Cyprus signs double tax treaty with Croatia

A treaty for the elimination of double taxation (the “Treaty”) between Cyprus and Croatia was signed on 17 October 2023 and was published in the Official Gazette on 27 October 2023. Its provisions will come into effect in the year following the year in which the ratification process will also be completed by Croatia. Once ratified, it will effectively replace the Treaty between Cyprus and the Socialist Federal Republic of Yugoslavia, which continued to be in force after Yugoslavia’s dissolution.

The Treaty will contribute to the further development of trade and economic relations between the two countries, especially after Croatia's accession to the European Union. It also provides clarity and certainty to prospective investors on the fiscal treatment of their income and capital gains.

The Treaty is based on the latest version of the OECD Model Convention for the avoidance of double taxation, is in line with the recommendations of the BEPS Action Plan, and incorporates all the latest standards regarding the exchange of information, mutual agreement procedure and principal purpose test.

The main provisions of the Treaty are summarised as follows:

Dividends: 5% withholding tax if the recipient is the beneficial owner of the dividend income.

Interest: 0% withholding tax if the recipient is the beneficial owner of the interest income and if such interest is paid:

• in connection with the sale on credit of any industrial, commercial or scientific equipment;
• in connection with the sale on credit of any merchandise by one enterprise to another enterprise; or
• on any loan of whatever kind granted by a bank.

In all other cases, a 5% withholding tax applies.

Royalties: 5% withholding tax if the recipient is the beneficial owner of the royalties.

(NOTE: According to the domestic Cypriot legislation, no withholding tax is levied on payments of interest or dividends made to non-Cypriot resident physical or corporate persons, regardless of the existence or provisions of any double tax treaties. Furthermore, no withholding tax is levied on royalties arising from sources outside Cyprus).

Capital gains: Gains derived by a resident of one of the two countries from the alienation of shares (or comparable interests, such as interests in a partnership or Trust) which, at any time during the 365 days prior to the alienation, derived more than 50% of their value directly or indirectly from immovable property situated in the other country, may be taxed in that other country.

This provision does not apply to gains from the alienation of shares:

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

Principal Purpose Test: Benefits under the Treaty may be denied 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 such benefits was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit.

The signing of the double tax treaty between Cyprus and Croatia is a significant development that is expected to boost trade, business cooperation and investments.

Senior tax manager at Totalserve Group.