The new double tax treaty between Cyprus and Spain that was signed on February the 14th, 2013 enters into force on 1st of January 2015.
The new treaty was expected originally to come into force on the 1st of January 2014 however since there was no official exchange of the ratified documents between the Governments of Spain and Cyprus, this was postponed.
For several years prior to 2009, Cyprus-resident companies were ineligible for certain Spanish tax benefits and exemptions, as Cyprus was included in the Spanish authorities' black list of tax havens – despite complying with all relevant information exchange requirements. In 2009, the Spanish authorities removed the restrictions and the negotiations relating to the double taxation agreement started.
The entry into force of the agreement has already led to an essential expansion of economic ties and reciprocal investment between the two countries.
The main provisions of the new treaty can be summarized as follows:
- Dividend payments will be subject to a 5% withholding tax;
- Interest payments will not be subject to any withholding tax;
- Royalty payments will not be subject to any withholding tax;
Capital Gains from the direct sale of shares in “property-rich” companies will be taxed in the country where the immovable property is situated.
A Limitation of Benefits (LOB) provision has not been inserted in the treaty. However, the Protocol to the treaty stipulates that domestic anti-abuse provisions will apply.
As a result of this development, the economic interaction between the two countries is expected to increase as the new Treaty will be a significant instrument for bilateral investment.