Foreign shareholders of Cyprus Companies exempted from scope of deemed dividend distribution rules
On 13 September, 2011, the Commissioner of the Inland Revenue Department (the “Commissioner”) issued Circular 2011/10 (the “Circular”), which will have important positive repercussions for international businesses in Cyprus.
We set out herewith the implications of the Circular:
(1) Section 3(3) of the Special Contribution for Defence Fund of the Republic Law, Law 117 of 2002 (as amended) (the “Law”), provides that when a Cypriot company fails to distribute a dividend within two years from the end of the year of assessment to which the profits relate, 70% of the company’s “after tax profits” (as defined in the Law therein) are deemed to have been distributed as dividends. A 17% special contribution is payable on such deemed dividend distributions (the “Deemed Dividend Distribution Rules”).
(2) Circular 2006/1 issued by the Commissioner on 10 April 2006 exempted from the ambit of the Deemed Dividend Distribution Rules the profits of a Cyprus tax-resident company which are directly attributable to non-Cyprus tax-resident shareholders.
(3) The Circular extends the benefit and now exempts from the remit of the Deemed Dividend Distribution Rules the profits that are imputed indirectly to Cyprus tax-resident shareholders of a Cyprus tax-resident company, in so far, as such profits are indirectly apportioned to shareholders who are ultimately non-Cyprus residents.
(4) The net effects of paragraphs (2) and (3) above are as follows:
(a) the profits of a Cyprus tax-resident company which are directly or indirectly imputed to non-Cyprus tax-resident shareholders are exempted from the Deemed Dividend Distribution Rules; and
(b) prior to the introduction of the Circular, in cases when non-Cyprus shareholders established a “two tier” subsidiary structure in Cyprus, in other words, established in Cyprus a company (the “Parent”) which itself established a subsidiary of itself in Cyprus (the “Subsidiary”), in the event that no dividends were actually distributed by the Subsidiary, there was a tax burden at the level of the Parent as a result of the Deemed Dividend Distribution Rules which is now abolished and eliminated.
(5) The Circular is effective as of 13 September 2011 and applies to all years which have not yet been filed or examined by the Commissioner.