Cyprus and Luxembourg sign the First Double Tax Treaty: Recently, Luxembourg and Cyprus signed their first double tax treaty with an aim to strengthen their economic and commercial relationship. Moreover, after the signing of the double tax treaty both Luxembourg and Cyprus also signed the multilateral convention to implement tax treaty related measures aimed at preventing Base Erosion and Profit Shifting (“BEPS”).The treaty generally follows the OECD Model Convention and includes the latest international standards with regard to exchange of information. The treaty shall be applicable from 1 January 2018.

First Double Tax Treaty between Cyprus and Luxembourg: Scope of the Treaty

Resident of a Contracting State

For the purposes of the Convention this is defined as as any person, including a collective investment vehicle, who, under the domestic laws of that State, is liable to tax in that State by reason of its domicile, residence, place of management or any other criterion of a similar nature.

For legal persons. in case they are considered as a resident of both Luxembourg and Cyprus, they are considered as resident in the country in which they have their place of effective management. A person cannot be considered a “resident of a Contracting State” if such person is considered to be a tax resident but is subject only to a taxation limited to the income from sources in that State or to capital situated in that State.

Collective Investment Vehicle

A collective investment vehicle for the purpose of this Treaty is considered as a resident if it is liable to tax therein by reason of its domicile, residence, place of management or any other criterion of a similar nature.  It is also considered as liable to tax if it is subject to the tax laws of the Contracting State concerned, but is exempt from tax only if it meets all of the exemption requirements specified in the domestic tax laws of that State. A collective investment vehicle is deemed to be the beneficial owner of any income it receives.

Income derived from investments

Real estate

Any income derived by a resident of a Contracting State from the direct use, letting, or use in any other form of immovable property situated in a Contracting State may be taxed in the latter Contracting State. The right to tax of the State of source has priority over the right to tax of the other State and also applies in the case of an enterprise, where income is only indirectly derived from immovable property. To avoid double taxation of the foreign real estate income of its residents, Luxembourg will exempt such income and Cyprus will grant a tax credit for the foreign tax.

Dividends

Dividends can be taxed both by the source State and by the State of residence of the beneficiary. However, the treaty caps the withholding tax rates that could be levied by the foreign source State as follows:

0% in the case where the beneficial owner is a Company other than a partnership which holds a participation of at least 10% in the paying company and 5% in all other cases.

Moreover the treaty provides:

-for a general withholding tax rate which is lower than the domestic general withholding tax rate of 15% in Luxembourg and 17% in Cyprus, and

-for a withholding tax exemption under less restrictive conditions than the ones applicable under either the Luxembourg participation exemption or the Cyprus participation exemption regime.

To avoid double taxation of the foreign dividend received by their residents, Luxembourg will grant a tax deduction equal to the tax paid in Cyprus, and Cyprus will grant a tax credit.

Interest and royalties

Interest and royalties are only taxable in the Contracting State in which the recipients of the income are resident. Therefore, no withholding tax can be withheld in the foreign source State.

Capital gain on investments

Capital gains on immovable properties located in a Contracting State may be taxed in that State, whereas capital gains on shares are taxable only in the State of which the alienator is a resident. To avoid double taxation of capital gains realized by their residents on the disposal of immovable properties and movable assets, Luxembourg will exempt such income and Cyprus will grant a tax credit for foreign tax.