This article aims to explore and comment on the key amendments that have been introduced to the Income Tax law and to the Special Contribution for Defence law.
On the 21st of December 2021, the Cyprus Government Gazette, following the approval of the Cyprus Parliament, published legislative amendments to strengthen the tax framework in Cyprus with an emphasis placed on jurisdictions included in the EU blacklist of non-cooperative jurisdictions for tax purposes. The amendments have introduced changes to the Cypriot companies’ tax residency definition but they have also introduced withholding taxes on payments to companies that are resident in EU-blacklisted jurisdictions. The EU blacklist of non-cooperative jurisdictions for tax purposes is renewed bi-annually and according to the latest update, it is currently composed of the following jurisdictions: American Samoa, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands and Vanuatu. The next revision will occur in February 2022. In particular, the European Union provides a ‘Blacklist’ which specifically lists the non-cooperative jurisdictions in relation to taxation. In order to ‘demotivate’ and thereby reduce interaction with the particular jurisdictions, the new amendments make provision for withholding taxes on outbound payments of dividend, interest and royalties to blacklisted jurisdictions.
Corporate Tax Residency Definition The new amendments expand the definition of corporate tax residency for Cyprus companies to additionally include the incorporation test. Prior to the amendment, the test applied to examine whether a Cyprus company was considered a Cyprus tax resident, relied on the question whether the management and control is exercised in Cyprus.
With the new amendments in force, the residency rule framework has been broadened so as to insert an additional point of question as to the management and control criterion. If the management and control of a Cyprus company is exercised outside Cyprus, and the company is not a tax resident of any other country, it will be considered to be a tax resident of Cyprus. The underlying reason for this, is the fact that the company was incorporated in Cyprus. In practice, a Cyprus company, including companies that are managed and controlled from a different country, will have to prove that it is a tax resident of any other country in order for its income to be exempt from Cyprus tax.
The particular change can be considered to be a great initiative towards minimizing the scenarios whereby companies which, although being very profitable, ‘get-away’ with their tax responsibilities by stating that they are not tax residents in any country, namely, ‘stateless’ companies. The concept ‘Stateless companies’ is used to describe companies which, although having a broad activity in any part of the world, are not concentrated in one country only.
The new amendments have also introduced withholding taxes to the categories of outbound payments of dividends, interest payments and royalty payments to jurisdictions of the EU Blacklist. The key changes will be outlined below.
Dividends paid by a Cyprus tax resident company to another company will be subject to 17% special defence contribution if paid to a company which is:
any other jurisdiction which is not included in the EU Blacklist.
Further, either of the below conditions must also apply:
The company receiving the dividend holds over 50% of the capital of the Cyprus resident company issuing the dividend, holds over 50% of the voting rights or is entitled to receive more than 50% of the profits in the company paying the dividend.
Interest payments by a Cyprus tax resident company to another company will be subject to withholding taxes at the rate of 30% if paid to a company which is:
Exclusions apply to situations where:
Royalty payments by a Cyprus tax resident company to another company will be subject to withholding taxes at the rate of 10% if paid to a company which is:
Exclusions apply to situations where:
All in all, the abovementioned amendments are underpinned by the idea of minimizing challenges to the Tax Policy. The laws will be applicable from 31 December 2022 and they can be viewed as a great step towards achieving a fairer system by restricting tax avoidance. Undoubtedly, their adoption can be described as a significant initiative as to actively respond to the recent EU Country-Specific Recommendations for Cyprus and the EU guidelines for Member States with regard to EU blacklisted jurisdictions and the tax framework.
The content of this article is valid as at the date of its first publication. It is intended to provide a general guide to the subject matter and does not constitute legal advice. We recommend that you seek professional advice on your specific matter before acting on any information provided. For further information or advice, please contact Antrea Kinni, Associate, Limassol office, telephone 25363685 or email email@example.com