Cyprus: Double Taxation Agreement Between Cyprus and Iceland

The Cyprus Ministry of External Affairs and Ministry of Finance have announced that Cyprus has concluded and signed a new Double Taxation Agreement (DTA) with Iceland. 

On November 13, 2014 the two countries signed the Cyprus and Iceland DTA which was published in the Official Gazette of the Republic of Cyprus on December 19, 2014. This is the first DTA between the two countries. 

The DTA is based on the OECD Model Convention and is expected to further improve the business cooperation between Cyprus and Iceland. The DTA was well received by the local and foreign business communities as well as international investors thus shall further enhance Cyprus’ position as an international business center, in view of the provisions deemed to be significantly favorable. The main provisions are analyzed below: 

Permanent Establishment 

The definition of permanent establishment also includes a building site or construction or installation project or any supervisory activities in connection with such site or project constitutes a permanent establishment only if it lasts more than 12 months (definition in compliance with OECD model).

Dividends 

In cases where the recipient of the dividend is a company and it holds at least 10% of the total shares of the company paying the dividend, the withholding tax rate is imposed at 5%. In all other cases, the withholding tax rate is 10%. 

Interest 

No withholding tax on interest payments. 

Royalties 

Withholding tax rate is 5%. 

Capital Gains 

Gains from the disposal of immovable property are taxed in the country where the immovable property is situated. Capital gains arising from the disposal of share deriving more than 50% of their value directly or indirectly from immovable property in the other Contracting State may be taxed in that other State. Other capital gains from the alienation of any other property are taxable only in the place of residence of the alienator. 

Important Notes for Tax Planning 

1. Cyprus unilaterally does not withhold taxes on outbound dividends and interest payments but only applies withholding tax on royalty payments to non-Cyprus tax residents for rights used within Cyprus.

2. The continuously expanded number of DTAs Cyprus has signed and ratified, together with the application of the EU Directives (Parent-Subsidiary and Interest-Royalties) increase the options for international investors to channel investments in the most tax efficient way.

The DTA with Iceland will enter into force as from 1st of January 2016.

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