On March 22nd 2018, Luxembourg Parliament approved the double tax treaty between Luxembourg and Cyprus (hereafter the “Tax Treaty”). The Tax Treaty should enter into force on January 1st 2019, provided that the exchange of the instruments of ratification between Luxembourg and Cyprus take place in the course of the year 2018.
Cyprus was the last EU member state with which Luxembourg had no double tax treaty. The Tax Treaty includes BEPS compliant provisions and follows the latest OECD standards. The salient features of the Tax Treaty are listed below:
- The Luxembourg net wealth tax is not included as part of the taxes covered by the Tax Treaty;
- Collective investment vehicles that are liable to tax, even if in practice they are exempted from such taxes upon meeting exemption requirements, will be considered as being tax resident and the beneficial owners of the income they receive for the purposes of the Tax Treaty;
- The dividend withholding tax is nil for dividends paid by a company to another company (other than a partnership) which holds directly at least 10% of the capital of the company. In the other cases, this withholding tax amounts to 5% of the gross amount of dividends paid;
- A real estate rich clause has been included, which provides that the taxation right of capital gains realized on shares of a company deriving more than 50% of their value from immovable property of a contracting state is allocated to said contracting state. Otherwise, the capital gains arising from the disposal of shares is only taxable in the country of residence of the seller;
- Both royalties and interest payments will be exempt from withholding tax;
- In accordance with the ML (Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting) signed by both countries, the Tax Treaty includes an entitlement of benefits clause which incorporates the Principle Purpose Test to minimize treaty shopping; and
- A specific article has been added regarding offshore activities. Companies involved in offshore activities (i.e. exploration or exploitation of the seabed or subsoil or their natural resources) will be deemed to carry out their activities through a permanent establishment in the country where these activities are performed, provided said activities exceed a 30 days period. This provision also applies to wages paid for offshore activities and certain capital gains (e.g. capital gains on the disposal of exploration or exploitation rights or capital gains on shares deriving their value or the greater part of their value directly or indirectly from such rights).