Cyprus – UK signed a new Double Tax Treaty

2018-04-17

A new DTT was concluded on 22 March 2018 between Cyprus and the United Kingdom of Great Britain and Northern Ireland which replaces the previous one signed on 20 June 1974.

Summary of provisions

The new DTT is broadly in line with the OECD Model Tax Treaty with some alterations. Below are the main provisions:

  • Dividend, interest and royalty paid by a resident of one country to a resident of the other country are not subject to withholding taxes provided that the recipient is the beneficial owner of the income. Subject to conditions dividends paid by investment vehicles out of profits which emanate directly or indirectly from immovable property, may be subject to 15% withholding tax,
  • Capital gains that arise upon disposal of shares of property rich companies will be taxed in the country where immovable property is situated. This provision does not apply to shares which are listed on a stock exchange.
  • Pensions will only be taxed in the country the recipient is tax resident. This provision is not applicable to specific cases of Government Service pensions.
  • The tie breaker clause in case a company is considered as resident in both the UK and Cyprus changed. The competent authorities should give their best efforts (shall endeavor) to determine the company’s tax residence taking into consideration its place of effective management, place of incorporation and other relevant factors.
  • An entitlement to benefits provision is included in the DTT. This is an anti- avoidance provision that captures transactions that their principal purpose was to merely obtain benefits of the DTT. In such a case that person engaged in the transaction will not be entitled to the DTT benefits.

It is important to note that the new DTT is not in force at the moment. It will enter into force when ratified by both countries.

The new DTT will come into effect in Cyprus on or after 1st January following the date it enters into force.

As for the UK, it will become effective as follows:

  • From 1st January following the date it comes into force with regards to withholding taxes,
  • From 6th April from the date it enters into force for income tax and capital gains tax purposes, and
  • On or after the next 1st April following the date it comes into force for corporation tax purposes.


Important note

Both countries are still members of the EU albeit the UK is on the way out.

For as long as both countries are EU members the DTT cannot prevail over the Treaty on the Functioning of the European Union (TFEU). Thus limitation of benefits contained in the DTT will not prevail over the TFEU and its fundamental freedoms, as decided on a number of occasions by the European Court of Justice.

For any queries you may have in relation to the above please do not hesitate to contact us.

 


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