IN438 - The Benefits of the New Cyprus-Iran Double Tax Treaty

The Governments of Cyprus and Iran signed and ratified a new double tax treaty in August 2015. Cyprus has a favourable tax system with an extensive network of Double Tax Treaties and this new treaty makes Cyprus an excellent gateway jurisdiction for business and investments into and out of Iran.

The Cyprus Tax System at a Glance

  • Resident companies are generally taxed at 12.5% of their business profit, and Cyprus is therefore a good location for trading entities.
  • Cyprus is an attractive location for holding companies. There is no tax on dividends received and there is an exemption from withholding tax on dividends paid to non-resident shareholders.
  • Profits from a permanent establishment located outside of Cyprus are exempt from Cypriot taxes, as long as not more than 50% of the income has arisen from investment income (dividends and interest).
  • There is no capital gains tax. The only exception to this is immoveable property in Cyprus, or shares in companies owning such property.
  • Cyprus has an extensive network of Double Taxation Treaties (DTAs).
  • There are no thin capitalisation or CFC rules.
  • Deemed interest deductions are allowed on “new equity” funds introduced into a Cyprus tax resident company, where the funds are used for the operation of the company.

Cyprus – Iran Double Tax Treaty

The most significant provisions of the treaty are as follows:

  • Permanent Establishment

The permanent establishment definition is in line with the definition provided in the OECD Model Tax Convection. A company that has a presence overseas for more than 12 months will create a ‘permanent establishment’.

  • Dividends

The withholding tax on dividends is 5%, if the beneficial owner directly holds at least 25% of the capital of the dividend paying company. In all other cases the withholding tax rate is 10%.

  • Interest and Royalties
  1. The withholding tax on interest is 5%.
  2. The withholding tax on royalties is 6%.
  • Capital Gains

Gains received by a resident of one country from the disposal of immovable property situated in the other country, may only be liable to tax in that other country.

In addition, gains received by a resident of one country from the disposal of shares in a company, deriving more than 50% of their value directly from immovable property situated in the other country, may also only be liable to tax in that other country.

Limitations of Benefits

The treaty does NOT contain a limitation of benefits clause.

  • Dividends, Interest and Royalties Paid from Cyprus

No withholding tax is payable on dividends, interest or royalties paid from Cyprus.

Use of a Cyprus Holding Company

1a) A Simple Cyprus: Iranian Holding Company Structure

Cyprus Level

1. Corporation Tax 12.5%.

2. Dividends received from the Iranian company are exempt from Corporation Tax and Special Defence Contribution (subject to conditions).

3. There is no withholding tax on dividends paid from the Cyprus company to the principal company.

Iranian Level

1. Dividends paid from the Iranian company are subject to withholding tax of 5% or 10%, as detailed in the section above.

 

 

 

1b) A Cyprus Holding Company, with Investments in a Number of Countries

Cyprus Level

1. Corporation Tax 12.5%

2. Dividends received from the investments in various countries are exempt from Corporation Tax and Special Defence Contribution (subject to conditions).

3. No withholding tax on dividends paid from the Cyprus company to the Iranian Company/Individual.

Examples of Tax Payable on Investments in Different Countries

1. EU (Parent – Subsidiary Directive)

Dividends 0%, Interest 0%, Royalties 0%.

2. Russia

Dividends 5%-10%, Interest 0%, Royalties 0%.

3. South Africa

Dividends 5%-10%, Interest 0%, Royalties 0%.

Dixcart can provide a number of other examples detailing how the Cyprus: Iran DTA can be used in a tax efficient manner, for different types of companies. Specific additional examples include: financing companies and equity-loan financing companies.

How Can Dixcart Assist You?

The Dixcart office in Cyprus has extensive knowledge regarding Cyprus Double Taxation Agreements. The Cyprus: Iran Double Taxation Treaty presents a number of opportunities for companies investing into or out of Iran.

If you require additional information regarding the Cyprus and Iran Double Tax Treaty, please speak to your usual Dixcart contact or to Robert Homem at the Dixcart Office in Cyprus.

Categories: Cyprus, 2016