Specifics of application of Double Taxation Treaties in Cyprus

1) How to determine which Double Taxation Treaty applies to a specific transaction?

To determine which Double Taxation Treaty (DTT) applies to a specific transaction in Cyprus, a structured approach is followed that considers the nature of the transaction, the parties involved, and relevant treaty provisions.

1. Identify the Countries Involved

Cyprus has an extensive network of Double Taxation Agreements (DTAs) with many countries. First, determine the residency of the parties involved:

• Cyprus-resident entity/person;
• Non-Cyprus resident entity/person (identify their country of tax residence).

2. Confirm That a Treaty Exists for the Tax Department Website.

3. Determine the Nature of the Transaction.

4. Apply the Treaty Provisions.

5. Check for Anti-Avoidance Rules or Limitations.

6. Verify with Domestic Law.

2) What tax obligations does a resident have when receiving income from abroad under a DTT?

The tax obligations under a Double Taxation Treaty (DTT) depend on the specific treaty provisions between Cyprus as a country of residence and the country where the foreign income arises (source country).

The Foreign Income Source may include the following and these may be treated for tax purposes different in each Double Tax Treaty, allocating taxing rights between the source country and the residence country:

• Employment income;
• Business income;
• Dividends;
• Interest;
• Royalties;
• Capital gains.

3) How to properly prove tax residency status to apply treaty benefits?

To properly prove tax residency status and apply Double Tax Treaty (DTT) benefits, you typically need to obtain and present official documentation such as the Tax Residence Certificate of a company that confirms the residency for tax purposes as well as to have real substance of such company by having its management and control in Cyprus by having its real office, Board of Directors and employees physically based in Cyprus.

4) What types of income are covered by Double Taxation Treaties?

Double Tax Treaties of Cyprus usually refer to the following types of income:

• Employment income;
• Business income;
• Dividends;
• Interest;
• Royalties;
• Capital gains.

5) How are tax rates on dividends, interest, and royalties applied under a DTT?

Under a typical Double Taxation Treaty (DTT), Cyprus signed with other countries the tax rates on dividends, interest, and royalties are typically reduced compared to the domestic withholding tax rates in the source country.

6) What are the mechanisms for eliminating double taxation?

1. The residence country exempts the foreign-sourced income from taxation, either:

• Fully (full exemption); or
• Exempt from taxation but still considers it for rate-setting purposes (exemption with progression).

2. Credit Method (Foreign Tax Credit) 

The residence country includes foreign income in the taxable base, but gives a credit for taxes already paid abroad.

3. Deduction Method

The foreign tax paid is not credited, but instead is deducted as an expense from the gross income in the residence country.

4. Split or Exclusive Taxation

Some treaties allocate exclusive taxing rights to only one country, avoiding double taxation altogether.

7) What is the dispute resolution process and Mutual Agreement Procedure (MAP) under a DTT?

The dispute resolution process and the Mutual Agreement Procedure (MAP) under a Double Tax Treaty (DTT) are mechanisms designed to resolve tax-related disputes between two countries to avoid double taxation and ensure consistent treaty interpretation.

8) How are tax rates on dividends, interest, and royalties applied under a DTT?

Changes in international tax law and double tax treaty (DTT) updates in order to stay compliant and optimize cross-border tax planning should include the following:

1. To Stay Informed on Global Tax Developments;
2. To Review Treaty Updates Regularly;
3. Assess the Impact on the Corporate Structure.

9) How to avoid tax risks and penalties when applying DTT?

To avoid tax risks it is always advisable to follow the updated MAP procedures per OECD guidelines.

10) How are Permanent Establishment (PE) provisions applied and what is their tax impact?

As PE provisions contained in tax treaties based on the OECD or UN Model Tax Conventions, determine when a foreign enterprise has sufficient presence in another country to be taxed there on business profits, they apply.

Author: Nasos Kyriakides