Bills for the imposition of withholding tax on dividends, interest, and royalties paid by Cypriot Companies

Bills to amend the tax legislation of Cyprus, in order to strengthen the Cypriot tax regime to prevent tax evasion and tax avoidance.

The bills are expected to enter into force on July 1, 2021 and contain the following:

Withholding tax on payments from a Cyprus Company 

For payments to companies in EU blacklisted countries (list of non-cooperating EU tax jurinstinctions), or to companies incorporated / registered in EU blacklisted countries and are not tax residents in non-EU blacklisted countries.

  • For dividend payments withholding rate of 17%. 
    • Withholding rate of 17% for dividends paid to companies where the direct recipient directly holds at least 50% of the capital, votes, or right to profit in the company that pays the dividends (Cypriot company). 
    • The withholding tax does not apply in the case of dividend payments on shares listed in a recognized stock exchange. 
    • The 50% participation limit is met when the company receiving the dividend participates directly in the Cyprus company either alone or jointly with affiliated companies that are also in countries that are on the EU blacklist and participate directly to the Cyprus company. 
  • For passive interest payments, 30%. 
    • Withholding tax rate of 30% for passive interest paid by a Cyprus company which is a tax resident of Cyprus in companies that are in the black EU list.
    • The withholding tax does not apply in the case of passive interest payments on instruments listed in a recognized stock exchange. 
    • Payments by individuals do not fall within the scope 
  • Royalty payments, 10%.
    • Withholding tax rate of 10% for Royalty paid by Cypriot tax resident companies in countries that are on the EU blacklist
    • This is an extension of the current withholding tax. That is, it only applies to certain royalty payments.
    • Payments of royalties by individuals do not fall within the scope

The corporate residence test

Currently, the companies managed and controlled in Cyprus “management and control is carried out in Cyprus” are tax residents of Cyprus, according to the Income Tax Law of Cyprus . The proposals will not affect the income tax law and consequently such companies will continue to be tax residents of Cyprus.

The above concerns companies that have been established in Cyprus. Such companies will be considered tax residents of Cyprus provided that they are not tax residents of another country.

The above is in line with EU guidelines for combating tax evasion and tax avoidance.

Stakeholders should keep an eye on current developments to assess how this may affect their current and new structures in Cyprus.

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