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Convention for the avoidance of double taxation between Estonia and Cyprus

On 17 October 2012 minister of foreign affairs of Estonia, Mr. Urmas Paet, and minister of foreign affairs of Cyprus, Mr. Erato Kozakou-Marcoullis, signed Convention for the avoidance of double taxation between Estonia and Cyprus.

Main provisions of the Convention. Comments.

Dividends
Dividends paid by a company which is a resident of a Contracting State to a company which is a resident of the other Contracting State shall be taxed in the State of the recipient of dividends.

For example:
An Estonian company is the 100 % owner of a Cypriot company. The Cypriot company pays dividends to its parent company. Such dividends are subject to taxation in Estonia. Income tax on the dividends received from the Cypriot company will be 0 % (in accordance with section 50 of the Income Tax Act).
On the other hand, if the whole of the Cypriot company’s revenues were formed of dividends received from other companies owned by the Cypriot company, such income is not subject to taxation on Cyprus.

Interests
Interests paid by a company which is a resident of a Contracting State to a company which is a resident of the other Contracting State shall be taxed in the State of the recipient of interests.

For example:
A Cypriot company as lender receives interests from an Estonian company as borrower. For the Estonian company such interests that are paid to its Cypriot lender will be classified as direct costs which decrease its taxation base to the extent of the portion that does not exceed the market rate on such interests. For the Estonian company such interests will not be taxed. Interests received by the Cypriot company will constitute a base for taxation.

Royalties
Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

For example:
A company which is a resident of Cyprus receives royalties from an Estonian company for using a trademark of the Cypriot company.
Such royalties received by the Cypriot company will not be taxed in Estonia and will constitute direct costs for the Estonian company. For the Cypriot company the royalties received will be taxed with income tax at the rate of 2 % in accordance with the latest amendments.

Capital gains
Income tax on gains derived from the alienation of immovable property will be paid in the state where such property is situated.
Income tax on gains derived from the alienation of stocks or shares in a company the estimated value of which consists to the extent of more than 50 % of the value of immovable property will be taxed in the state where such property is situated.

For example:
An Estonian company is the 100 % owner of a Cypriot company which is engaged in management of immovable property that is situated on Cyprus and whose revenues are formed from such business to the extent of more than 50 %. If the Estonian company sells its shares in the Cypriot company to a new owner, then the gains received by the Estonian company from such sale of shares will be taxed on Cyprus at the rate of 10 %.

Remuneration for the work of directors
Directors´ fees derived by a resident of a Contracting State in his capacity as a member of the board of directors or any other similar organ of a company which is a resident of the other Contracting State may be taxed in that other State.

For example:
An individual who is Estonian resident acts as a director of a Cypriot company and receives remuneration for such activity. In accordance with the Convention such remuneration may be taxed on Cyprus and may not be taxed in Estonia.