Following the removal of Cyprus from the Portuguese ‘black list’ in 2011 (follow the link for details:http://www.httaudit.com.cy/index.php/component/k2/item/57-cyprus-removed-from-portugals-black-list) representatives of the two countries have concluded and signed a Double Taxation Avoidance Agreement (DTAA) and protocol on 19 November 2012. The treaty is based on the OECD Model Convention. It is our belief that the treaty will further enhance the business cooperation between the two countries since Cyprus can now use Portugal as a gateway to the South American continent countries and Portugal can use Cyprus as a gateway to Russia and ex-Soviet Union countries with which there are favorable treaties in place.

The DTAA, besides personal and corporate income tax of both countries, applies to, in the case of Portugal surtaxes on corporate income and in the case of Cyprus to Special Defence Contribution and Capital Gains Tax.

The DTAA’s main provisions are analyzed below:

Dividends
The withholding tax rate on dividend payments is set at 10%.

Interest
The withholding tax rate on interest is set at 10%.

Royalties
The withholding tax rate on royalties is set at 10%.

Gains
The DTAA provides for taxing transactions involving disposal of shares in property rich companies in the country in which the immovable property is situated.

Important notes
Cyprus unilaterally does not withhold taxes on outbound dividends and interest payments. For royalty payments on intellectual property rights used within Cyprus, application of the EU Interest and Royalties Directive can reduce withholding tax to 0%.

Applicability of the EU Parent-Subsidiary and Interest and Royalties Directives in Portugal can reduce withholding taxes to 0% as well.

The DTAA will enter into force thirty days after the completion of the procedure through which the parties exchange notification of ratification and shall take effect on the 1st January of the year that follows such date.