Double taxation treaty between Cyprus and Luxembourg

According to an announcement issued by the Cyprus Ministry of Finance (MOF) on 8 May 2017 the negotiation of the tax Treaty has been signed by the Ministers of Finance of both Cyprus and Luxembourg (hereinafter the “Treaty”).


The text has been agreed between the two countries but is still not in force. The Treaty’s aim is that it will contribute to further develop the economic relationship between the two countries and will enhance the co-operation in tax matters. The Treaty should be ratified by both parties by year end in order to come into effect on 1 January 2018.


The Treaty follows the Convention for the Elimination of Double Taxation with respect to Taxes on Income and on Capital and the Prevention of Tax Evasion and Avoidance which is based on the OECD Model Convention for the Avoidance of Double Taxation on Income and on Capital and incorporates all the minimum standards of the Base Erosion Profit Shifting (BEPS) project, as issued by the OECD /G20 in October 2015, specifically those of BEPS Action 6 (Treaty Abuse) and BEPS Action 14 (Making Dispute Resolution Mechanisms More Effective).


Furthermore it includes the exchange of financial and other information in accordance with the relevant Article of the Model Convention.


Taxes & persons covered:

The Treaty will apply to persons who are residents in either Cyprus or Luxembourg (the “Contracting States”).

The taxes which refer in the Convention are the following:

Cyprus:

  • Income tax;
  • Corporate income tax;
  • Special contribution for the Defence of the Republic of Cyprus, and
  • Capital gains tax.

Luxembourg:

  • Income tax;
  • Corporate income tax;
  • Communal trade tax;
  • Capital gains tax.

Resident:

Resident as defined in both countries means any person who, under the laws of that Contracting 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 Contracting State and any political subdivision or local authority thereof.

These include permanent home and center of vital interests, country of habitual residence and nationality, in descending order. If none of these criteria are decisive, residence is settled by mutual agreement between the two countries' tax authorities.


Permanent establishment:

Permanent establishment means a fixed place of business through which the business carried on and includes particularly, the place of management, a branch, an office, a factory, a workshop or a mine, an oil or gas well, a quarry or any other place of extraction, exploration or exploitation of natural resources.


Income from Immovable property:

Income derived by a resident of a Contracting State from immovable property situated in the other Contracting State may be taxed in that other State.


Business profits:

In respect to article 7, the profits of an enterprise are taxable only in the Contracting State in which it is resident unless it carries on business in the other Contracting State through a permanent establishment there, in which case the profit attributable to the permanent establishment may be taxed in the Contracting State in which it is located.


Shipping, Inland Waterways Transport and Air Transport:

The provisions of article 8 refer to profits of an enterprise of a Contracting State from the operation of ships or aircraft in international traffic, as well as from the operation of boats engaged in inland waterways transport, shall be taxable only in that State.


Dividends/interest/royalties:

Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State and the withholding tax rates on dividends will be as follows:

  • 0 per cent of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 10 per cent of the capital of the company paying the dividends;
  • 5 per cent of the gross amount of the dividends in all other cases.

For interest payments, there are no withholding tax rates, much like royalty payments, where it is also zero per cent as long as the recipient of the royalties is in fact, the beneficial owner of the income.


Capital gains:

Article 13 of Treaty refers to capital gains tax which includes the following:

  • Gains derived by a resident of one of the Contracting States, from the alienation of immovable property which is situated in the other Contracting State, may be liable to tax in the country in which the property itself is situated;
  • Gains from the alienation of movable property, forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State, including such gains from the alienation of such a permanent establishment (alone or with the whole enterprise), may be taxed in that other State;
  • Gains derived by a resident of a Contracting State, from the alienation of shares in a company, deriving more than 50 per cent of their value directly from immovable property situated in the other Contracting State, may be taxed in that other State;
  • Gains from the alienation of any property are liable to tax only in the contracting State in which the alienator is a resident of.

Income from employment and Director fees:

Salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other state.


Offshore activities:

The provisions of article 20 of the Treaty include provisions in respect of offshore activities which are preserved in case they might be otherwise limited by other provisions of the Treaty.

A person who is a resident of the Contracting State and carries on activities (offshore) in the other Contracting State in connection with exploration and exploitation should be considered as carrying on the business through a permanent establishment. This provision would not apply where the activities are for period less than thirty days in aggregate in any twelve months.

Profits which arise from companies involved in the transportation and where activities are connected with exploration and exploitation will be taxable only in the Contracting State where the companies are resident.

Salaries which arise by a resident of a Contracting State in relation to employment in transportation, exploitation and exploration activities; should be taxed in the Contracting State of which such company, is carrying out such activities.


Elimination of double taxation:

The provisions of article 23 of the Treaty refer to the elimination of double taxation which applies to Luxembourg and Cyprus; a credit of foreign tax will now apply which will enable to receive credit against Cyprus tax payable in respect of any income derived from Luxembourg and vice versa.


Exchange of information:

The authorities of both Contracting States are now committed to exchange any information which is relevant for the application of the Treaty.

All information should be treated as confidential in the same manner as information obtained under local laws of each Contracting State and should be disclosed only to the appropriate persons or authorities.


Conclusion:

Upgrading and expanding the network of Double Taxation Conventions, is of high economic and political importance and aims to further strengthen Cyprus as an international business center.



The author of the article is Marios Panayides.

Marios is a Corporate & Financial Advisor at Royal Pine & Associates. He is a Fellow Chartered Certified Accountant and Member of Institute of Chartered Certified Accountants. He holds Bsc in Accounting & Finance from University of Macedonias. He has more than 10 years of professional experience in one of the big four audit firms and he was a Senior manager in the Audit & Assurance department. In addition he is a Member of The Institute of Certified Public Accountants of Cyprus (ICPAC).

Posted on Dec 04, 2017

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