Bilateral taxtreaty between the Netherlands and Cyprus effective per 2023

On 1 June 2021, the Netherlands and Cyprus signed a tax treaty (Tax Treaty) aimed to eliminate double taxation and prevent tax evasion. The Tax Treaty is generally in line with the OECD and meets the minimum standards of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI).

The Netherlands is considered an attractive jurisdiction to establish for international businesses and investment vehicles / platforms. It has a large network of bilateral investment treaties and tax treaties for the avoidance of double taxation. The Tax Treaty encourages cross-border investments between the Netherlands and Cyprus and enables Dutch and Cypriot resident taxpayers to invest in both contracting states in a more tax-efficient manner.

In the below summary the most salient provisions of the Tax Treaty are highlighted.

Withholding taxes
Under the application of the Tax Treaty, tax on dividends levied by the source state is reduced to 0% if:

• the recipient of a company which beneficially holds directly at least 5% of the capital of the company paying the dividends throughout a 365 day period, or
• the recipient is a recognized pension fund.

In all the other cases, tax on dividends levied by the source state is reduced to 15%.

Under the application of the Tax Treaty, tax on interest and royalty payments levied by the source state is generally reduced to 0%.

Capital gains derived from alienation of shares
Taxing rights with respect to capital gains, derived from the alienation of shares (or other rights of participation) in an entity are allocated to the state of source if at any time during the 365 days preceding the alienation that entity derives 50% or more of its value from immovable property situated in a jurisdiction.

However, the taxing rights are not allocated to the state of source if:the entity is listed on a recognised stock exchange;

• in case of a reorganisation of the company;
• the business is carried on in the immovable property which determines the value of the shares or similar property;
• if, prior to the first disposal, the alienator (in)directly, alone or with affiliated persons, owned 25% or less of the capital or the other comparable interests;
• if the alienator is a recognised pension fund.

Prevention treaty abuse (principle purpose test)
The application of the Tax Treaty will depend on observing a new anti-abuse provision, the so-called principle purpose test (PPT). The PPT is worded as follows: 

“Notwithstanding the other provisions of this Convention, a benefit under this Convention shall not be granted in respect of an item of income 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 this Convention.”

Dual resident entities
The tax residency of dual resident companies will be determined by way of a mutual agreement procedure (MAP) between the tax authorities of the Netherlands and Cyprus. The mutual agreement procedure will be carried out on a case-by-case basis, in which various factors will be taken into account. The treaty itself does not mention any factors that may be relevant or conclusive for determining the state of residence through mutual agreement. However, some guidance is given in the explanatory notes to the treaty, in terms of the factors which may be taken into account. These include:

• where the senior management activity of the entity is carried out;
• where board meetings are held;
• where the entity's headquarters are located;
• the extent and nature of the economic nexus of the entity to each state; and
• whether determining that the entity is a resident of one state, but not of the other, would carry the risk of improper use of the new treaty or inappropriate application of the domestic law of either state.

In absence of any mutual agreement a company will in principle not be entitled to any tax relief or exemption provided by the Tax Treaty.

Enter into force
The Tax Treaty will enter into force on 1 January 2023, as the parliamentary approval procedure has recently been completed in the Netherlands, as well as in Cyprus. The Tax Treaty will apply to tax years, periods and taxable events occurring on or after 1 January 2023 although certain provisions may only apply after Cyprus has introduced the necessary legal basis.

Recommendation
It is recommended to check whether your structure meets the future requirements of the Tax Treaty, to investigate possibilities to make your structure more efficient and to verify this with a Cypriot tax advisor.

We will be pleased to provide our comments and answer your questions on the future application of the Tax Treaty.