The Double Tax Treaty (DTT) between the Republic of Cyprus and The Kingdom of The Netherlands, signed on June 1, 2021, came into force on June 30, 2023, marking a significant milestone in the financial relations between the two nations. This treaty is designed to prevent double taxation on income and capital, ensuring a more efficient and fair tax regime for entities operating in both countries. Its provisions are set to apply from January 1, 2024, onwards.
Key Features of the Cyprus-Netherlands DTT:
- Foundation on OECD Model Convention: The treaty is grounded in the OECD Model Convention for the Elimination of Double Taxation on Income and Capital. It aligns with the global efforts to combat tax evasion and avoidance, incorporating all the minimum standards of the OECD/G20 Actions against Base Erosion and Profit Shifting (BEPS) concerning bilateral agreements.
- Withholding Tax Rates: A notable feature of the DTT is the 0% withholding tax (WHT) on dividends, interest, and royalties under specific conditions. For dividends, this rate applies when the recipient/beneficial owner is either a company holding at least 5% of the capital of the dividend-paying company for a 365-day period or a recognized pension fund exempt under Cyprus's corporate income tax law. In all other cases, the WHT on dividends is capped at 15%.
- Capital Gains: The treaty stipulates that capital gains from the disposal of shares will be taxed exclusively in the seller's country of residence, with certain exceptions. Gains from the disposal of shares deriving more than 50% of their value from immovable property situated in the other Contracting State, or from certain offshore rights or properties related to the exploration of natural resources, may be taxed in that other State.
- Principal Purpose Test (PPT): A critical inclusion is the Principal Purpose Test, derived from the BEPS project's Action 6. This provision ensures that treaty benefits are not granted in cases where obtaining such benefits was one of the main purposes of any arrangement or transaction, thereby preventing abuse.
The establishment of this DTT between Cyprus and The Netherlands is a landmark development, offering clear guidelines and benefits for the taxation of dividends, interest, royalties, and capital gains, which will likely encourage investment and economic cooperation between the two countries. By incorporating BEPS standards, the treaty also underscores both nations' commitment to preventing tax evasion and ensuring tax compliance on a global scale.
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