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Cyprus. New Double Tax Treaty with United Kingdom

On March 22, 2018 Cyprus and the United Kingdom signed the new double tax treaty. The Treaty is now pending certain legal proceedings by both contracting states after which it should come into force on January 1, 2019 in Cyprus. As for the United Kingdom, the Treaty should come into force on or after 1 January 2019 for withholding taxes for amounts paid or credited and for income tax and capital gains tax it should come into force from 6 April 2019, and for corporation tax for any financial year beginning it should come into force on or after 1 April 2019.
 
This Treaty was signed in Nicosia by the Cyprus Minister of Finance Harris Georgiades and the British High Commissioner Matthew Kidd. The abovementioned Treaty is based on the Organisation for Economic Co-operation and Development Model Tax Convention for the avoidance of double taxation on income and capital and updates the later one which was signed by the two countries in June 1974 and came into effect in March 1975.
 
The Treaty covers the follows specific taxes:
United Kingdom:
- Income tax
- Corporation Income tax
- Capital gains tax
 
Cyprus:
- Income tax
- Corporation Income tax
- Capital gains tax
- Special Contribution for Defence of the Republic tax
 
According to this new Treaty the withholding tax rate on payments of dividends, interest and royalties is 0% (the exception is for dividends paid by certain investment vehicles out of income derived, directly or indirectly, from tax exempt immovable property income, in such cases the withholding tax rate is 15%).
 
As for capital gains, Cyprus keeps the exclusive taxing right on the disposal of shares made by Cyprus tax residents, except in the following cases:
- Where the shares derive more than 50% of their value (directly or indirectly) from immovable property situated in the UK. This does not used to shares in which there is substantial and regular trading on a Stock Exchange.
- Where the shares derive their value or the greater part of their value (directly or indirectly) from certain offshore rights/property relating to exploration or exploitation of the seabed or subsoil or their natural resources located in the UK.
 
Cyprus also keeps the exclusive taxing rights on pension income of Cyprus tax resident individuals, the exception is certain cases of UK Government service pensions.
 
The New Treaty incorporates the 'Principal Purpose Test' (PPT), which is a minimum standard under the Base Erosion and Profit Shifting project. The PPT provides that a double tax treaty benefit shall not be granted, under conditions, if obtaining that benefit was one of the principal purposes of an arrangement or transaction.
 
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