Cyprus x Netherlands conclude an Agreement for the Avoidance of Double Taxation (AADT)
Introduction
In the late 70ies the Dutch professional tax advisors, as if wanting to copy the glory of their ancestorial seagoing explorers, discovered the island of Cyprus and were the first to set up operations for their Dutch international companies to take advantage of what was then known as the Cyprus offshore company. This Dutch connection helped Cyprus establish itself as a sound international business centre and very soon international companies from all over the world set up business in Cyprus.
The tax systems of the two countries were for many years such that double taxation did not occur and therefore the two countries did not consider necessary the signing of an agreement for the avoidance of double taxation (AADT) . When changes were affected in the legislation of the two countries the attractiveness of Cyprus to Dutch international companies diminished but was not eliminated. When Cyprus joined the EU the various tax directives offered significant protection from double taxation, but the directives are no substitute to a tailor made AADT. After a rather protracted negotiation the two EU partners have concluded an AADT which comes into effect on 1 January 2022.
It follows the new style of AADTs established internationally, tailored of course to the specific provisions of the tax legislation of each country.
Brief description of important provisions
Residence.
For individuals, residence is determined by reference to the permanent home, centre of vital interest, habitual home, state of nationality and if deadlocked by mutual agreement procedure.
For companies, residence is determined by, the place of management, place of effective management, place of incorporation, any other relevant factors. If deadlocked, then residence is determined through mutual agreement procedure and if no agreement is reached the AADT will not be applied to the full extend. The two tax authorities can agree a limited application.
International shipping and air transport.
Profit from this operation is taxable only in the country where the effective management is exercised.
Dividends
Withholding tax on dividend payment from one country to the other is set at 15%. However, payment of dividend is exempt when the recipient is a company which directly holds beneficially at least 5% of the shares of the paying company for at least 365 days from the payment of the dividend.
There is a special provision that takes care of exit tax considerations allowing dividend withholding tax for situations where the exit tax is still outstanding.
AADTs are not intended to impose tax when the local legislation does not provide so. They can decrease or eliminate local tax as per the agreement. Cyprus does not impose withholding tax on dividend payment to non-residents so it will not apply the AADT rate.
Interest
Interest is taxed only in the country of residence of the beneficial owner.
Royalties
Royalties are taxed only in the country of residence of the beneficial owner.
Capital gains.
This article deals with the taxation of various assets of capital nature.
Gains from the disposal of immovable property situated in one state and owned by a resident of the other state maybe taxed in that other state if so provided by the laws of this other state.
Gains from the disposal of movable property in the other state may be taxed when disposed if the laws of the other state provide so.
Gains from the disposal of ships and aircraft are taxed only in the country of effective management of the company.
Gains from the disposal of shares in a company resident in the other country may be taxed in the other country when more that 50% the value of the shares disposed is derived directly or indirectly from immovable property. There are some exemptions to this provision for listed companies, reorganisations, when the property is the place where the business takes place, when the seller is a pension fund and when the seller directly or indirectly owns 25% or less of the shares.
There is provision for the taxing of an individual who changes residence (exit tax) on the appreciation of value of the assets whilst still resident in the other country.
Other relevant.
There are elaborate provisions for crediting taxes paid in the other country when the same income falls to be taxed in both countries.
No discrimination is allowed, mutual agreement procedure is explained in detail and so is the exchange of information procedure.