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Amendments to the Income Tax Law and the Special Contribution for Defence Law

Updated: Aug 20

Two amending laws were published in the Official Gazette on December 21, 2021, aiming to strengthen the Cyprus tax framework and prevent tax abuse. The new provisions, which amend the Special Contribution for Defence Law (SCDL) and the Income Tax Law (ITL), go into effect on December 31, 2022.

The laws are consistent with recent EU Country-Specific Recommendations (CSRs) for Cyprus, as well as EU guidelines for defensive tax measures to be implemented by EU Member States in relation to EU blacklisted jurisdictions.


The new measures are intended to prevent aggressive tax planning and to make the tax framework fair and effective.


A summary of the new provisions

Withholding taxes (WHT) on payments to companies in jurisdictions on the EU Blacklist of non-cooperative jurisdictions ("EU Blacklist") are being implemented. (Amendment to the SCDL)


Dividends

WHT at the rate of 17% is levied on dividends paid by a Cyprus tax resident company to companies that are:

  • resident in one of the EU Backlist jurisdictions, or

  • incorporated/registered in a jurisdiction on the EU Blacklist and are not tax residents in any other jurisdiction not on the EU Blacklist.

The following conditions must be met:

  • The company receiving the dividend owns more than half of the capital, voting rights, or is entitled to more than half of the profits in the company paying the dividends, either directly or jointly with associated companies.

  • The associated companies should also be residents of an EU blacklisted jurisdiction or be incorporated/registered in an EU blacklisted jurisdiction, and are not tax residents of any other jurisdiction that is not on the EU Blacklist.

The WHT does not apply to dividend payments made on shares listed on a recognized stock exchange.


Interest

WHT at the rate of 30% is levied on interest paid by a Cyprus tax resident company to the following companies:

  • residents in one of the jurisdictions on the EU Blacklist, or

  • incorporated/registered in a jurisdiction on the EU Blacklist and are not tax residents in any other jurisdiction not on the EU Blacklist.

The WHT does not apply in the following situations:

  • payments of interest on securities listed on a recognized stock exchange

  • Interest payments made by individuals

Royalties (Article 21 of the ITL)

WHT at the rate of 10% is levied on royalties paid by a Cyprus tax resident company to the following companies:

  • residents in one of the jurisdictions on the EU blacklist, or

  • incorporated/registered in a jurisdiction on the EU Blacklist and are not tax residents in any other jurisdiction not on the EU Blacklist.

Individual royalty payments do not fall under the purview of the WHT.


It should be noted that the laws do not specify the effective date of WHT application to jurisdictions added to or removed from the EU Blacklist in each updated version. The Cyprus Tax Authorities are expected to clarify this and other issues (for example, whether WHT is applied on a cash or accruals basis).


Additional corporate residency test / Definition of "Cyprus tax resident company"


(See ITL Article 2 for more information.)


In order to strengthen the residency rule framework beyond the management and control criterion/concept, the term Cyprus tax resident company was expanded to include a company incorporated/registered in Cyprus but whose management and control is exercised outside Cyprus, as long as the company is not a tax resident in any other State.



*DISCLAIMER: This article and its publication are intended to provide a brief introduction and act as a general guide. This is provided for information purposes only and cannot be utilized as a substitute for professional advice. This document does not represent a legal opinion and one must not rely on it without receiving independent advice based on the particular facts of its own case. No responsibility is accepted by the author or the publishers for any loss suffered from acting or refraining from acting based on the contents of this publication.



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