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 (DTAA) with Iceland.

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

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

Permanent Establishment

Based on the new treaty 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 set at 5%.  In all other cases the withholding tax rate is 10%.

Interest

No withholding tax on interest payments.

Royalties

5% of the gross amount of the royalty.

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 shares 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 and only applies withholding tax on royalty payments to non-Cyprus tax residents for rights used within Cyprus.

2. The continuously expanded network of DTAAs Cyprus has signed off and ratified and the application of the EU Directives (Parent-Subsidiary and Interest-Royalties) increasing international investors’ options for channeling investments in the most tax efficient way.

3. The DTAA with Iceland will enter into force as from 1st of January of the following year in which Iceland will inform Cyprus of their ratification i.e. 1st of January 2016.

This newsletter has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this newsletter. Reanda Cyprus Limited would be pleased to advise readers on how to apply the principles set out in this newsletter to their specific circumstances. Reanda Cyprus Limited accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this newsletter.