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New Double Tax Treaty with Luxembourg

New Double Tax Treaty with Luxembourg

7 September 2018 Tax Law

New Double Tax Treaty with Luxembourg

On the 8th of May 2017, Cyprus and Luxembourg have concluded for the first time a Double Tax Treaty (DTT) which will enter into force as of 1st of January 2019.  At its infancy stage, the afresh treaty is founded on the Organization for Economic Co-operation and Development Model Tax Convention framework, thereby assisting in the expansion of Cyprus’ trade, and by extension paving the way for fresh investment opportunities and economic relations between the two countries.

Below is a summary of the main provisions of the DTT.

The DTT encompasses a 0% withholding tax (WHT) rate where the recipient is the beneficial owner of the interest and/or royalties. Concerning dividends, a 0% WHT rate appertains to corporate investors owning directly at least 10% of the capital of the payor company. Conversely in all other cases of dividends a WHT levied may not be greater than 5%.

For capital gains, under the DTT, Cyprus maintains the exclusive taxing rights on capital gains emanating from the transfer of shares of a company, unless more than 50% of the value of such shares arises directly from immovable property located in Luxembourg and vice versa. As such, taxation will be levied in the state where the immovable property is located.

The DTT incorporates a Limitation of Benefits clause whereby a benefit shall not be permitted, if acquiring such benefit was one of the principal purposes of an arrangement or transaction. This measure is designed to combat treaty shopping and strengthens the importance of ensuring that operations are bolstered by befitting substance and mirror a principal commercial rationale.