Hong Kong and Cyprus sign new Double Taxation Agreement

The governments of the Hong Kong Special Administrative Region (HKSAR) and the Republic of Cyprus announced the signing of a comprehensive double taxation agreement (DTA) on 12 June aimed at eliminating double taxation on income and combating tax evasion and tax avoidance.

In-scope taxes include Hong Kong profits tax, salaries tax and property tax and Cyprus income tax, corporate income tax, capital gains tax and special defence contribution.

Business profits are generally taxable only in the country of residence, unless the company operates through a permanent establishment (PE) in the other jurisdiction. Where a PE exists, profits must be attributed based on the arm’s length principle, reflecting functions, assets and risks. This aligns with international OECD standards and provides a consistent framework for transfer pricing.

Under the DTA, any tax paid by Hong Kong residents in Cyprus will be allowed as a credit against the tax payable in Hong Kong in respect of the same income, subject to the provisions of the Inland Revenue Ordinance (Cap. 112) (IRO). Similarly, Cyprus residents can offset Hong Kong taxes against their Cyprus tax obligations.

The agreement provides that dividends and interest income will not be taxable at source. For cross-border passive income, dividends will generally be taxable only in the recipient’s jurisdiction, while interest will be taxed only where the beneficial owner resides. Cyprus withholding tax rates for Hong Kong residents on royalties will be reduced from 10% to 3%.

For real estate investments and holding structures, gains from immovable property or from shares derived mainly from real estate will be taxed where the property is located. Other gains will generally be taxed in the investor’s country of residence

For individuals, the treaty clarifies that employment income will generally taxed in the country where the employment is exercised but a 183-day rule allows exemption in short-term assignments under certain conditions. This provides flexibility for expatriates and cross-border professionals.

The DTA includes provisions intended to counter tax base erosion and profit shifting. It also includes a Principal Purpose Test (PPT) to counter treaty abuse, prevent the artificial avoidance of permanent establishment status, neutralise the effects of hybrid mismatch arrangements and improve dispute resolution mechanisms.

The agreement will enter into force after the completion of domestic ratification procedures by both states. It will then be effective for Hong Kong from 1 April of the year following its entry into force and in Cyprus from 1 January of the year following its entry into force.

“Cyprus is a participant in the Belt and Road Initiative and an important trading partner of Hong Kong in Europe. This CDTA sets out the allocation of taxing rights between Hong Kong and Cyprus, which will enable investors to better assess their potential tax liabilities from cross-boundary economic activities and avoid double taxation. This will help promote bilateral trade and investment,” said Hong Kong Secretary for Financial Services & the Treasury Christopher Hui.

“This is the 58th CDTA that Hong Kong has concluded and also the third one this year, signifying the HKSAR Government’s ongoing achievements in expanding the CDTA network. We will continue to actively seek to sign CDTAs with more tax jurisdictions to enhance the attractiveness of Hong Kong as a business and investment hub.

Mingson Chi, Client Accounting manager at Sovereign Trust (Hong Kong), said. “Cyprus offers access to EU markets, while Hong Kong serves as a springboard into Mainland China and Asia. This agreement effectively creates a tax-efficient bridge between the two regions.

“The favourable treatment of dividends and interest makes this treaty highly attractive for holding companies, treasury centres and private equity and investment funds. With royalties capped at 3%, businesses can also explore IP licensing structures with significantly reduced withholding tax exposure.”

For further information or to find out how this new DTA may impact your business or cross-border investments, please contact Mingson by phone on +852 2542 1177 or by email below.