Double taxation agreements (DTAs) are key to avoiding income double taxation. These agreements determine which country has primary taxing rights on various income types, minimizing tax liabilities for businesses. It’s crucial to establish the beneficial ownership of income, particularly in complex corporate structures, to ensure compliance with international standards.
In general, double taxation agreements (DTAs)
Almost all countries have double taxation agreements and DTAs in place to prevent double taxation of income. These agreements outline the rules for determining which country has primary taxing rights on specific types of income. Understanding and leveraging double taxation agreements DTAs can help minimise tax liabilities.
When distributing income from one country to another like dividends for example It is important to demonstrate that the country distributing dividends is the beneficial owner of the dividends. This is particularly important when there are many company layers in a structure especially if some of them are considered conduit companies rather than companies having real business and, in some cases, having economic value.
Referring to OECD provisions, countries’ double tax treaty provisions in most cases apply only if the recipient company of income (dividends, interest, royalties, etc) is the beneficial owner of such income and not a conduit company. The beneficial owner company of the income is where recipient company’s powers are exercised by its directors without the interference of its shareholders, sufficient economic substance is present, income is reported in the recipient’s bank account and financial statements, free deal with the inflow of funds by the recipient, the recipient has the ability to make decisions on its own and having fully-fledged offices and employ full time or part-time employees, Income received in a form of interest should be in the form of unrelated payment received and be at arm’s length with adequate margin returns.
In Cyprus double taxation agreements (DTAs)
Foreign tax paid on income of a Cyprus resident company is credited against the corporation tax, subject to Double Tax treaty conditions. In the absence of a tax treaty, the tax paid in a non-treaty country is normally allowed as a deductible expense. Tax paid is credited only if a similar concession is given to Cyprus companies in that country. The foreign tax relief cannot exceed the Cyprus corporation tax on these profits.
The actual withholding tax rate charged may be lower/eliminated based on each paying country’s domestic law provisions or in the case of an EU country by the EU parent-subsidiary, Interest, and Royalty Directive
Cyprus does not impose withholding tax on dividends, interest, and royalties paid to non-residents of Cyprus, except in the case of royalties acquired from rights used in Cyprus, which are subject to a withholding tax of 10% (5% in the case of motion pictures). This can be reduced or eliminated by double taxation agreements entered by Cyprus or by the EU Interest and Royalty Directive.
As of 31 December 2022, Cyprus applies a withholding tax of 17% on dividends paid by unlisted companies, 30% on passive interest payments (excluding payments from natural persons), and 10% on royalty and similar payments (excluding payments from natural persons) if the recipient of the payment is a company in a jurisdiction on the EU’s list of non-cooperative tax jurisdictions (commonly referred to as the EU “blacklist”)
For more information on Cyprus’ double taxation agreements (DTAs) refer to our publication following the links below
Conclusion
In conclusion, Double Taxation Agreements (DTAs) play a vital role in ensuring tax efficiency for businesses operating in Cyprus. These agreements provide a framework to prevent double taxation of income, enhancing the attractiveness of Cyprus as an international business destination. Understanding and leveraging DTAs is key to minimizing tax liabilities and optimizing your business operations. Cyprus’ commitment to DTAs further solidifies its position as a business-friendly environment.
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