Cyprus: New income tax treaty with Croatia signed
The treaty will enter into force in the year following the year in which the ratification process in Croatia is also completed.
Summary of main provisions
The Cyprus and Croatian Ministers of Finance signed a new income tax treaty on 17 October 2023.
As announced by the Cyprus Ministry of Finance on that day, the treaty is based on the OECD Model Tax Treaty and incorporates the base erosion and profit shifting (BEPS) minimum standards.
Following ratification by Cyprus, the treaty will enter into force in the year following the year in which the ratification process in Croatia is also completed. Then the treaty will replace the existing income tax treaty between Cyprus and the Socialist Federal Republic of Yugoslavia, which was in force after its dissolution.
Summary of main provisions
Dividends
A 5% withholding tax applies to the recipient/beneficial owner of dividends.
Interest
A 0% withholding tax applies if the interest is paid to a recipient/beneficial owner of the other contracting state:
- In connection with the sale on credit of any industrial, commercial, or scientific equipment
- In connection with the sale on credit of any merchandise by one enterprise to another enterprise
- On any loan of whatever kind granted by a bank
A 5% withholding tax applies in all other cases.
Royalties
A 5% withholding tax applies to the recipient/beneficial owner of the royalty.
Capital gains
Gains derived by a resident of a contracting state from the alienation of shares or comparable interests, such as interests in a partnership or trust, deriving more than 50% of their value directly or indirectly from immovable property situated in the other contracting state at any time during the 365 days preceding the alienation, may be taxed in that other state.
Exceptions apply to gains derived from alienation of shares:
- Listed on an approved stock exchange
- In the course of a corporate reorganization
- When the alienator is a recognized pension fund
Limitation to benefits
A benefit under this treaty will not be granted in respect of an item of income or capital, if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes (principal purpose test) of any arrangement or transaction that resulted directly or indirectly in that benefit.
Read a November 2023 report prepared by the KPMG member firm in Cyprus
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