The Double Tax Treaty between Cyprus and Luxembourg, which was signed on 8 May 2017, has now entered into force on 21 May 2018, following completion of the ratification procedures from both countries. Its provisions will be applicable as from 1 January 2019.
The Treaty is based on the latest version of the OECD Model Convention for the avoidance of double taxation, incorporates the latest standards with regards to the exchange of information, and takes into full consideration the recommendations of the BEPS action plan. The main provisions of the Treaty are as follows:
Dividends
Dividends paid by a company resident in one of the two countries to a resident of the other country shall be exempt from withholding tax, provided that the beneficial owner of the dividends is a company which holds at least 10% of the capital of the company paying the dividends. In all other cases, the withholding tax shall not exceed 5% of the gross amount of dividends.
Notwithstanding the above, Cyprus does not withhold tax on outbound dividend payments.
Interest
Interest arising in one of the two countries and paid to a resident of the other country shall be exempt from withholding tax at source.
The exemption does not apply in case where, by reason of a special relationship between the parties, the amount of interest exceeds that which would have been agreed in the absence of such a special relationship (i.e. under arm’s length terms and conditions). In such cases, the amount of interest in excess of the arm’s length interest will remain taxable according to the domestic legislation of each contracting state.
Notwithstanding the above, Cyprus does not withhold tax on outbound interest payments.
Royalties
Royalties arising in one of the two countries and paid to a resident of the other country shall be exempt from withholding tax at source, provided that the recipient of the royalties is the beneficial owner of the income.
The exemption does not apply in case where, by reason of a special relationship between the parties, the amount of the royalties exceeds that which would have been agreed in the absence of such a special relationship (i.e. under arm’s length terms and conditions). In such cases, the amount of royalties in excess of the arm’s length interest will remain taxable according to the domestic legislation of each contracting state.
Capital gains
Gains derived by a resident of one of the two countries from the sale of shares in property-rich entities, deriving more than 50% of their value directly from immovable property situated in the other country, shall be subject to tax in that other country.
Offshore activities
The Treaty contains a separate article with detailed provisions regarding the taxation of offshore activities. Specifically, a person resident in one of the two countries who carries out activities offshore in the other country in connection with the exploration or exploitation of the seabed or subsoil or their natural resources situated in that other country shall be deemed, in relation to those activities, to be carrying out business in that other country through a permanent establishment situated therein, provided that the activities are carried on for a period exceeding 30 days in aggregate during any twelve-month period.
Moreover, where profits are derived by a company from the transportation of supplies or personnel to a location, or between locations, and where activities in connection with the exploration or exploitation of the seabed or subsoil or their natural resources are being carried out, such profits shall be taxable only in the country in which the company is a resident.
Further, profits derived by a resident of one of the two countries from the alienation of exploration or exploitation rights, or of property situated in the other country and used for exploration/ exploitation of the seabed or subsoil or their natural resources situated in the other country, may be taxed in that other country. The same is applicable for gains from the sale of shares deriving their value or the greater part of their value, directly or indirectly, from such rights or property.
Limitation of benefits
The Treaty contains a principal purpose test, according to which treaty benefits may be denied in respect of an item of income or capital in cases where it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining treaty benefits was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit.
Collective investment vehicles
The Protocol to the Treaty specifies that collective investment vehicles that are considered to be residents of either country are considered as the beneficial owners of the income that they receive, and are thus entitled to Treaty benefits.
The Protocol specifies that a collective investment vehicle is considered to be resident in either country if, under the domestic laws of that country, it is liable to tax by reason of its domicile, residence, place of management, or any other similar criterion.
