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Cyprus Signs a Tax Treaty with Luxembourg for the Avoidance of Double Taxation

The Republic of Cyprus has concluded a Double Tax Treaty with Grand Duchy of Luxembourg. The treaty was signed on the 8th of May 2017.

The new treaty shall enter into force upon both Cyprus and Luxembourg exchanging notifications that the formal ratification procedures have been completed. The provisions of the treaty with respect to taxes will have effect in both contracting states on or after 1 January post ratification.  

As the new treaty was publication in the Gazette on 29th of December 2017 it is effective from 1/1/2018.

The new treaty is based on the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention framework, and will contribute to the expansion of Cyprus’ trade and economic relations between the two countries.

The preamble to the double tax treaty refers to the elimination of double taxation with respect to taxes on income and on capital and the prevention of tax evasion and avoidance through non taxation or reduced taxation effected through treaty shopping. 

The main provisions of the Double Tax Treaty

The convention shall apply to the following taxes: 

In the Republic of Cyprus:

  1. The income tax;
  2. The corporate income tax;
  3. The special contribution for the defence of the Republic; and
  4. The capital gains tax.

In the Grand Duchy of Luxembourg:

  1. The income tax on individuals;
  2. The corporation tax;
  3. The capital tax; and
  4. The communal trade tax.

Permanent Establishment

The definition of the permanent establishment in the context of the double tax treaty is a fixed place of a business through which the business of an enterprise is wholly or partly carried on.

Any building site or construction or installation project constitutes a permanent establishment only if it lasts more than 12  months.

Capital Gains Tax

Gains from the disposal of immovable property are taxed in the country where the immovable property is situated.

The term “immovable property” shall have the meaning which it has under the laws of the Contracting State in which the property in question is situated.

Gains derived by alienation of shares in a company, where 50% of the value of the shares derives directly from immovable property situated in the other Contracting State may be taxed in that other state.

Directors’ fees

Directors’ fees derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State.

Withholding tax rate on interest payments

  • 0% withholding tax

Withholding tax rate on dividend payments

  • 0% withholding tax where the beneficial owner is a company that holds at least 10% in the paying company’s capital; 5% otherwise

Withholding tax rate on royalty payments

  • 0% withholding tax