On the 9th of March 2015, in Manama- Bahrain, an agreement for the avoidance of double taxation was signed between the Republic of Cyprus and the Kingdom of Bahrain, subsequently the tax treaty was entered into force on 26April 2016. The main objective of the agreement is to develop a stronger economic and trade relationship between the two countries.

The double tax treaty with Bahrain expands Cyprus’ network of related arrangements, based on the OECD Model Convention for the Avoidance of Double Taxation on Income and on Capital, andaims to boost trade and foreign investments between Cyprus and the Gulf state.

The agreement will be enforced upon mutual confirmations from both countries, concluding the ratification procedures, with an effective date being 1stof January 2017.

The main provisions of the tax treaty include:

Taxes covered (pertaining to Article2)

  • The agreement applies to taxes on income imposed by either country on income tax, corporate income tax, capital gains tax and Special Defence Tax (SDT).

Permanent establishment ((article 5) 

  • This follows the OECD Model Tax Convention and refers to abuilding site, a construction or installation project or any supervisory activities in connection with them constitute a permanent establishment only if they last for more than twelve months.

Business profits

  • The agreement relating to Business profits correlates verbatim with the OECD Model Convention bar profits of a permanent establishment in the other contracting state, therefore only taxable in the country in which the company is resident.

Dividends, interest and royalties

  • Dividends, interest and royalties is paid by a company resident in the contracting state and taxable only in the resident state. Zero withholding taxes is to be applied on payments of dividends, interest and royalties, and although currently Bahrain doesn’t levy withholding taxes on dividends, interest or royalties at present, should this be revised in the future, no withholding taxes would be applied to payments made to Cypriot tax residents.

Capital gains

  • Gains derived by immovable property may be taxed in the contracting state in which the property is situated. Gains derived from the alienation of all other property (including aircraft operated in international traffic or ships) as well as gains from disposal of shares are only taxable in the contracting state in which the alienator is resident.

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