The updated UK-Cyprus Double Taxation Agreement (DTA) signed on March 22 2018 aligns the provisions more closely with the OECD Model.

Withholding tax

The new treaty when in effect will provide for zero withholding tax on dividends unless they are paid from income derived (directly or indirectly) from immovable property by an investment vehicle which distributes most of the income annually and whose income from the immovable property is exempt from tax. In this case there will be a maximum withholding tax of 15% on the dividends. If however the beneficial owner of the dividends is a pension scheme established in the other contracting state the withholding tax is zero.

Zero withholding tax applies to interest or royalties paid at arm’s length.

Capital gains

Gains derived by a resident of a contracting state from the disposal of immovable property in the other state may be taxed in the state where the property is situated. Also gains on unlisted shares deriving more than 50% of their value directly or indirectly from immovable property in the other state may be taxed in the state where the property is situated.

Offshore activities

A resident of a contracting state carrying on activities offshore in the other state for more than 30 days in any 12 month period in relation to exploration or exploitation of the seabed, subsoil or natural resources is deemed to be carrying on business through a permanent establishment.

Limitation on benefits

The updated treaty contains an article on limitation of treaty benefits based on a principal purpose test in line with the OECD guidelines as amended for recommendations of the reports on base erosion and profit shifting (BEPS). No benefit will be available under the treaty in relation to an item of income or a capital gain if it is reasonable to conclude, having regard to all the facts and circumstances, that obtaining the benefit was one of the principal purposes of that arrangement or transaction.

Entry into force

The updated treaty will enter into force when the parties have completed ratification procedures and exchanged diplomatic notes. The DTA is expected to take effect in the UK at the beginning of the 2019/20 tax year.