Section 33 of the Cyprus Income Tax Law allows the tax authorities to adjust a company's taxable profit in the event that transactions between related companies are undertaken other than on an arm's length basis.
In 2009 the tax authorities gave informal guidance on the parameters to be observed in arriving at the acceptable margin of taxable interest which should apply in transactions involving Cyprus entities as intermediary financing vehicles in back-to-back financing arrangements. This guidance has now been formalised in correspondence between the Department of Inland Revenue and the Institute of Certified Public Accountants of Cyprus. For tax years beginning 1 January 2008 onwards the following minimum profit margins have been confirmed as acceptable.
|
Amount of loan |
Interest bearing loans |
Interest free loans |
|
Less than €50 million |
0.35% |
0.35% |
|
Between €50 million and €200 million |
0.25% |
0.35% |
|
More than €200 million |
0.125% |
0.35% |
If loans are made on an interest-free basis, taxation will be calculated on the basis of a rate of 0.35% regardless of the amount of the loan.
For earlier years which are still open, the minimum profit margin is 0.30% irrespective of the loan amount and whether it is interest bearing or not.
These margins apply to Cyprus companies borrowing funds and using them within a period of six months to finance related or connected entities via loans. The margins apply to funds borrowed from another related or connected party, or from a bank where the facility is guaranteed by a related or connected party. Each financing arrangement will be considered separately.
Professional advice should be obtained in relation to financing transactions so as to ensure tax certainty. In particular, taxpayers may apply to the revenue authorities for an advance ruling in relation to a proposed financing arrangement confirming that it will not trigger any adjustments.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
