Tax alert – Withholding tax and corporate tax residency updates
TAX ALERT – MARCH 2023
AMENDMENTS IN THE CYPRUS TAX RESIDENCY RULE FOR COMPANIES AND WITHHOLDING TAXES ADOPTED FOR THE PREVENTION OF TAX ABUSE
We would like to remind you of the below important provisions adopted as a result of the amending laws which were published in the Official Gazette on 21 December 2021 and are effective as of 31 December 2022.
Amendment of Article 2 of the Income Tax Law and the definition of tax residency for companies:
In an effort to strengthen the tax residency rule for companies, which was mainly driven by the management and control of a company, the term has expanded to include companies whose management and control is exercised outside Cyprus.
More specifically, a company which was incorporated or registered in Cyprus as per any Law which is in force in the Republic and whose management and control is exercised outside the Republic, is considered to be a tax resident company unless it is a tax resident in any other jurisdiction.
Amendment of the Income Tax Law, article 21, and the Special Defence Contribution Law, article 3, which provide for Withholding tax obligations:
Effective from 31 December 2022, these measures address the tax treatment of payments made to jurisdictions included in the EU list of non-cooperative jurisdictions for tax purposes, Annex I, the so-called EU “Blacklist”.
In summary, Cyprus will apply the following rates of withholding tax on outbound payments of dividends, interest and royalties to companies in jurisdictions included in the above-mentioned list:
- Dividends - 17%
- Interest - 30%
- Royalties - 10%
More specifically:
1. Dividends:
As per the amendments of Article 3(2)(a1) of the Special Defence Contribution Law, a withholding tax rate of 17% will apply on dividend payments made by a Cyprus tax resident company to companies which are either resident in a jurisdiction included in the EU list of non-cooperative jurisdictions or which were incorporated or registered and are not a tax resident in another jurisdiction not included in the above EU list.
The above applies subject to the condition that the company which receives the dividend payment participates directly, either on its own or together with associated companies, in more than 50% of the capital/voting rights/is entitled to receive more than 50% of the profits of the company paying the dividends.
Per the amended law, the associated companies mentioned above, should also be incorporated or registered in a jurisdiction which is included in the EU list of non-cooperative jurisdictions and are not tax resident in a jurisdiction which is not included in the above list.
Excluded from the above are dividend payments received by non-Cyprus resident companies with respect to shares listed on a recognised stock exchange.
Furthermore, Special Defence Contribution paid on deemed dividend shall not be returned in case of dividend actually paid if the provisions of the article 3(2)2(a1) apply.
2. Interest:
As per further amendments of Article 3(2)(b) of the Special Defence Contribution Law, a withholding tax rate of 30% will apply on interest received or accrued made by a Cyprus tax resident company to companies which are either resident in a jurisdiction included in the EU list of non-cooperative jurisdictions or which were incorporated or registered and are not a tax resident in another jurisdiction not included in the above EU list.
Excluded from the above are interest payments received by non-Cyprus resident companies with respect to interest received or accrued with respect to securities listed on a recognised stock exchange and interest payments made by individuals.
As a reminder, interest which is accrued as a result of the ordinary course of the business or is deemed to be connected with the ordinary course of the business as well as interest accrued to collective investment fund (open or close type), does not fall within the scope of the imposition of Special Defence Contributions.
3. Royalties:
As per the amendment of Article 21 of the Income Tax Law, a withholding tax rate of 10% will apply on royalty payments made by a Cyprus tax resident company to companies which are either resident in a jurisdiction included in the EU list of non-cooperative jurisdictions or which were incorporated or registered and are not a tax resident in another jurisdiction not included in the above EU list.
General Remarks:
Further to the recent developments with relation to the updated EU list of non-cooperative jurisdictions as adopted on 14 February 2023 found here, British Virgin Islands, Costa Rica, Marshall Islands and Russia were added on this list.
Our team of experts remains at your disposal for assistance in the assessment of the tax implications arising as a result of the above.
