatory Notes
(1)
10% if recipient is a company with at least 25% direct
share interest; 15% in all other cases.
(2)
10% if recipient is a company with at least 10% direct
share interest; 15% in all other cases.
(3)
10% if recipient is a company with at least 25% direct
share interest; 27% if recipient is a company with
more than 25% direct or indirect share interest as
long as the German corporate tax on distributed profits
is lower than that on undistributed profits and the
difference between the two rates is 15% or more; 15%
in all other cases.
(4)
5% if recipient is a company with at least 25% direct
share interest; 15% in all other cases.
(5)
Nil if recipient is a company which controls, directly
or indirectly, at least 50% of the voting power.
(6)
A resident of Cyprus, other than a company which,
either alone or together with one or more associated
companies, controls directly or indirectly at least
10% of the voting power, is entitled to a tax credit
in respect of the dividend. Where a resident of Cyprus
is entitled to a tax credit tax may also be charged
on the aggregate of the cash dividend and the tax
credit at a rate not exceeding 15%. In this case,
any excess tax credit is payable. Where the recipient
is not entitled to a tax credit the cash dividend
is exempt from any tax.
(7)
subject to certain exceptions.
(8)
nil if royalties are on literary, artistic or scientific
work including cinematographic and films or tapes
for television or radio forecasting.
(9)
5% on cinematographic films not including television
films.
(10)
5% on cinematographic films including television films.
(11)
5% on cinematographic films.
(12)
nil if royalties are copyright and other literary,
dramatic, musical or artistic work not including film
or videotape royalties.
(13)
5% if recipient is a company with at least 10% direct
share interest; 15% in all other cases.
(14)
There is withholding tax of 20% on dividends and 25%
on interest. The final tax liability is determined
as follows:
• Companies: in respect of dividends are refundable
on application. For interest, on application in accordance
with corporate tax rates.
• Individuals: on objection, in accordance with personal
tax rates. In both cases any excess tax withheld is
refundable. N. B. The agents or recipients of interest
or dividends are liable for the payment of the due
amount of tax on such income.
(15)
At the rate applicable in accordance with domestic
law.
(16) Nil if shareholder is a company that holds directly
at least 25% of the capita; of the company paying
the dividends; 15% in all other cases.
(17)
15% for any patent, design or model, plan, secret
formula or process or any industrial, commercial,
or scientific equipment or for information concerning
industrial, commercial or scientific experience.
Conclusion
The impressive number of the double tax treaties combined
with the tax and other advantages of Cyprus, have
contributed to the development of Cyprus as a reputable
international business center. Cyprus international
business companies may be beneficially used as a vehicles
where a treaty partner does not have a treaty with
the country in which an investment is proposed or
where such a treaty exists but is not as beneficial
as Cyprus own treaty with the country; for example,
Cyprus has treaties with Bulgaria and Kuwait with
whom the UK has no corresponding treaty.
Financing group structures may also be beneficially
arranged through a Cyprus intermediary finance company
in respect of countries with which the island as negotiated
more beneficial tax treaties than the ultimate leader.
The use of a Cyprus finance company may allow a reduction
in foreign withholding tax on interest received and
accumulation of interest in Cyprus may be tax free
or subject to a low rate of tax if this is desirable
for treaty purposes. No debt/equity rules exist in
Cyprus.
In addition the reputation that Cyprus enjoys with
foreign tax jurisdictions means that tax screening
requirements normally relevant to tax heavens and
low tax countries, may not be relevant to payments
to Cyprus entities while the anti-avoidance legislation
of high tax countries aim at clawing back benefits
derived through tax heavens and low tax centers may
be less significant with regard to Cyprus.
