Cyprus ratifies the Base Erosion and Multilateral Instrument

Principal Purpose test

The main impact of the convention for Cyprus’ active DTTs is the Principal Purpose Test (PPT). The PPT provides that a bilateral DTT benefit shall not be granted, if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the bilateral DTT. This measure is designed to tackle "treaty shopping" and puts a strong emphasis on ensuring that operations are supported by appropriate substance and reflect a principal commercial rationale.

Cyprus MLI position

Cyprus has listed the vast majority of its bilateral DTTs as being a “covered DTT” under the MLI, excluding recent bilateral DTTs in cases where such bilateral DTT already reflects the BEPS project. As noted above, a bilateral DTT is only modified by the MLI if both contracting party jurisdictions to the bilateral DTT choose to list it as a “covered DTT” under the MLI. For example, while Cyprus has listed its bilateral DTT with the United States (US) in its MLI Position, that DTT will not be a “covered DTT” unless the US subsequently signs the MLI and lists the Cyprus-US DTT as a “covered DTT”.

Effect to Cyprus Tax Resident Companies

As from 1 January 2021, in the case of a Cypriot tax resident company (usually established by a non - Cypriot tax resident individual or by a non - tax resident company), in order to continue to be able to claim reduction or elimination of withholding taxes on income received (usually dividends, interest or royalties) from a country with which Cyprus has concluded a double tax treaty, (provided this country itself has completed the ratification procedures) it must prove that obtaining treaty benefits was not the only purpose or one of the principal purposes for the company being established in Cyprus.

In order to be able to prove the above, the Cypriot tax resident company needs to have sufficient substance in Cyprus, has business considerations for being set up in Cyprus and, preferably, carry out multiple activities within the company.