Cyprus and Sweden Sign First Protocol to Their 1988 Double Tax Convention

Cyprus and Sweden Sign First Protocol to Their 1988 Double Tax Convention

The announcement

On 3 July 2026 in Nicosia, the Republic of Cyprus and the Kingdom of Sweden signed a Protocol amending their Convention for the Avoidance of Double Taxation with respect to Taxes on Income. The Protocol was signed by the Minister of Finance of the Republic of Cyprus, Mr Makis Keravnos, and the Ambassador of Sweden to Cyprus, Mr Martin Hagström. The signing had been approved by the Cyprus Council of Ministers on 24 April 2026.

This is the first amendment to the Convention in almost four decades. The original Convention was signed in London on 25 October 1988, entered into force on 13 November 1989, and, unusually, applies to income derived from 1 January 1988 onwards. It has operated unchanged since.

According to the Cyprus Ministry of Finance, the Protocol introduces the minimum standards of the OECD Base Erosion and Profit Shifting (BEPS) Actions relating to bilateral tax treaties, together with mutually agreed wording on the exchange of tax information and further bilaterally negotiated amendments. The Ministry explained that the route of a standalone bilateral protocol was chosen because constitutional difficulties on the Swedish side had impeded the implementation and entry into force of the Multilateral Instrument (MLI), which would otherwise have delivered the same amendments automatically.

The Protocol will enter into force once both States complete their respective constitutional ratification procedures and, in Cyprus, following publication in the Official Gazette of the Republic. At the time of writing the Protocol had not yet been ratified and its text had not been published.

Why this matters: the age of the 1988 Convention

Sweden's inability to bring the MLI into effect left the Cyprus – Sweden Convention as one of the few remaining Cyprus treaties with a European Union partner untouched by the post BEPS wave of amendments. The consequences are visible on the face of the existing text:

• No anti-abuse provision. The Convention contains no principal purpose test, no limitation-on-benefits article, and no preamble language directed at treaty shopping. Beneficial ownership requirements in the dividend and interest articles, and domestic and EU anti-abuse rules, have carried the entire burden.
• A narrow exchange-of-information article. Article 24 follows the pre 2005 model: exchange is confined to information necessary to apply the Convention or the domestic law concerning taxes covered by it, with no obligation to override domestic bank secrecy, no "notwithstanding domestic tax interest" language and no obligation to obtain information not held in the ordinary course of administration.
• No assistance in the collection of taxes and no arbitration in the mutual agreement procedure. Article 23 provides only for the classic MAP, with a three-year presentation window.
• A corporate residence tie-breaker turning solely on the place of effective management (Article 4(3)), rather than resolution by the competent authorities.
• Obsolete taxes and terminology. Article 2 still lists Swedish taxes long since abolished, the seafarers' tax, the ersättningsskatt, the utskiftningsskatt and the profit sharing tax, alongside references to the Cypriot pound and to the Scandinavian Airlines System consortium.

Sweden has in the meantime resorted to unilateral correction. With effect from tax years beginning after 31 December 2019, the Swedish implementing statute disapplies the treaty's exemption for business profits attributable to a Cypriot permanent establishment where Cyprus does not in fact tax that income because it does not consider a permanent establishment to exist, a switch over rule addressing double non-taxation that a modern treaty would deal with bilaterally.

Against that background, the Protocol is best understood not as a renegotiation of the economic bargain but as a long overdue alignment of an otherwise sound treaty with current international standards.

What the BEPS minimum standards will introduce

The minimum standards relating to bilateral treaties are those of BEPS Actions 6 and 14. Based on the Ministry's description and on the pattern of Cyprus's comparable protocols, the amendments can be expected to include:

Action 6 — prevention of treaty abuse. Revised preamble language stating that the Convention is not intended to create opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including treaty-shopping arrangements, together with a principal purpose test: treaty benefits may be denied where it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining the benefit was one of the principal purposes of an arrangement or transaction, unless granting it would be in accordance with the object and purpose of the relevant provisions.

Action 14 — improving dispute resolution. Modernisation of the mutual agreement procedure, typically permitting a case to be presented to the competent authority of either Contracting State and confirming that agreements reached are implemented notwithstanding domestic time limits.

In addition, the Protocol is stated to contain updated exchange-of-information wording and further bilaterally agreed changes. Whether these extend to an assistance-in-collection article, a mutual-agreement corporate tie-breaker, or amendments to the withholding rates will only be established when the text is published. Clients should not assume changes to rates until then.

The existing rules, unchanged pending ratification

Until the Protocol enters into force, the 1988 Convention continues to apply as it stands. Its principal features are:

Two practical qualifications are important. First, published treaty tables frequently show a nil rate on interest in this treaty; the Convention in fact permits a 10% source tax, and the nil outcome arises because neither State levies withholding tax on interest under its domestic law. Secondly, for qualifying corporate flows the EU Parent-Subsidiary and Interest and Royalties Directives, as transposed, will often produce a better result than the treaty, and Cyprus in any event levies no withholding tax on outbound dividends or interest to non-residents (subject to the defensive measures applicable to EU non-cooperative and low-tax jurisdictions, which do not concern Sweden).

Other features that arise regularly in practice:

• Permanent establishment. A building, construction or installation site constitutes a permanent establishment only where the activity continues for more than six months (Article 5(3)). There is no service permanent establishment clause, and the agency test remains the classic "authority to conclude contracts in the name of the enterprise".
• Capital gains. Gains on immovable property, and on shares in a company whose principal assets consist of such property, may be taxed where the property is situated; business-asset gains of a permanent establishment may be taxed in that State; gains on ships and aircraft in international traffic and all other gains are taxable only in the State of residence of the alienator (Article 13(1) – (4)).
• The seven-year trailing right (Article 13(5)). Where an individual has been resident in one Contracting State and becomes resident in the other, the residence-only rule for other property does not affect the former State's right to tax gains on disposals of property realised at any time during the seven years following the cessation of residence there. For Swedish shareholders relocating to Cyprus this is the single most consequential provision of the Convention, and it operates alongside, not instead of, Sweden's domestic rules on continuing residence through essential ties. Exit planning that ignores it is incomplete.
• Employment income. The 183-day test is applied over any twelve-month period (Article 15(2)).
• Relief of double taxation. Credit method in Cyprus, with an underlying tax credit for dividends from a Swedish company in which the Cyprus recipient holds at least 25% of the capital; credit in Sweden, with exemption for business profits of a Cypriot permanent establishment subject to the activity conditions in Article 21(2)(b) and to the Swedish switch over rule noted above. The tax-sparing deemed credits in Article 21(2)(d) were confined to the first seven years of application and are long spent.
• Other income. Article 20(3) permits the source State to tax items of income not dealt with in the earlier articles, a broader source right than the OECD Model.

What clients should be doing now

1. Do not restructure on the basis of the announcement. The Protocol is signed but not yet in force, and the text is not yet public. Existing entitlements continue to apply until ratification is completed in both States.
2. Stress-test existing Cyprus – Sweden structures against a principal purpose test. Structures established before BEPS and never revisited are the exposure. What matters is whether the Cyprus entity has genuine substance: directors resident and actually deciding in Cyprus, board meetings held and minuted there, resources proportionate to the activity, and a documented commercial rationale that does not reduce to obtaining treaty relief.
3. Confirm the basis on which relief is currently claimed. Where relief flows from the EU Directives rather than the treaty, the Protocol's anti-abuse provisions will matter less, but the Directives carry their own anti-abuse conditions, and the analysis should be recorded.
4. Revisit relocation and exit timelines. For individuals who have moved, or plan to move, between the two States, the seven-year trailing right and the interaction with Swedish domestic residence rules should be mapped before any disposal is contemplated.
5. Watch for the text. Publication in the Official Gazette of the Republic will fix the amendments and, together with the Swedish notification, the effective dates. We will report on the text and on the entry-into-force timetable once available.

Cyprus's wider treaty programme

The Protocol forms part of a sustained expansion and modernisation of the Cyprus treaty network. In June 2026 Cyprus signed a double taxation agreement with the Hong Kong Special Administrative Region, and ratified its treaty with Kyrgyzstan; during 2025 it concluded agreements with Vietnam and Curaçao. Read alongside the domestic tax reform applicable from tax years commencing 1 January 2026, under which the corporate income tax rate rose to 15%, the deemed dividend distribution regime was abolished and the Notional Interest Deduction and intellectual property regime were retained, the direction of travel is clear: a jurisdiction competing on treaty coverage, EU membership and legal certainty rather than on opacity.

How Anastasios Mylonas & Co LLC can assist

Anastasios Mylonas & Co LLC advises corporate and private clients on Cyprus holding, financing and intellectual property structures, on tax residency and substance requirements, and on the corporate, real estate and transactional aspects of investment between Cyprus and Sweden. We assist with substance reviews and board governance, the documentation required to sustain treaty and Directive claims, tax residency certificates and relief-at-source procedures, and the corporate implementation of relocations and exits.

For further information, or for a review of an existing Cyprus – Sweden structure ahead of the Protocol's entry into force, please contact our offices.

This publication is provided for general information purposes only and does not constitute legal or tax advice. It reflects the position as at August 2026, at which date the Protocol had been signed but not ratified and its text had not been published. Specific professional advice should be sought before acting on any of the matters discussed herein.