Cyprus and Latvia - double tax treaty

Posted on 28 Jun 2016, by Konstantinos Zacharioglou

On the 24th of May 2016 the Republic of Cyprus entered for the first time into a Double Tax Treaty with the Government of the Republic of Latvia. The treaty is known as the ‘Treaty for the Avoidance of Double Taxation on Income’ (the ‘DTT’). The DTT was formally approved by Cyprus on the 3rd of June 2016.

A Double Tax Treaty allows that tax paid can be offset in one of two countries against tax payable in the other, thus avoiding double taxation. Cyprus is a signatory to a number of double tax treaties. Some forms of income are exempt from tax or qualify for reduced rates. These include royalties, dividends and capital gains.

The DTT will enter into force once Cyprus’ and Latvia’s exchange notifications have been formally ratified and the correct procedures have been completed. Thus the provisions (with respect to taxes) will take effect in both countries on the 1st of January (or onwards) following the date the treaty enters into force.

The DTT was signed by Mr Harris Georgiades (Minister of Finance) on behalf of the Republic of Cyprus and Mrs Dana Reinzniece-Ozola (Minister of Economics) on behalf of the Republic of Latvia.

The DTT aims to further develop trade and economic relations between the two countries. The DTT is based on the “model convention for avoidance of double taxation on income capital” of the Organisation of Economic Cooperation and Development (‘OECD’).

The treaty is compliant with the exchange of information provisions of the OECD.

Taxes included within the scope of the Tax Treaty

The agreement will extend to any similar or identical taxes imposed in the future in addition to, or in place of, the existing taxes.

  • The Latvian personal income tax and enterprise income tax; and
  • The Cyprus income tax, corporate income tax and capital gains tax.

The main provisions in the agreement are as follows:

Tax Withholding Rates

The main withholding tax rates with respect to dividends, interest and royalties:

The treaty provides 0% withholding tax which will apply to Dividends, Interest and Royalty payments made to a company resident state (i.e. company-to-company payments) in the other contracting state that is the beneficial owner (this only applies in the case of a company, it does not apply in case of a partnership).

However, if this is not applicable, and the recipient company is not the beneficial owner (i.e. on non company-to-company payments), the dividend/interest withholding tax, will be 10% and in the case of royalties 5%. Since both countries are part of the European Union (‘EU’), the ‘Parent Subsidiary Directive’ (90/435/EEC) and the ‘Interest and Royalties Directive’ (2003/49/EC) will be applicable.

Applicable:

  • Dividends – 0%
  • Interest – 0%
  • Royalties – 0%

Not applicable:

  • Dividends – 10%
  • Interest – 10%
  • Royalties – 5%

Capital Gains

Profits made by a resident of Cyprus from the alienation of immovable property situated in Latvia may be liable for tax in Latvia.

The above may occur when:

  • The profits derived from disposal of shares or similar interests in a company or other entity deriving more than 50 per cent of its value from immovable property situated in Latvia, or any other contracting state. They can be taxed in the contracting state in which the immovable property is situated.

  • The profits derived by a resident of Cyprus from the disposal of immovable or movable property associated with a permanent establishment. They can be taxed in Cyprus or the contracting state providing it is the tax residence of the person disposing of the shares.

Conclusion

The Treaty will be expected to contribute to further development of the economic relations between the Republic of Cyprus and the Republic of Latvia, as well as other countries.

The DTT will provide considerable advantages to businesses and individuals who have chosen to establish legal entities in Cyprus. The EU Parent Subsidiary and the Interest & Royalties Directives will be used to eliminate withholding taxes on payments of dividends, interest and royalties from or to EU Group Companies and the EU Merger Directive (90/434/EEC) to eliminate the tax effects of EU Group reorganizations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought on your specific circumstances.