You know that Cyprus is known for its favorable policies towards foreign employees, entrepreneurs, business owners, and investors. Its personal and corporate tax regimes are among the lowest in Europe and the world. After all, tax treaties with many of the world’s leading economies provide another opportunity for foreign earners to maximize their income. In this article, we’ll take a deep dive into Cyprus’ tax treaties and will know list of countries that have tax treaties with Cyprus.
What is a tax treaty?
A tax treaty, or Double Taxation Agreement (DTA), is a bilateral agreement between countries, it prevents the same income from being taxed in both jurisdictions.
These treaties, pivotal in international finance, ensure that your income such as dividends, pensions, and royalties are taxed only once. Cyprus’s network of DTAs attracts foreign investment and fosters international economic cooperation. Through these treaties, Cyprus mitigates the risk of double taxation for its residents and foreign investors.
How do tax treaties work?
Residency is crucial in tax treaties as it decides which country has the authority to tax an individual’s worldwide income. If you are from German and have a residence of that country but earns income in Cyprus, such earns will be taxed primarily in Germany, original country of residence. However, Cyprus still has the right to tax income generated within its borders. This could lead to double taxation on the same income, but a tax treaty protects income from being taxed twice.
DTAs use the term ‘permanent establishment’ to refer to a fixed place of business where an enterprise conducts its activities. For example, a British company with an office in Cyprus would have a permanent establishment in Cyprus, and the profits attributed to that office would be subject to taxation by Cyprus.
DTAs protect the income of individuals and businesses and help prevent tax evasion. Clear rules on tax payment reduce opportunities for tax loopholes. Modern DTAs include provisions to exchange information between tax authorities, deterring tax evasion.
What’s the purpose of tax treaties?
- Avoidance of double taxation: The main purpose of DTAs is to ensure that income earned in one country by residents of another country is not taxed in both countries.
- Prevention of fiscal evasion: Cyprus, for instance, shares tax-related information with treaty partners, making it harder for individuals and corporations to hide taxable income.
- Encouragement of foreign investment: Knowing that profits from an investment in Cyprus won’t be subject to double taxation, investors from partner countries are more likely to invest.
- Facilitation of economic exchange: By reducing the tax burden, these treaties lower the cost of international transactions, encouraging trade and economic exchange.
- Stabilization of international trade relations: DTAs contribute to a stable and predictable international trading environment.
Countries that have tax treaties with Cyprus
1.UK
The UK and Cyprus signed a new tax treaty in 2018, which went into effect in 2019. Whatever income you earn will only be taxed in the country it was derived from.
2.Germany
Germany and Cyprus amended their tax treaty in 2011, offering more favorable terms for income earners in both countries. In particular, dividend income will be taxed at 5% instead of 10%. Other income is taxed only in the country where it is earned.
3.US
The US-Cyprus tax treaty is fairly complex. Anyway, qualifying individuals may claim foreign tax credits for the tax they pay in one country against their tax liability in the other. This has the potential to reduce your tax burden in the second country to 0 or even generate a surplus.
However, there is a “savings clause” – a provision that preserves the right of each country to tax its own citizens and residents as if the treaty did not exist. It’s particularly important for US citizens abroad to understand the terms and conditions of this clause. And, the tie-breaker factors that determine whether you are double taxable.
Also, the US levies tax rates on various forms of passive income derived in the country, which range from 0%-30%. There are also special rules regarding income earned while temporarily in the US, social security taxes, state taxes, etc.
4.UAE
Cyprus and the UAE agreed on a tax treaty in 2010, which became active in 2014. It largely follows the Organization for Economic Co-operation and Development (OECD) model, but there are some differences, as in all UAE tax treaties. Cypriots with residence in the UAE and who earn an income there will benefit from the Emirate’s 0% tax. However, income earners in Cyprus will still need to pay the local tax there.
5.Hong Kong
The Cyprus-Hong Kong tax agreement is fairly straightforward. In most cases, individuals and businesses will not be double-taxed. But, Hong Kong residents employed in Cyprus will only earn tax credits toward their Hong Kong tax liability, not a full exemption.
Other countries that have DTAs with Cyprus include:
- Australia
- Canada
- France
- Italy
- Japan
- Switzerland
- Egypt
- Israel
- Lebanon
- Singapore
- Thailand
- Ukraine
You can find the full list of countries with double taxation agreements on the official website of the Ministry of Finance of Cyprus.
Book a call with YouReg right now and get a free consultation regarding setting up your business in Cyprus today and don’t be afraid about double taxation!
