We would like to raise again awareness on a very important issue which is the introduction of Defense Tax on Interest, Dividends and Royalties paid by Cyprus companies to European black listed jurisdictions which currently consist of 16 countries some of which are often seen as shareholders or lenders of Cyprus companies. 

Although Cyprus does not impose withholding tax on Dividends/ International/ Royalties paid out and non-Cyprus tax residents following the two amended laws of 21/12/2011, which are effective as of 31/12/2021, withholding tax is applied to corporate taxpayers located in Europe non-cooperative jurisdictions from Cyprus tax resident payer at the rates of 17% (for dividend), 30% (for interest) and 10% for royalties.

The laws are in line with recent EU Country-Specific Recommendations (CSRs) for Cyprus, and the EU guidelines for defensive tax measures to be adopted by EU member states towards jurisdictions on the EU list of noncooperative jurisdictions for tax purposes.

The purpose of the new measures is to prevent aggressive tax planning and make the tax framework fairer and more effective.

Overview of the new provisions

1.            Withholding taxes

Amendments to the SCDL (dividends and interest) and the ITL (royalties) will introduce withholding tax (WHT) on payments by Cyprus tax resident companies to companies that are:

• Resident in jurisdictions included in the EU blacklist; or
• Incorporated/registered in a jurisdiction included in the EU black list and are not tax residents in any other jurisdiction that is not included in the EU black list.

Dividends

WHT at the rate of 17% will be imposed on dividends paid by a Cyprus tax resident company to such a recipient where:

• The company receiving the dividend holds directly, either alone or jointly with associated companies, over 50% of the capital or voting rights of or is entitled to receive more than 50% of the profits of the company paying the dividends; and
• The associated companies also are residents in an EU blacklisted jurisdiction or incorporated/registered in an EU blacklisted jurisdiction and do not tax residents in any other jurisdiction not included in the EU blacklist.

WHT will not apply to dividend payments on shares listed on a recognized stock exchange.

Interest

WHT at the rate of 30% will be imposed on interest paid by a Cyprus tax resident company to such a recipient other than interest payments:

• On securities listed on a recognized stock exchange; or
• Made by individuals.

Royalties

WHT at the rate of 10% will be imposed on royalties paid by a Cyprus tax resident company to such a recipient, other than royalties paid by individuals.

The laws do not indicate the effective date of application of WHT to jurisdictions added to or removed from each updated version of the EU blacklist. It is expected that this and certain other issues (for example, the application of WHT on a cash or accrual basis) will be clarified by the Cyprus tax authorities.

2.            Definition of Cyprus tax resident company

In an effort to strengthen the residency rule framework beyond the management and control criterion/concept, the term "Cyprus tax resident company" is also 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 anywhere else in the world.

We can help if your company is faced with the above situation. Please get in touch with us at Адрес электронной почты защищен от спам-ботов. Для просмотра адреса в вашем браузере должен быть включен Javascript. or call 00357 25 817181 for any tax advisory services.