On 1 June 2021, Cyprus and the Kingdom of the Netherlands (the “Netherlands”) signed a Double Tax Treaty (the “DTT”), which was ratified by Cyprus on 4 June 2021. The DTT will enter into force after the necessary legal procedures are completed in both contracting states. Once the DTT enters into force, it will take effect as from 1 January of the next calendar year.
The DTT is generally based on the Organisation for Economic Co-operation and Development (“OECD”) Model Convention for the Elimination of Double Taxation on Income and on Capital and incorporates minimum standards of the Base Erosion and Profit Shifting Action Plans (“BEPS”). More specifically, the DTT introduces: (i) a Mutual Agreement Procedure (“MAP”) for dispute resolution (Article 23), and, (ii) the Principal Purpose Test (“PPT”) (Article 26).
The main provisions of the DTT are outlined below:
Dividends
A 0% withholding tax (“WHT”) applies if the beneficial owner (“BO”) is:
(a) a company that holds directly at least 5% of the capital of the company paying the dividends, throughout a 365-day period that includes the day of the dividend payment;
(b) a recognised pension fund which is generally exempt under the company tax or corporate income tax laws of the other contracting state.
In all other cases, there shall be a maximum of 15% WHT.
Interest
A 0% WHT applies as long as the recipient of the interest is the BO of the income.
Royalties
A 0% WHT as long as the recipient of the royalties is the BO of the income.
Capital gains
Cyprus maintains the exclusive taxing rights on gains arising from the disposals of shares made by Cyprus tax residents, except where the disposal of shares or comparable interests which derive more than 50% of their value directly or indirectly from immovable property situated in the Netherlands. However, the DTT provides that Cyprus maintains the exclusive taxing rights on capital gains on disposal of shares in the following cases:
• shares listed on a recognised stock exchange;
• in the course of a corporate reorganisation such as a qualifying merger, division and similar transaction;
• where the immovable property from which the shares derived their value is immovable property in which the business is carried on;
• when the alienator owns, directly or indirectly, either alone or with related persons, 25% or less of the capital or other comparable interests prior to the first alienation of shares;
• when the alienator is a recognised pension fund of Cyprus.
Limitation of Benefits
A benefit under the DTT shall not be granted, in respect of an item of income, if it reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes (Principal Purpose Test) of any arrangement or transaction that resulted directly or indirectly in that benefit.
The full text of the DTT can be found here.