The new double tax treaty concluded between Cyprus and the United Kingdom, which is considered crucial for tax structuring arrangements of UK companies in the EU ahead of Brexit, replaces the previous treaty signed in 1974.
Effective as of 1 January 2019
The new double tax treaty between Cyprus and the UK is effective in Cyprus as of 1 January 2019. In the UK, the new double tax treaty will become effective:
- for withholding taxes on amounts paid or credited on or after 1 January 2019
- for income tax and capital gains tax from 6 April 2019, and
- for corporation tax for any financial year beginning on or after 1 April 2019.
No withholding tax on dividends, interest or royalties
The new treaty arrangements between Cyprus and the UK provide zero (0%) withholding tax on payments of dividends, interest and royalties. An exception to this rule would be dividends paid by investment vehicles out of income derived from tax-exempt immovable property income, in which case a 15% rate will apply on dividends.
The disposal of shares is exempt from capital gains tax in Cyprus, unless the shares are in a company which holds real estate.
Under the new double tax treaty with the UK, the disposal of shares made by Cyprus tax residents (including tax resident companies) is taxed in Cyprus, except where, inter alia, 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.
The new treaty incorporates the OECD/G20 Base Erosion and Profit Shifting (BEPS) principal purpose test, which provides that a benefit under a double tax treaty shall not be granted, under conditions, if obtaining that benefit was one of the principal purposes of an arrangement or transaction. This measure is designed to tackle “treaty shopping” and puts a strong emphasis on ensuring that operations are supported by appropriate substance and reflect a principal commercial rationale.
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