A double tax treaty with Luxembourg has now entered into force and will come into effect on 1st January 2019. The new treaty is expected to strengthen and further develop the economic relations between the two countries and further strengthen Cyprus's treaty network.
Below is a summary of the main provisions included in the treaty:
Dividends
There shall be no withholding tax levied on dividend payments made in the instance where the recipient is a company, being the beneficial owner of the dividends and holds at least 10% of the capital of the dividend paying company. In all other cases, the withholding tax levied may not exceed 5%.
Interest
There shall be no withholding tax levied on interest payments made where the recipient is the beneficial owner of the interest, unless the interest is derived from a permanent establishment situated in the other State.
The exemption does not apply where the interest paying and receiving entities maintain a special relationship (i.e. are connected parties), and the interest rate exceeds the rate that would be applied in an arm's length transaction. Any excess over and above the arm's length rate would remain chargeable under the domestic legislation in which the interest paying company is a resident.
Royalties
There shall be no withholding tax levied on royalty payments where the recipient is the beneficial owner of the royalties. The exemption from withholding tax will not apply where such royalties paid to a resident of a Contracting State are derived by a permanent establishment of that entity in the other State.
The exemption does not apply where the royalty paying and receiving entities maintain a special relationship (i.e. are connected parties), and the royalties exceed the charge that would be applied in an arm's length transaction. Any excess over and above the arm's length charge would remain chargeable under the domestic legislation in which the royalty paying company is a resident.
Capital Gains
Capital gains arising from the alienation of the shares of a company will be taxable only in the State of residency of the alienator, unless more than 50% of the value of such shares is derived directly from immovable property situated in the other State. In such a case, taxation will be levied in the State where the immovable property is situated.
Limitation of Benefits
The treaty includes a Limitation of Benefits Clause which states that the benefits of the treaty shall not be granted in the instance where the obtaining of such benefit was one of the principal purposes of the arrangement, unless the granting of such benefit would be in accordance with the object and purpose of the provision, or such benefit would still be granted in the absence of the treaty.
We trust the above are sufficient for your purposes; in the instance where you will require additional information, please do not hesitate to contact your trusted KPMG advisor.
All content prepared by KPMG Cyprus.