Cyprus is set to introduce two new corporate tax measures; namely: (1) the imposition of withholding tax on certain payments to EU blacklisted countries, and, (2) the introduction of a corporate tax residency test based on incorporation. 

Cyprus reiterates its commitment and willingness to support the relevant European Commission’s initiatives to fight ‘Aggressive Tax Planning’ (ATP) and to be in line with various related guidelines and directives.

In this respect, two new corporate tax measures have been included in the 2021 Draft Budgetary Plan (DBP). This DBP was approved by the Council of Ministers on 22 October 2020 and will be laid before the House of Representatives. The related draft bills are currently undergoing legal vetting by the Attorney General.

The outline of these two new measures is set out below:

(1) Withholding tax on payments to EU blacklisted countries

Currently it is within the domestic tax legislation that there are no Cyprus withholding taxes on payments relating to dividends, interest or royalties (not used in Cyprus) towards non-Cyprus residents (companies or individuals). 

The proposed new measure is set to introduce a Cyprus withholding tax on dividend, interest and royalty payments to countries included in Annex I of the EU list of non-cooperative jurisdictions on tax matters. This list currently includes the following countries:

  • American Samoa
  • Anguilla
  • Barbados
  • Fiji
  • Guam
  • Palau
  • Panama
  • Samoa
  • Trinidad and Tobago
  • US Virgin Islands
  • Vanuatu
  • Seychelles

The Cyprus withholding tax rates to be introduced in these cases are understood to be 17% for dividends, 30% for interest and 10% for royalties.

NOTE: For cases which are adversely affected by the measure of the withholding tax introduction (e.g. because the beneficial shareholder of the Cyprus company is in a jurisdiction included in Annex I), it may be considered to change the jurisdiction of the beneficial shareholder of the Cyprus company to another jurisdiction. This could for example be effected by way of redomiciliation or transfer of shares. Please contact us for any assistance that may be needed in this respect.

(2) Corporate tax residency test

Currently, the Cyprus tax residency for companies is determined by the ‘management and control’ test.

The proposed new measure is set to introduce a corporate tax residency test based on incorporation, in addition to the existing ‘management and control’ test.

This post will be updated with more details as soon as these become available.