The governments of Hong Kong Special Administrative Region (HKSAR) and the Republic of Cyprus have signed a first-time agreement aimed at eliminating double taxation with respect to taxes on income and the prevention of tax evasion and avoidance.
Broadly based on the Organisation of Economic Cooperation and Development (OECD) Model Double Taxation Convention (DTC), key elements of the agreement include the elimination of withholding tax on dividends and interest paid from one contracting state to another and a 3 per cent withholding tax on royalty payments. Tax residence and beneficial ownership provisions shall apply.
Capital gains derived by an HKSAR investor from the disposal of shares in a Cyprus company are generally exempt from tax in Cyprus under the DTC, unless the company is land-rich and derives more than 50 per cent of its value directly or indirectly from immovable property situated in Cyprus.
The DTC also provides for the exchange of tax information between the competent authorities and establishes procedures for the settlement of tax disputes under the Mutual Agreement Procedure (MAP). This agreement will come into force after completion of ratification procedures by both sides.
ICONIX Comment
The DTC provides more certainty for cross-border transactions between HKSAR and the Republic of Cyprus, therefore encouraging investment opportunities between Asia and Europe via Cyprus, which has engaged in the Belt and Road Initiative.
Furthermore, greater certainty is also provided with regard to payments to HKSAR following recent anti-avoidance measures introduced by Cyprus, which seek to impose withholding taxes and tax non-deductibility on dividend, interest and royalty payments made to certain Low Tax Jurisdictions.