DTTs are bilateral agreements between two countries aimed at allocating taxing rights between the countries involved, thereby preventing the imposition of double taxation on the same income or profits. These treaties provide clarity and stability for international investors and businesses operating across multiple jurisdictions by setting clear rules regarding which country has the right to tax specific types of income. As a result, DTTs are integral in mitigating or eliminating the risk of double taxation, which typically occurs when an individual resides in one state but earns income in another, or when a corporation is established in one jurisdiction but operates across multiple jurisdictions.
One of the major benefits of DTTs is the reduction of withholding tax rates on dividends paid by a company in one treaty country to a resident of the other treaty country. Dividends are typically taxed both at the corporate level – as corporate income- and at the shareholder level via withholding tax. In the absence of a DTT, withholding taxes on dividends can be significantly high, potentially deterring cross-border investment. However, many DTTs provide for the reduction or even entire elimination of these taxes, resulting in substantial tax savings for shareholders. In this regard, Cyprus generally imposes no withholding tax on dividends distributed to non-resident shareholders, thereby making it an attractive jurisdiction for international investment. Furthermore, individuals and legal entities resident in Cyprus who receive dividends from foreign countries may be entitled to a tax credit for any withholding tax paid in the country of origin, subject to the provisions of the applicable DTT.
In addition to dividends, DTTs may also provide for the reduction of withholding taxes on cross-border payments of interest and royalties, thereby minimizing tax leakage and enhancing after-tax returns for investors and businesses. While such income is typically taxed in the recipient’s state of residence, many DTTs allow for a reduction in the withholding tax rate imposed by the source country, making it more attractive for businesses to invest in intellectual property or lend money across borders.
Cyprus’s approach to the avoidance of double taxation is embedded in the Income Tax Law of 2002 (Law 118(I)/2002), that provides the legal framework for the avoidance of double taxation, ensuring that taxpayers who have paid foreign taxes in a jurisdiction with which Cyprus has a DTT can claim relief in accordance with the treaty’s provisions.
Specifically, according to Article 34 and Article 35 of the Income Tax Law, if a taxpayer in Cyprus has paid tax on income in a foreign jurisdiction with which Cyprus has entered into a DTT, Cyprus allows the taxpayer to claim a tax credit for foreign taxes paid, up to the amount of tax payable in Cyprus on the same income. If the foreign tax rate exceeds the Cypriot tax rate, Cyprus will allow a credit for the tax paid abroad. Conversely, if the foreign tax rate is lower than the Cypriot tax rate, the taxpayer will be required to pay the difference in Cyprus. Provision (1) of Article 35 defines “foreign tax” as any tax levied by a jurisdiction with which Cyprus has a DTT and provision (2) of Article 35 specifies that the amount of the foreign tax credit will reduce the tax liability of the taxpayer in Cyprus, ensuring that the taxpayer is not exposed to double taxation. Additionally, in the event of a conflict between the provisions of the DTT and Cyprus’ domestic tax laws, the terms of the DTT will prevail.
Considering the above, Cyprus’s tax laws effectively prevent double taxation on the same income, through a credit method, when a taxpayer is liable to pay tax in both Cyprus and another jurisdiction with which there is a DTT in force.
DTTs may also define taxing rights over capital gains, such as those arising from the sale of immovable property or shares. Cyprus retains the right to tax capital gains arising from the sale of immovable property located within its borders. In such cases, capital gains are subject to a Capital Gains Tax (CGT) rate of 20%, regardless of the seller’s tax residency. Cyprus also imposes CGT on the sale of shares in companies holding immovable property in Cyprus, which is of particular importance to international investors. Pursuant to the provisions of most DTTs, Cyprus generally retains taxing rights over capital gains derived from the sale of immovable property located within its jurisdiction, or from the sale of shares of property-holding companies. However, residents of jurisdictions with which Cyprus has concluded a DTT may be entitled to claim relief for any taxes paid in Cyprus, ensuring that, even when Cyprus retains taxing rights over capital gains, the DTT provides relief from double taxation for residents of treaty countries.
In conclusion, the legal framework governing Cyprus’ tax system, supported by its network of DTTs, provides a robust mechanism for the relief of double taxation, ensuring that international investors and businesses are not taxed in multiple jurisdictions on the same income. The provisions of the Income Tax Law of 2002, alongside the various DTTs entered into by Cyprus, solidify the country’s position as an attractive and competitive jurisdiction for cross-border investment. By guaranteeing that income is not taxed both in the country of source and the country of residence, Cyprus fosters a tax environment that is efficient, equitable, and conducive to international trade and investment. As global economic conditions evolve, Cyprus’s treaty network and its commitment to tax efficiency and legal certainty will continue to enhance its standing as a desirable destination for international business and investment.
The content of this article is valid as at the date of its first publication. It is intended to provide a general guide to the subject matter and does not constitute legal advice. We recommend that you seek professional advice on your specific matter before acting on any information provided. For further information or advice, please contact Rafaela Vasileiadou, Associate at our Athens Office, Tel +302103387060 or email rafaela.vasileiadou@kyprianou.com