Corporate tax residency
WHT and EU "blacklist"
WHT on dividend payments
WHT on interest payments
WHT on royalty payments
Comment
On 21 December 2021, new provisions that amended both the Income Tax Law and the Special Contribution for the Defence of the Republic Law (SCD Law) were published in the Official Gazette of the Republic. The amendments had previously been approved by the House of Representatives and were designed to bolster anti-tax avoidance measures. They take effect from 31 December 2022. The principal changes that have been introduced relate to the definition of "corporate tax residency" and to the imposition of withholding tax (WHT) on some categories of dividend, interest and royalty payments.
Prior to 2021, the test of residence and liability to Cyprus tax for companies was based on the locus of management and control of a company. However, during his 2021 budget speech, the Cyprus finance minister announced that from 2022 a Cyprus-incorporated company will, by default, be considered a tax resident of Cyprus (in addition to those passing the existing "management and control" test), subject to the relevant law being enacted. The amendments that were published on 21 December 2021 brought this into effect.
In practical terms this means that from 31 December 2022 any company incorporated in Cyprus, including those managed and controlled from a different country, can be subject to taxation on their worldwide income, unless they are able to prove that they are already tax resident in a different jurisdiction. In implementing this change, Cyprus joins the global fight to eradicate "stateless" companies. These are companies that can potentially make enormous profits but pay no tax on them because they are not registered as being "tax resident" in any jurisdiction.
The European Union maintains a "blacklist" of jurisdictions that it regards as non-cooperative on tax matters. This is updated twice per year and currently includes the following nine jurisdictions:
- American Samoa;
- Fiji;
- Guam;
- Palau;
- Panama;
- Samoa;
- Trinidad and Tobago;
- US Virgin Islands; and
- Vanuatu.
In a bid to reduce the attractiveness of such jurisdictions, Cyprus has, with the amendments to the SCD Law, introduced WHT on outbound payments of dividend, interest and royalties to those blacklisted jurisdictions. It has also amended "deemed distribution" rules in a manner that targets these jurisdictions. The types of entity that will be affected by the changes are:
- companies registered in a blacklisted jurisdiction; or
- companies incorporated or registered in a blacklisted jurisdiction that are not considered to be tax residents in another jurisdiction that is not included in the blacklist.
Prior to the amendments coming into effect, no WHT had been levied on outward bound dividend payments made by Cyprus tax-registered companies. WHT would still be imposed on dividends paid on securities listed on a recognised stock exchange. From 31 December 2022, however, dividends paid to companies included within the categories outlined above may be subject to WHT of 17% if the company meets any of the following conditions:
- it has more than 50% of the voting rights of the Cyprus resident company issuing the dividend;
- it owns more than 50% of the capital of the Cyprus resident company issuing the dividend; or
- it is entitled to receive more than 50% of the profits generated by the Cyprus resident company.
In addition to the above, any non-Cyprus individual tax resident will not be eligible for a refund of WHT taken under deemed dividend distribution rules if that person is tax resident in a blacklisted jurisdiction.
Previously, there was no WHT payable on outbound interest payments to individuals or companies that are non-Cyprus tax residents. From 31 December 2022, passive interest received by or credited to a company included in the scope of the amendments will be subject to a 30% WHT. However, interest payments made by an individual will not subject to WHT. Interest received or credited to a non-resident company will also be exempted from WHT if it relates to securities listed on a recognised stock exchange.
Previously, a 10% WHT was levied on outbound royalty payments to non-tax residents (individual or corporate) who are not engaged in business in Cyprus. This applied only to royalty income derived in Cyprus for rights granted for use in Cyprus. From 31 December 2022, for companies falling within the scope of the amendments, a 10% WHT will also apply to the income received from the exercise of rights granted for use outside of Cyprus.
The amendments, particularly when viewed alongside the Cyprus Security and Exchange Commission's new strategy on inward investment and the recent tough penalties it imposed on AFX Capital Markets Ltd, its directors and its auditors, are part of a strong signal from the government that Cyprus is keen to both act and be seen as a "clean" and reputable international business centre.
For further information on this topic please contact Linda Stokes at Elias Neocleous & Co LLC by telephone (+357 25 110 110) or email ([email protected]). The Elias Neocleous & Co LLC website can be accessed at www.neo.law.