Amendments to the Income Tax Law and the Law on Special Contributions for Defense in Cyprus

Amendments to the Income Tax Law and the Law on Special Contributions for Defense in Cyprus

On December 21, 2021, two amendment laws were published in the Official Gazette aimed at strengthening the tax base of Cyprus to prevent tax abuses.
New provisions amending the Special Contributions for Defense Act (SCDL) and the Income Tax Act (ITL) come into effect on December 31, 2022.
These laws are in line with the recent EU Country Recommendations (CSR) for Cyprus and the EU guidelines for protective tax measures to be taken by EU Member States in relation to blacklisted EU jurisdictions.
The aim of the new measures is to prevent aggressive tax planning and make the tax base more fair and efficient.

Overview of new provisions
Introduction of Withholding Tax (WHT) on payments to companies in jurisdictions included in the EU Black List of Non-Cooperating Jurisdictions (“EU Black List”) (SCDL change).

Dividends
An income tax of 17% applies to dividends paid by a tax resident of Cyprus to companies that:
• Are residents of jurisdictions included in the EU list.
• Registered/registered in an EU blacklisted jurisdiction and are not tax resident in any other non-EU blacklisted jurisdiction.
The following conditions also apply:
• The company receiving the dividend holds directly, alone or jointly with associates, more than 50% of the capital, voting rights, or is entitled to receive more than 50% of the profits from the company paying the dividend.
• Associates must also be residents of an EU blacklisted jurisdiction or incorporated/registered in an EU blacklisted jurisdiction and must not be tax resident in any other non-EU blacklisted jurisdiction.
WHT does not apply in the case of dividend payments on shares listed on a recognized stock exchange.

Interest
An income tax of 30% is applied to the interest paid by the Cyprus tax company to companies that:
• Residents in jurisdictions blacklisted by the EU.
• Registered in an EU blacklisted jurisdiction and not tax resident in any other non-EU blacklisted jurisdiction.
VAT does not apply in case of:
• Interest payments on securities listed on a recognized stock exchange.
• Payment of interest by individuals.

Royalty
An income tax of 10% applies to royalties paid by the Cyprus Tax Company to companies that:
• Resident in jurisdictions blacklisted by the EU, or
• Registered in an EU blacklisted jurisdiction and not tax resident in any other non-EU blacklisted jurisdiction.
The tax does not apply in case of payment of royalties by individuals.
It should be noted that the laws do not specify an effective date for the WHT for jurisdictions added to or removed from each updated version of the EU Blacklist. It is expected that this and some other issues (eg application of tax on a cash basis or on an accrual basis) will be clarified by the Cyprus tax authorities.

What is a “Cyprus tax resident company”?
In an effort to strengthen the structure of residency rules beyond the criterion/concept of management and control, the term “Cyprus tax resident company” has been expanded to include also a company that has been/is incorporated in Cyprus but is managed and controlled outside of Cyprus, as provided that the company is not a tax resident in another state.

The above is for informative purposes only.  Further professional advice should be sought for each particular case. Our firm does not accept any responsibility for any loss or damage occurring by acting on the basis of this information.