The Double Tax Treat between Cyprus and the UAE open a wide array of new tax planning possibilities which benefit many EU and east European entities.
The treaty was signed between the two countries in February 2010 and became effective in January 2012. The double tax treaty follows the OECD model convention for tax treaties.
In the treaty between Cyprus and the UAE, an individual is considered “resident of the UAE” if so determined under UAE law, In Cyprus, an individual is considered resident id he is liable to pay tax by reason of residence. The Cyprus criterion follows the OECD model but the UAE criterion does not. This can be favourable because it means that an expatriate in the UAE wish a residence visa can be considered resident for the purposes of the treaty. It is unclear in the UAE double tax treaties if a liability for tax requirement arises as one cannot be liable for tax in UAE since there is no tax. If, on the basis of these criteria, an individual is considered resident in both states, then the treaty determines that the person shall be considered resident in the country where he/she maintains a permanent domicile.
The residency tests for companies for the purposes of this treaty is that the UAE considered a company resident if it is formed under the laws of the UAE and this will also include international business (offshore) companies operating in the UAE emirate of Ras Al Khaimah (RAK). Cyprus considers a company resident if the place of effective management is in Cyprus. If the result is that the company is considered resident in both countries, then the place of effective management will be decisive.
If, therefore, UAE tax residence of a company is important and there could be issues as to whether effective management of the company is exercised in Cyprus or not, it is better to use a UAE incorporated company than one incorporated in any other offshore jurisdiction (say BVI) because only the first has treaty protection.
The treaty also stipulates that Cyprus is not allowed to impose taxes on dividends and interest paid to a company that under the terms of the treaty is considered resident of the UAE.
Cyprus has low corporate tax rate, VAT and social security taxes and is a major gateway for investment into the EU, Russia and former USSR countries. This, because Cyprus does not tax incoming dividends from subsidiaries in these countries and has zero withholding taxes on dividends, interest and royalties going out.
Another interesting aspect is that Cyprus does not have specific transfer pricing rules. What exists is a general rule that transactions between related companies should be concludes at ‘arm’s length prices’. This makes it possible to use a Cyprus company as an invoicing vehicle by obtaining an EU VAT number to invoice customers in the EU, if an EU originated invoice is preferred.
Cyprus is also a favourable location for setting up EU compliant mutual funds, private equity funds and securities brokerage firms. Profits realized are largely exempt in Cyprus.
To read the full newsletter on the Benefits of the Cyprus and UAE Tax Treaty please click on the image below.
More information:
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Eurobank Cyprus online banking.