As part of the Cyprus tax reform, the rules relating to deemed benefits arising from receivables owed by shareholders and directors to companies have been expanded.

Under the previous framework, a deemed benefit calculated at 9% applied primarily to direct shareholders and directors where amounts were owed to a company without appropriate remuneration.

The amendment extends the scope of this rule to also include indirect shareholders.

This change broadens the application of the deemed benefit provisions and aims to ensure that financing arrangements between companies and individuals connected to them are properly captured for tax purposes.

Technical Clarification

Where a company has receivables from a shareholder or director, a deemed benefit calculated at 9% per annum may arise.

The extension of the rule means that the deemed benefit now applies not only to direct shareholders, but also to individuals who hold shares indirectly through intermediate entities.

As a result, companies must consider whether amounts owed by individuals connected through indirect shareholding structures may trigger the deemed benefit provisions.

Practical Implications

Companies and individuals will need to carefully review financing arrangements or arrangements resembling financing, including:

• shareholder advances
• loans granted to directors
• receivables arising from company transactions
• other arrangements where amounts remain payable to the company

The extension of the rule increases the likelihood that such arrangements may fall within the deemed benefit provisions.

Commentary – Policy Rationale

The extension of the deemed benefit rules to indirect shareholders reflects the intention of the tax reform to prevent the use of intermediate structures to avoid the application of these provisions.

By expanding the scope of the rule, the legislation aims to ensure that benefits arising from company funds made available to individuals connected with the company are appropriately taxed.