On 24/05/2016 the Republic of Cyprus entered for the first time into a Double Tax Treaty (DTT) with the Republic of Latvia. This is the 60th Double Tax Treaty entered into by Cyprus. The DTT was formally approved by Cyprus on 03/06/2016 and was signed by the relevant Ministers of each country.  

A DTT allows that tax paid can be offset in one of two countries against tax payable in the other, thus avoiding double taxation. Some forms of income are exempt from tax or qualify for reduced rates. These include royalties, dividends and capital gains.  

The DTT will enter into force once Cyprus’ and Latvia’s exchange notifications have been formally ratified and the correct procedures have been completed. Thus the provisions (with respect to taxes) will take effect in both countries on the 1st of January (or onwards) following the date the Treaty enters into force.

The Treaty is based on the “model convention for avoidance of double taxation on income capital” of the Organization of Economic Cooperation and Development (‘OECD’). Also, the Treaty includes an exchange of information article, in line with the exchange of information provisions of the OECD Model Convention.

Taxes included within the scope of the Tax Treaty

The agreement will extend to any similar or identical taxes imposed in the future in addition to, or in place of, the existing taxes.

• The Latvian personal income tax and enterprise income tax; and
• The Cyprus income tax, corporate income tax, capital gains tax and special contribution for the Defence of the Republic (otherwise known as SDC tax).

The main provisions in the agreement are as follows:

Tax Withholding Rates

The main withholding tax rates with respect to dividends, interest and royalties are as follows:

The treaty provides 0% withholding tax which will apply to Dividends, Interest and Royalty payments made to a company resident state (i.e. company-to-company payments) in the other contracting state that is the beneficial owner. Note that this only applies in the case of a company and not in case of a partnership.

However, if this is not applicable, and the recipient company is not the beneficial owner (i.e. non company-to-company payments), the dividend/interest withholding tax, will be 10% and in the case of royalties 5%. Since both countries are EU Member States, the ‘Parent Subsidiary Directive’ (90/435/EEC) and the ‘Interest and Royalties Directive’ (2003/49/EC) will be applicable.

Applicable:

• Dividends – 0%
• Interest – 0%
• Royalties – 0%

Not applicable:

• Dividends – 10%
• Interest – 10%
• Royalties – 5%

Capital Gains

Profits made by a resident of Cyprus from the sale of immovable property situated in Latvia may be liable for tax in Latvia. The above may occur when:

• the profits derived from disposal of shares or similar interests in a company or other entity deriving more than 50 per cent of its value from immovable property situated in Latvia, or any other contracting state. They can be taxed in the contracting state in which the immovable property is situated.
• the profits derived by a resident of Cyprus from the disposal of immovable or movable property associated with a permanent establishment. They can be taxed in Cyprus or the contracting state providing it is the tax residence of the person disposing of the shares.

Conclusion

The DTT is not only expected to contribute to further development of the trade and economic relations between Cyprus and Latvia, as well as with other countries, but also aims at further enhancing and attracting foreign investments and promoting Cyprus as an international business centre.

Lastly, the DTT will provide considerable advantages to businesses and individuals who have chosen to establish legal entities in Cyprus. The EU Parent Subsidiary Directive and the Interest & Royalties Directive will be used to eliminate withholding taxes on payments of dividends, interest and royalty payments from or to EU Group Companies and the EU Merger Directive (90/434/EEC) to eliminate the tax effects of EU Group reorganizations.