Amendments to Income Tax Law and Special Contribution for Defence Law for the prevention of international tax abuse
On 21 December 2021, two amending Cyprus
tax laws were published in the Official Gazette of the Republic of Cyprus, with the purpose of strengthening the Cyprus tax framework for the prevention of international tax abuse, tax evasion and tax avoidance (the “Amendments
The Amendments, which amend the Special Contribution for Defence Law (the “Amendments to the SDC
”) and the Income Tax Law (the “Amendments to the ITL
”), will enter into force on 31 December 2022.
We set out below a brief summary of the Amendments:
1. Expansion of Cyprus corporate tax residency test
Currently, a company is considered as Cyprus tax resident if its “management and control
” is exercised in Cyprus. The Amendment to the ITL does not impact this rule and companies which are ‘managed and controlled’ from Cyprus will remain tax residents of Cyprus.
The Amendment to the ITL relates to companies which are incorporated/registered in Cyprus and which are ‘managed and controlled’ from outside of Cyprus. In such cases, these companies may be considered as Cyprus tax residents provided that they are not tax residents in any other jurisdiction.
2. Introduction of withholding taxes on payments to companies in jurisdictions included in the EU Blacklist of non-cooperative jurisdictions (the “EU Blacklist”)
For the withholding taxes to apply, the direct recipient of the dividends, interest and royalties should be a company which is:
- Tax resident in jurisdictions included in the EU Backlist; or
- Incorporated/registered in a jurisdiction included in the EU Blacklist and is not tax resident in any other jurisdiction that is not included in the EU Blacklist.
(the “Blacklisted Companies
A withholding tax of 17% applies on dividends paid by a Cyprus tax resident company to Blacklisted Companies, where the company receiving the dividend holds directly, either alone or jointly with associated companies, over 50% of the capital, voting rights, or is entitled to receive more than 50% of the profits in the Cyprus tax resident company paying the dividends.
Note that the associated companies should also be tax resident in an EU blacklisted jurisdiction or incorporated/registered in an EU blacklisted jurisdiction and not tax resident in any other jurisdiction that is not included in the EU Blacklist.
The withholding tax does not apply in the case of dividend payments on shares listed on a recognised stock exchange.
A withholding tax of 30% applies on passive interest paid by a Cyprus tax resident company to EU Blacklisted Companies. This does not apply in the case of:
- Interest payments on securities listed on a recognised stock exchange; or
- Interest payments made by individuals.
A withholding tax of 10% on royalties and similar type payments, which is currently applicable to royalties and similar type payments only under certain conditions, is expanded to cover royalties and similar type payments from Cyprus sources to EU Blacklisted Companies, with the exception of payments by individuals.