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December 23, 2021
2021-2311

Cyprus amends definition of corporate tax residency and introduces withholding tax on payments of dividends, interest and royalties to companies in non-cooperative jurisdictions

Executive summary

On 9 December 2021, the Cypriot House of Representatives approved the long-awaited bills amending the Income Tax Law as well as the Special Contribution for the Defense of the Republic Law with respect to the definition of corporate tax residency and the imposition of withholding tax on outbound payments of dividends, interest and royalties made to companies resident or registered in jurisdictions included on the EU list of non-cooperative jurisdictions on tax matters (Annex I) (the so-called EU Blacklist, referred to as the EU List).

The relevant laws implementing the new provisions were published in the Official Gazette of the Republic on 21 December 2021 and will be effective as of 31 December 2022.

This Alert summarizes the new provisions.

Detailed discussion

Amendment to the definition of corporate tax residency

Currently, the definition of corporate tax residency is solely based on the management and control criterion.

As of 31 December 2022, the definition of corporate tax residency is expanded to additionally include the incorporation test. More specifically, a company which is incorporated or registered in Cyprus, and its management and control is exercised outside Cyprus, should be considered a resident of Cyprus for tax purposes unless it is a tax resident in another country.

Introduction of withholding tax on outbound payments to EU-listed companies

Withholding tax on dividend payments

Dividends paid by a Cypriot tax resident company to a company which is a resident in a jurisdiction that is included on the EU List, or to a company incorporated or registered in a jurisdiction included on the EU List and not considered to be tax resident in another jurisdiction which is not included on the EU List, will be subject to 17% withholding tax on the amount of the dividend paid.

The withholding tax applies where the company receiving the dividend is included on the EU List and such company participates directly in the Cypriot company paying the dividend by more than 50% in voting rights or owns more than 50% of the share capital or is entitled to 50% or more of the profits of the Cypriot company. In addition, withholding tax shall apply in the case where two or more associated enterprises, which are included on the EU List, participate directly in the Cypriot company paying the dividend and collectively have more than 50% in voting rights or own more than 50% of the share capital or are entitled to 50% or more of the profits of the Cypriot company.

No withholding tax will be imposed on dividends paid in relation to securities listed on a recognized stock exchange.

Change in the deemed dividend distribution rules

Under certain conditions, a nonresident person may be entitled to a refund of tax withheld under the so-called deemed dividend distribution rules. As per the amended law, any tax so withheld should not be refunded if the recipient of the dividend is a company included on the EU List.

Withholding tax on interest payments

Withholding tax at the rate of 30% will be imposed on interest received by or credited to a company which is resident in a jurisdiction included on the EU List, or to a company which is incorporated or registered in a jurisdiction included on the EU List and is not resident in another jurisdiction that is not included on the EU List, if the interest is derived from sources within Cyprus. However, no withholding tax shall apply on any interest payments made by an individual.

Further, no withholding tax will be imposed on interest received by or credited to a non-Cypriot tax resident company which relates to securities listed on a recognized stock exchange.

Withholding tax on royalty payments

Royalties paid to a company which is not a tax resident of Cyprus and is a tax resident in a jurisdiction included on the EU List, or to a company which is incorporated or registered in a jurisdiction included on the EU List and is not resident in another jurisdiction that is not included on the EU List, will be subject to 10% withholding tax. However, no withholding tax shall apply on any royalty payments made by an individual.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young Cyprus Limited, Nicosia

 

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

 

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