The House of Representatives voted on the 9th of December 2021 amendments to the Income Tax Law (ITL) and Special Contribution for the Defence Law (SDC) which affect the:
a. Definition of tax residency of Cyprus companies
b. Withholding tax deduction on royalties, dividends and interest paid to companies resident in EU Blacklisted jurisdictions.
The amendments will apply as from 31st of December 2022.
I. Definition of tax residency for companies
The ITL has been amended so that in effect all companies incorporated or registered in the Republic of Cyprus will be regarded as tax resident in Cyprus, unless it can be demonstrated that they are considered as tax resident in any other state.
This amendment eliminates the possibility for a Cyprus incorporated/registered company to be regarded as non-tax resident in Cyprus, whilst not being tax resident in any other jurisdiction.
II. Imposition of withholding tax on outbound dividend, interest and royalty payments made to companies resident in EU list of non-cooperative jurisdictions for tax purposes
Up to now any outbound payment of dividend, interest and royalty payment made by a Cyprus tax resident company to a recipient in a foreign jurisdiction was not subject to withholding tax deductions in Cyprus.
By amending both the ITL and SDC an obligation to withhold tax on outbound dividends, interested and royalties was introduced in situations where the recipient is:
· A non-Cyprus tax resident company which:
- Has its tax residency in a country included in the EU list of non-cooperative jurisdictions for tax purposes,
- Is registered in a country included in the EU list of non-cooperative jurisdictions for tax purposes and is not considered a tax resident in any jurisdiction.
The withholding tax imposed on such payments will be as follows:
Provided that the recipient company holds directly, alone or together with associated companies (which are also resident or registered in a non-cooperative jurisdiction)
- 50% or more of the voting rights, share capital or
- right to receive profits of the Cyprus tax resident company that pays the dividend.
The above does not apply on dividend paid by a Cyprus tax resident company listed in a recognised stock exchange)
Does not apply to interest paid in relation to securities listed in a recognised stock exchange
III. EU list of non-cooperative jurisdictions for tax purposes
The EU list of non-cooperative jurisdictions for tax purposes, as adopted by the EU Council on 5 October 2021 is composed of:
1. American Samoa;
7. Trinidad and Tobago
8. Us Virgin Islands
The above list is regularly reviewed and amended by the EU Council.
The purpose of the abovementioned measures is to strengthen the Cyprus tax framework for the prevention of abuse, tax evasion and tax avoidance. In our view, the amendments are definitely a step to the right direction are improving Cyprus’ position as an international business centre.
Cyprus companies that have up to now been regarded as non-tax residents in Cyprus must be able to provide appropriate evidence to proof that they are residents in another jurisdiction, otherwise their activities will be subject to the provisions of the tax laws of Cyprus.
Finally, companies who transact with companies registered in EU non-cooperative jurisdictions must inform their counterparties about the imposition of withholding tax in Cyprus on the amount of dividend, interest or royalties they receive from Cyprus tax resident entities.