Double Tax Treaties with Cyprus

Introduction

The Cyprus double tax treaties have been drafted very closely to the Organization in Economic Cooperation and Development (OECD) Model Treaty. The OECD model has been changed where necessary in order to conform with the tax systems of the countries concerned.

Cyprus provides substantial tax advantages to foreign investors, coupled with the provision of the double tax treaties; it makes good sense to make good use of such treaties.

It is certainly the policy of the Cyprus Government to encourage tax incentives for aliens, in order to develop Cyprus as a financial centre in its area, without, proclaiming or promoting itself as a tax haven.

The following form part of the main provisions included in the OECD model:-

Residence

In order for an individual, or a company to take advantage of a double tax treaty, he or it must be resident of one or two contracting states i.e. to be resident of Cyprus for tax purposes.

A resident of a contracting state is given by article 4.1 of the OECD model, namely "any person who, under the laws of that state, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature".

Permanent establishment

Permanent establishment is defined by article 5 of the OECD model meaning a fixed place of business through which the business of the enterprise is wholly or partly carried on. It includes especially a place of management, a branch, an office, a factory, a workshop, a mine, oil or gas well, a quarry or any other place of extraction of natural resources.

Business profits

Article 7 of the OECD model deals with business profits and states that these shall be taxable only in that state unless the enterprise carries on business in the other contracting state through a permanent establishment situated therein.

Dividends

The withholding taxes that are applicable to treaty countries are low, and this together with the low tax rates for offshore companies, makes investments in treaty countries through Cyprus very important.

Additionally investments can take place through Cyprus by a third country with the end result of great savings on tax planning.

Similar benefits can be accrued by the use of payments been affected by the use of interest or royalties.

Limitation of treaties

In some of the double tax treaties that have been established a number of anti avoidance provisions exist. These are to be found in the treaties with the France, Germany, UK, U.S.A. and Canada.