Cyprus – Luxembourg double tax treaty entered into force

Shanda Consult Ltd, July 2, 2018

The double taxation avoidance treaty between Cyprus and Luxembourg which was signed on 8 May 2017 in Nicosia, has entered into force on 21 of May 2018 with the application of its provisions starting 1 January 2019 aiming to expand trade and economic relations between the two countries.
This treaty is based on the latest international standards in terms of avoidance of double non-taxation and exchange of information. It is fully in line with the Base Erosion and Profit Shifting (BEPS) recommendations of the Organisation for Economic Co-operation and Development (OECD) and the Principal Purpose Test (PPT) clause that takes its origin in the OECD Multilateral Convention to Implement Tax Treaty Related Measures (MLI).
The introduction to the double tax treaty mentions the elimination of double taxation with respect to taxes on income and on capital as well as the prevention of tax evasion and avoidance through non-taxation or reduced taxation effected through treaty shopping.

The convention will apply to the following taxes:

In Cyprus:
• The income tax,
• The corporate income tax,
• The special contribution for the defence of the Republic,
• The capital gains tax.

In Luxembourg:
• The income tax on individuals,
• The corporation tax,
• The capital tax,
• The communal trade taxes.

Some of the main areas of coverage of the treaty are as follows:
According to article 4 of the treaty, the term “resident of a Contracting State” means 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, and also includes that State and any political subdivision or local authority thereof. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein.

Capital Gains Tax

Income gained by a resident of a Contracting State from immovable property (including income from agriculture or forestry) situated in the other Contracting State may be taxed in that other State.
Withholding tax rate on interest payments
0% withholding tax on interest. It will be taxed only in the country of residence of the beneficiary, “subject to the legal acts of the European Union.”

Withholding tax rate on dividend payments

0% withholding tax on dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State if the beneficial owner is a company which holds directly at least 10% of the capital of the company paying the dividends. In other cases, the withholding tax rate is 5% of the gross amount of the dividends paid.

Withholding tax rate on royalty payments

The Treaty provides that royalties will not be subject to withholding tax.

Offshore activities

A resident of a Contracting State who carries on activities offshore in the other Contracting State for more than 30 days in any period of 12 months of the year, in connection with the exploration or exploitation of the seabed or subsoil or their natural resources, will be considered, in relation to those activities, to be carrying on business in the other Contracting State through a permanent establishment situated therein. In addition, profits derived from the transportation of supplies or personnel to a location, or between locations, where any of the aforementioned activities are being carried on, will be taxable only in the Contracting State of which the enterprise is a resident.

Elimination of double taxation

Subject to the provisions of Cyprus tax law regarding credit for foreign tax, there shall be allowed as a credit against Cyprus tax payable in respect of any item of income earned from Luxembourg, the tax paid under the laws of Luxembourg and in accordance with this agreement. The credit shall not, however, exceed that part of the Cyprus tax, as computed before the credit is given, which is appropriate to such items of income. Where in accordance with any provision of the Convention income derived by a resident of Cyprus is exempt from tax in Cyprus, Cyprus may nevertheless, in calculating the amount of tax on the remaining income of such resident, take into account the exempted income

Non-discrimination

The Treaty contains non-discrimination provisions in line with article 24 of the OECD Model Convention.

Mutual agreement procedure

The Treaty provides for a mutual agreement procedure in line with article 25 of the OECD Model Convention, without however including the possibility to submit any unresolved issues arising from the case to arbitration.

Exchange of information

The Treaty contains an exchange of information provision in line with article 26 of the OECD Model Convention.
For the pdf file of the treaty, in English and Greek click here.

Sources: Ernst & Young Cyprus, Ministry of Finance


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