On May 13th, 2015 the Finance Ministers of Cyprus and Georgia signed a Double Tax Treaty (DTT) in Tbilisi during the 24th annual meeting of the European Bank of Reconstruction and Development (EBRD). This is the first such agreement concluded between the two countries and is providing promising ground towards strengthening of the economic relations between the two nations.
The agreement was ratified by Cyprus and published in the Official Gazette of the Republic on May 29th, 2015. According to an update by the Cyprus Finance Ministry, it has entered into force on January 4th, 2016. The treaty provisions with respect to the tax clauses shall have effect on or after the following January 1st.
The signed treaty is based on the OECD Model Convention for the Avoidance of Double Taxation on Income and on Capital, with the main provisions being:
• Permanent Establishment
Its definition as included in the treaty is in line with the one provided by the model convention and is considered to include a building site, construction, or installation project, or any supervisory activities in connection with such site or project with duration exceeding nine months.
• Withholding tax rates
The withholding tax rates for dividends, interest and royalties payments have all been set at 0%.
• Capital Gains Tax
Capital Gains derived by a resident of one country from the disposal of immovable property located in the other country, may be taxed in that other country where the property is located.
Capital Gains arising from the disposal of shares are taxable only in the country in which the seller is a tax resident.
Consequently, Cyprus retains in this way the exclusive right on imposing tax on disposal proceeds by Cyprus tax residents of shares in Georgian companies, inclusive of Georgian companies holding immovable property located in Georgia, and vice versa.
Here at Eurofast, our advisors’ standpoint is that Cyprus is a very convenient location for a regional headquarters hub for businesses in Eastern Europe, and this treaty is anticipated to further expand the Cyprus tax treaty network already in place in this region. Additionally, as this new tax treaty allows for zero withholding tax on dividends, interest and royalty payments, it will be encouraging inbound investments into Georgia, and effectively minimising Georgian domestic withholding taxes.
Furthermore, as this agreement creates very favorable conditions towards enhancing the economic relations between the two contracting states, our tax, finance, and legal consultants both in our Cyprus and Georgian offices are ready to provide necessary guidance for successful enactment of new projects connecting the two countries.