Opportunities arising from Cyprus DTT with Iran
On August 4th 2015 Cyprus signed an agreement with Iran for the avoidance of double taxation. The treaty will enter into force once the ratification procedures on both sides are completed. The provisions of the treaty will come into effect on or after January 1st following the date upon which the treaty enters into force.
The tax treaty, which is based on the OECD Model Convention for the Avoidance of Double taxation on Income and on Capital, adds to Cyprus’ extensive network of double tax agreements, which currently covers more than 50 countries.
The agreement opens up new opportunities for trade and cooperation between the two countries, following the lifting of international sanctions against Iran.
Main provisions of the treaty can be seen in the diagram and notes below:
N1 – As per treaty the withholding tax rate on dividends is 5% if the bene¬ficial owner holds directly at least 25% of the capital of the dividend paying company. In all other cases the withholding tax rate is 10%. However currently Cyprus and Iran do not impose withholding tax on dividends. The treaty rates will apply only when any or both of the two states impose withholding tax in their domestic legislation.
N2 – Interest payments from Iran to the Cypriot beneficial owner of the interest will be subject to a WHT at a rate of 5% as per double tax treaty. However, under Iranian law, interest payments to non-Iranian tax residents are subject to a withholding tax of 3% and therefore, the lower rate of 3% is expected to apply for interest payments from Iran to Cyprus.
N3 – Capital gains derived from the sale of shares will be taxable only in Cyprus, unless the shares derive more than 50% of their value directly from immovable property situated in Iran. In this respect, such gains will be subject to taxation in Iran. Gains on the sale of shares in Cyprus will be exempt from tax, unless more than 50% of their value derives directly from immovable property situated in Cyprus. If not capital gains tax in Cyprus is 20%.
N4 – Interest income received from intra-group lending bears 12,5% Corporation tax. In case of back-to back financing the minimum profit margins on the lending interest rates acceptable by the Cypriot tax authorities are as follows:
|Less than EUR 50mln||-----> 0.35%|
|EUR 50mln - EUR 200mln||-----> 0.25%|
|Over than EUR 200mln||-----> 0.125%|
N5 - Incoming dividends from Iran, are exempt from Cyprus corporation tax and may also be exempt from SDC provided that one of the below is met:
- No more than 50% of the Iranian Company’s activities lead to investment income; or
- The foreign tax rate must not be significantly lower than the tax payable in Cyprus (i.e. lower than 6.25%).
N6 – Royalty profits are subject to 12.5% corporation tax. However, if intellectual property is owned by the Cyprus company, 80% of the any income generated from intellectual property is exempt from corporation tax. Therefore the effective tax rate is reduced to 2.5%.
Cyprus’ infrastructure, legal framework and availability of educated and qualified individuals are favorable conditions for the development of an R&D center in Cyprus. Amicorp Cyprus can assist and support in setting up and managing such entity.
N7 – These amounts will vary depending on the country. Indicative rates as per applicable tax/treaties for some major countries/jurisdictions are as follows:
|EU (Application of EU Directives)||0%||0%||0%|
N8 – The Notional Interest Deduction (NID) that can be used to reduce taxable income. This applies as a deemed interest expense on newly injected capital and can reduce the effective tax rate to 2.5%. It is calculated by multiplying a ‘reference interest rate’ on the new capital issued by the company. The reference interest rate is the ten year government bond rate of the State the capital is invested in, plus 3%. However this cannot be less than the ten-year Cyprus Government bond increased by 3%.
The allowable deemed expense cannot exceed 80% of the taxable income of the company. In case of a tax loss, no expense can be claimed.
A plethora of rules and regulations is being developed by international bodies in order to combat tax avoidance. These include the OECD’s base erosion and profit shifting (BEPS) project and several EU anti abuse rules. Cyprus, being a member country of the European Union and geographically located at the crossroad of three continents, as well as having a multi-lingual, highly skilled human capital and first grade infrastructure can provide the right economic and strategic reasons to set up an entity on the island.
Amicorp Cyprus is available to assist with any queries you might have, help you understand and explore the opportunities that may arise for your business as a result of this DTAA and assist in the set-up and maintenance of Cyprus as well as other jurisdiction entities.