Withholding tax introduced on payments to companies in low-tax jurisdictions
A law published in the Cyprus official gazette on 21 December 2021 introduces withholding tax on dividends, interest and royalties paid to companies resident in jurisdictions included on the EU blacklist of noncooperative jurisdictions. Previously, Cyprus did not levy withholding tax on dividends and interest paid to a nonresident, and levied a 10% withholding tax on royalties that were derived from Cypriot sources. The new rules, which will apply as from 31 December 2022, also include a revised definition of residence for corporate income tax purposes.
The withholding tax obligation generally will be triggered where a payment is made to an entity that is incorporated, registered or resident in a jurisdiction on the EU blacklist and is not tax resident in another jurisdiction that is not on the EU list.
The withholding tax will be levied as follows:
- Dividends: A 17% withholding tax will be levied on gross payments made by a Cypriot company to a nonresident company that, alone or jointly with other associated entities, holds more than 50% of the share capital or voting rights of the payer company or is entitled to receive more than 50% of the profits of the payer company.
- Interest: 30%
- Royalties: As mentioned above, Cyprus already imposed a 10% withholding tax on payments made to a nonresident that was not engaged in a business in Cyprus with respect royalty income generated in Cyprus on rights granted for use in the country. The new legislation extends the applicability of the 10% tax to apply to royalty income derived in Cyprus for rights granted for use outside Cyprus.
It should be noted that payments made to entities incorporated in an EU blacklist jurisdiction but tax resident in a non-blacklist jurisdiction are exempt from the withholding tax, as are payments to entities listed on a recognized stock exchange.
The law does not indicate the effective date for the imposition of withholding tax on payments made to jurisdictions that are newly added to or removed from the EU blacklist. The Cyprus tax authorities are expected to issue guidance in this area and it is likely that the withholding tax will apply based on whether an entity is on the EU blacklist at the time the payment is made.
Definition of corporate residence
The scope of the definition of residence for corporate income tax purposes, which previously was based on management and control, is expanded to include an entity that is incorporated or registered in Cyprus that is not a tax resident in another jurisdiction (even if the entity’s management and control is exercised in another jurisdiction).
The measures are designed to prevent the use of Cyprus entities in aggressive and abusive tax planning schemes, reduce the scope for using Cyprus as a conduit for making payments to high risk jurisdictions and bring entities that used branches in tax haven jurisdictions within the scope of Cyprus taxation.