Background
On 1 June 2021 the Kingdom of the Netherlands and Cyprus signed a double tax treaty for the avoidance of double taxation (the "treaty"). It was published in the Official Gazette on 4 June 2021, the date of ratification by Cyprus.
The treaty follows the Model Convention of the Organisation for Economic Co-operation and Development (OECD), incorporating the standard provisions designed to avoid the double taxation of income and capital. The principal terms are outlined below.
Dividends
The withholding tax on dividends paid to the other contracting state is 15%. No withholding tax is imposed, however, in two instances:
- Where the beneficial owner is a company that holds directly at least 5% of the capital of the company paying the dividends throughout a 365-day period that includes the day of the dividend payment
- Where the dividends are paid to a recognised pension fund that is generally exempt under Cyprus corporate income tax law
Interest and Royalties
There is no withholding tax on interest, provided the recipient of the interest is the beneficial owner of the income.
Likewise, there is no withholding tax on royalties, provided the recipient of the royalties is the beneficial owner of the income.
Capital Gains
Cyprus retains the exclusive taxing rights on gains from the disposal of shares made by Cyprus tax residents, subject to the exceptions below:
- Disposal of non-listed shares or comparable interests deriving more than 50% of their value, directly or indirectly, from immovable property situated in the Netherlands
- Disposal of shares deriving more than 50% of their value, directly or indirectly, from rights to assets produced by exploration or exploitation of natural resources in the Netherlands (including the seabed and its subsoil, and the production of energy from water, sun and wind), or from technical equipment or similar property situated in the Netherlands and directly used in offshore activities
- Gains from the disposal of immovable property are taxable where the property is situated
- Gains from the disposal of movable property forming part of a permanent establishment are taxable where the permanent establishment is based
- Gains from the disposal of ships and aircraft used in international traffic are taxable where the real seat of the owning company is situated
Anti-Abuse and BEPS Provisions
To implement the Base Erosion and Profit Shifting (BEPS) measures on dispute resolution and anti-tax avoidance, the treaty contains a Mutual Agreement Procedure (MAP) to resolve disputes, including cases of dual tax residency of entities.
The treaty also introduces a principal purpose test (PPT) under Article 26, allowing the tax authorities to deny treaty benefits where obtaining that benefit was one of the principal purposes of the relevant arrangement or transaction — unless granting the benefit would be in accordance with the object and purpose of the treaty.
Entry into Force
Although signed by both countries, the treaty required formal adoption by the Dutch Parliament before entering into force. It was anticipated to take effect once the ratification and notification procedures were finalised by both countries.
How ASC Can Help
ASC advises on the practical application of Cyprus’s double tax treaty network, including structuring cross-border holdings and financing to secure treaty benefits while satisfying beneficial ownership and principal purpose requirements. Contact us to discuss your situation.