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HMRC internal manual

Double Taxation Relief Manual

DT: Cyprus: double taxation agreement, Article 12: Interest

(1) Interest derived from one of the Contracting States by a resident of the other Contracting State who is the beneficial owner thereof may be taxed in the first mentioned Contracting State at a rate not exceeding 10 per cent of the gross amount thereof.

(2) The term `interest` as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and other debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State in which the income arises.

(3) Interest shall be deemed to be derived from a Contracting State when the payer is that State itself, a political subdivision or a local authority thereof or a resident of that State. Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment, then such interest shall be deemed to be derived from the Contracting State in which the permanent establishment is situated.

(4) The provisions of paragraph (1) of this Article shall not apply if the beneficial owner of the interest, being a resident of one of the Contracting States, has in the other Contracting State from which the interest is derived a permanent establishment with which the indebtedness from which the interest arises is effectively connected. In such a case the provisions of Article 8 shall apply.

(5) Where owing to a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest paid having regard to the indebtedness for which it is paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such a case, the excess part of the payment shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Convention.

(6) The provisions of this Article shall not apply if the loan or other indebtedness in respect of which the interest is paid was created or assigned mainly for the purpose of taking advantage of this Article and not for bona fide commercial reasons.