Recently, Cyprus and UK have signed a new double tax treaty which replaces the existing treaty signed between two countries since 1974. It is expected that the new treaty will soon be ratified and therefore it will take effect as from 1st January 2019 in Cyprus. Once the new double tax treaty enters into force, it will take effect in the UK for withholding taxes for amounts paid or credited on or after 1st of January 2019. For income tax, capital gains tax and corporation tax the provisions of new tax treaty will be implemented for any financial year beginning on or after April 2019. The new tax treaty applies to persons who are residents of one or both Contracting States UK and Cyprus.
The term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on. The “permanent establishment” includes especially: a place of management, a branch, an office, a factory, a workshop and a mine, an oil or gas well, a quarry or any other place of extraction of natural resources. It must be noted that a building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.
Tax Residency of Companies
In the case that the company is resident in both countries, for the determination of the residence of a company the competent authorities shall take into account the following:
- Where the senior management of the person is carried on;
- Where the meetings of the board of directors or equivalent body are held;
- Where the person’s headquarters are located;
- the extend and nature of the economic nexus of the person to each State; and
- whether determining that the person is a resident of one of the Contracting States but not of the other State for the purposes of the Convention would carry the risk of an improper use of the treaty or inappropriate application of the domestic law of either State.
Although this list of factors is not exhaustive, in the absence of the factor v) above the list of factors at i) to iv) above will generally be determinative.
Income from Immovable property
Income derived by a resident of a Contracting State from immovable property (including income from agriculture or forestry) situated in the other Contracting State may be taxed in the other Contracting State. For example, if UK resident receives income from immovable property situated in Cyprus then this income may be taxed in Cyprus.
Capital Gains Tax
Gains derived by a resident of a Contracting State from the alienation of immovable property and situated in the other Contracted State may be taxed in that other Contracting State. For example, if a UK resident receives gains from the alienation of immovable property situated in Cyprus then gains may be taxed in Cyprus.
It is worth to be noted that for the 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 derive more than 50% of their value (directly or indirectly) from immovable property situated in the UK. This does not apply to shares in which there is substantial and regular trading on a Stock Exchange.
- 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.
Cyprus also retains the exclusive taxing rights on pension income of Cyprus tax resident individuals, with the exception of certain cases of UK Government service pensions.
Profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits that are attributable to the permanent establishment may be taxed in that other Contracting State.
For example, if the UK enterprise carries on business in Cyprus through a permanent establishment situated then the profits that are attributable to the permanent establishment may be taxed in Cyprus.
Dividends paid by UK company to Cypriot Resident may be taxed in Cyprus. Moreover, dividends paid by company which is a resident of UK may also be taxed in UK according to the law of UK.
It is worth to be noted that the new tax treaty provides for zero withholding taxes on dividends in case the recipient is the beneficial owner of the income, except where dividends are paid out of income (including gains) derived directly or indirectly from immovable property by an investment vehicle which distributes most of this income annually and whose income from such immovable property is exempted from tax, in which case a withholding tax of 15% applies (other than where the beneficial owner of the dividends is a pension scheme established in the other Contracting State). There is no withholding tax on interest and royalty payments, as long as the recipient of the interest or royalties is the beneficial owner of the income. Gains from the sale of property rich companies are taxed in the country where the property is located (except for shares of companies traded on a stock exchange)
Interest arising in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in that other State. For example, if the interest arising in UK and the beneficial owner is resident of Cyprus then the interest shall be taxable in Cyprus.
However, if the beneficial owner of the company, is a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises through a permanent establishment. For example, if the beneficial owner of the interest is UK resident and the interest arising in UK as well but he carries on business in Cyprus and interest arises also through a permanent establishment in Cyprus then the profits attributable to the permanent establishment of an enterprise in Cyprus will be taxed in Cyprus.
Limitation of benefits
This provision states that a benefit under this tax treaty shall not be granted in respect of an item of income or a capital gain if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit.
The benefits under the various EU tax directive may be eliminated due to upcoming Brexit on 2019. The new tax treaty eliminates all withholding taxes in respect of dividends, interest and royalties paid from one country to tax residents in the other country, maintains and even improves the benefits of doing business between tax payers located in the two jurisdictions, with particular emphasis in the financial services, the technology and the shipping industry sectors.