New Year’s Eve heralds the implementation of changes to the Income Tax Law and Special Contribution for Defense Law – Taxation
Cyprus: New Year’s Eve announces the implementation of changes to the Income Tax Law and Special Contribution for Defense Law
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On December 21, 2021, new provisions amending both the Income Tax Law and the Law on the Special Contribution for the Defense of the Republic (SCD Law) were published in the Official Gazette of the Republic. The amendments had previously been approved by the House of Representatives and aim to strengthen measures to combat tax evasion. They come into force on December 31, 2021. The main changes introduced relate to the definition of “corporate tax residence” and the imposition of a “withholding tax” (“WHT”) on certain categories of dividend payments, interest and royalties.
Corporate tax residency
Before 2021 for companies, the criterion of residence and liability to Cypriot tax was based on the place of management and control of a company. However, during his 2021 budget speech, the Cypriot Minister of Finance announced that from 2021, a company incorporated in Cyprus will, by default, be considered tax resident in Cyprus (in addition to those that pass the test of existing “management and control”), subject to the relevant law being enacted. Amendments published on December 21, 2021 bring it into force.
In concrete terms, this means that any company incorporated in Cyprus, including those managed and controlled from another country, may be subject to tax on its worldwide income unless it is able to prove that it is already resident. tax in a different jurisdiction. By implementing this change, Cyprus is joining the global fight to root out so-called stateless companies. These are companies that can potentially make huge profits but pay no tax because they are not registered as “tax residents” in any jurisdiction.
Withholding taxes and the EU “blacklist”
The EU maintains a “blacklist” of jurisdictions it considers uncooperative in tax matters. This is updated twice a year and currently includes the following nine jurisdictions: American Samoa, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands and Vanuatu. In an effort to reduce the “attractiveness” of these jurisdictions, Cyprus has, together with the amendments to the SCD Act, introduced the WHT on outgoing payments of dividends, interest and royalties to blacklisted jurisdictions. It also changed the “deemed distribution” rules in a way that targets those jurisdictions. The entity types that will be affected by the changes are:
- A business registered in a blacklisted jurisdiction, or
- A company incorporated or registered in a blacklisted jurisdiction that is not considered tax resident in another non-blacklisted jurisdiction.
- WHT on dividend payments
Prior to the entry into force of the amendments, no WHT was levied on outgoing dividend payments made by companies registered in Cyprus. The fact remains that no RPS will be imposed on dividends paid on securities listed on a recognized stock exchange. However, from December 31, 2021, dividends paid to companies included in the categories described above may be subject to a WHT of 17% if one of the following conditions is met:
- The company holds more than 50% of the voting rights of the Cypriot resident company issuing the dividend.
- The company holds more than 50% of the capital of the Cypriot resident company issuing the dividend.
- The company is entitled to receive more than 50% of the profits generated by the Cypriot resident company.
In addition to the above, any non-Cypriot tax resident will not be eligible for a refund of WHT taken under the “deemed dividend” distribution rules if such person is tax resident in a blacklisted jurisdiction.
Currently, there is no WHT payable on outgoing interest payments to individuals or companies who are not Cypriot tax residents. From December 31, 2021, passive interest received or credited to a company included in the scope of the amendments will be subject to a WHT of 30%. However, interest payments made by an individual will not be subject to WHT. Interest received or credited to a non-resident corporation will also be exempt from WHT if it relates to securities listed on a recognized stock exchange.
Currently, a 10% WHT is levied on outgoing royalties paid to tax non-residents (individual or legal entity) who do not carry out business activities in Cyprus. This applies only to royalties collected in Cyprus for rights granted for use in Cyprus. From 31 December 2021, for businesses falling within the scope of the amendments, a 10% WHT will also apply to income derived from the exercise of the rights granted for use outside Cyprus.
The amendments, especially when considered alongside its new foreign investment strategy and the recent harsh sanctions imposed by CySEC on AFX Capital Markets Ltd, its directors and auditors, are part of a strong signal from the Cypriot government. indicating that Cyprus is keen both to act as and to be seen as a “clean” and reputable international business centre.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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