Croatia & Cyprus agree to avoid double taxation

On 17^th of October 2023 the two European Member States signed an agreement during the ECOFIN meeting that was held in Luxemburg (‘Treaty’). The new Treaty aims to avoid and eliminate double taxation of income and property, and to avoid tax evasion to encourage growth of bilateral economic cooperation and improve and develop conditions for boosting trade in goods and services, as per the Croatian finance ministry. By executing this agreement Croatia has agreements to avoid double taxation with all the European Union member states. 

Based on the Cyprus Ministry of Finance announcement, the Treaty is grounded on the OECD Model Tax Treaty and incorporates the Base Erosion and Profit Shifting (“BEPS”) minimum standards. The new Treaty will replace the existing agreement dated back to 1985, which was signed between the Republic of Cyprus and the Socialist Federal Republic of Yugoslavia.

TREATY KEY POINTS:

Dividends

A 5% withholding tax will be applicable to the beneficial owner of the dividends.

Interest

A 0% withholding tax applies if the interest is paid to a recipient/beneficial owner of the other Contracting State to the following circumstances:

1. to a sale on credit of any industrial, commercial or scientific equipment;
2. to a sale on credit of any merchandise by one enterprise to another enterprise;
3. to any loan granted by a bank organisation.

In all other circumstances a 5% withholding tax will be applicable.

Royalties

A 5% withholding tax applies to the recipient/beneficial owner of the royalty.

Capital Gains

Gains derived by a resident of one of the contracting states from the alienation of shares or comparable interests, such as interests in a partnership or trust, deriving more than 50% of their value directly or indirectly from immovable property situated in the other Contracting State at any time during the 365 days preceding the alienation, may be taxed in that other State.

Exceptions apply to gains derived from alienation of shares:

1. listed on an approved stock exchange;
2. in the course of a corporate reorganization;
3. when the alienator is a recognized pension fund.

Restriction to benefits

A benefit under this Treaty shall not be granted in respect of an item of income or capital, if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes (Principal Purpose Test) of any arrangement or transaction that resulted directly or indirectly in that benefit.