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Cyprus Double Tax Treaties

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Double Tax Agreements (DTA), also known as double tax treaties, exist between many countries on a bilateral basis to prevent double taxation, in other words to prevent taxes levied twice on the same income, profit, capital gain, etc.

Most developed countries have a large number of tax treaties, while developing countries are less well represented in the worldwide tax treaty network. Cyprus has treaties with over 40 countries.

Tax treaties tend not to exist, or to be of limited application, when either party/nation regards the other as a tax haven. There are a number of model tax treaties published by various national and international bodies, such as the United Nations and the OECD.

 

How does a DTA work?
The non resident corporate or individual shareholder who has established a Cyprus company will have tax levied on them in the following way.

A Cyprus resident company is taxed on its Cyprus business profits at a rate of 10%. When a Cyprus company makes profits it pays those profits to its members (shareholders) in the form of dividends. Dividends paid in Cyprus to members are tax exempt, but if those members are non-residents they will be taxed in their respective residency countries. Corporate shareholders will be taxed at the corporate level and individuals at their marginal tax rates.

DTA affect the way that non-cypriot residents are taxed on the income earned in Cyprus. For instance it may be worthwhile for them to be in Cyprus because the tax system is very favourable, but those profits (dividends or royalties or income from shipping etc) is also taxable in their countries. DTA therefore step in and mandate

  • What type of income is included under the DTA
  • Who has taxing jurisdiction
  • The rate of tax applicable.

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Illustrative Example (Russian Federation-Cyprus DTA)

A Russian non Cypriot resident who has earned a capital gain from the sale of securities in Cyprus is not taxed for his/her capital gain because in Cyprus this gain is tax exempt.
In Russia however, residents are taxed for income from in and out of Russia. There is no separate tax on capital gains; rather, gains or gross receipts from sale of assets are absorbed into the income tax base. Taxation of individual and corporate taxpayers is distinctly different:

Capital gains of individual taxpayers are tax free if the taxpayer owned the asset for at least three years. If not, gains on sales of real estate and securities are absorbed into their personal income tax base and taxed at 13% (residents) and 30% (non-residents, for gains associated with Russian not Cyprus). A tax resident is any individual residing in the Russian Federation for more than 183 days in the past year.

Capital gains of resident corporate taxpayers operating under the general tax framework are taxed as ordinary business profits at the common rate of 24%, regardless of the ownership period. Small businesses operating under the simplified tax framework pay tax not on capital gains, but on gross receipts at 6% or 18%.

Under the DTA however capital gains from sale of securities are taxed at 0%. So non-resident shareholders look for countries where the local tax system is favourable and there is DTA in place which provides for lower rates of taxes.

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For further information on individual treaty arrangements See Double Tax Agreements (Reference Material - Tax).

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