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Amendments to the Special Contribution for Defence and the Income Tax Laws

20 December 2021

On 9 December 2021 the House of Representatives passed legislative amendments to the above laws in order to expand the scope of the current legislation to surround companies established in the Republic of Cyprus, but their control and management are exercised outside the Republic by introducing withholding taxes on payments of royalties, dividends and interest to a company tax resident in a country included on the EU blacklist or to a company incorporated in any of the EU backlisted countries which is not considered tax resident anywhere.

The EU blacklist, adopted by the EU Council on 5 October 2021 is composed of: American Samoa, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands and Vanuatu.

The most important of the Amendments are set out below.

Definition of tax residency for companies

According to the Income Tax Law 118(I) of 2002, (Section I, Article 2), a company is resident in Cyprus, if its management and control are exercised in Cyprus.

Under the amendment to the law, any company incorporated or registered in Cyprus whose management and control is exercised outside Cyprus will still be considered as tax resident of Cyprus, unless this company is considered as tax resident in any other state.

Payments to a company which is tax resident in a country included in the EU blacklist or to a company incorporated in a backlisted country which is not considered as tax resident anywhere.

Dividends

Where the company receiving the dividend holds more than 50% of the voting rights, share capital or is entitled to receive more than 50% of the profits of the Cypriot tax resident dividend paying company, applies that dividends paid by a Cypriot tax resident company either to a company tax resident in a country which is included in the EU blacklist of non-cooperative jurisdictions or to a company incorporated in one of such blacklisted countries which is not considered tax resident anywhere will be subject to 17% special defence contribution (“SDC”).

Interest

Interest paid will be subject to 30% SDC for companies that are not tax residents of Cyprus but either tax residents in a country which is included in the EU blacklist of non-cooperative jurisdictions or to companies incorporated in one of such blacklisted countries which are not considered tax resident anywhere.

Royalties

Royalties paid will be subject to the 10% withholding tax, for companies which are not tax residents of Cyprus, but which is either tax residents in a country which is included in the EU blacklist of non cooperative jurisdictions or to companies incorporated in one of such backlisted countries which is not considered tax resident anywhere irrespective if the asset for which the royalty is paid is for use in Cyprus or elsewhere.

 * The above does not apply to dividends paid by a company tax resident in Cyprus and to interest paid relating to securities which are listed on a recognised stock exchange.

Both laws will enter into effect from the 31st of December 2022.