The plan

Foreign investors wishing to set up a Cyprus Company to use it as a financing company in order to finance other associated companies.

1. An EU/Non-EU parent company establishes a Cyprus finance company which it finances by means of a loan.
2. The Cyprus finance company, in turn, lends the funds to its own EU / non-EU associate company/companies
3. Associated companies will use the funds to finance their operations
4. Cyprus Company receives interest from associate companies and pays interest to Parent Company

Cyprus Tax Consequences

–        Provided that one of the major business activities of the Cyprus Company is that of financing activities, the Cyprus finance company will be taxed at a Corporation tax rate of 12,5% on interest profit margin (i.e. interest received less interest paid);

–        Low or no withholding tax on interest payments due to the Cyprus double tax treaty network or EU directives;

–        Deductibility of interest expenses in the borrowing company;

–        No withholding tax on interest payments from Cyprus at all times;

 

Cyprus finance company Corporation tax on interest profit margins

Cyprus Company Corporation tax on interest profit margins will be at the rate of 12, 5% and shall follow the arms’ length principles as defined by the Cyprus tax department circular

Further aspects of the determination of taxable income

The net income is calculated after deducting from net interest income, the costs incurred wholly and exclusively for the purpose of generating income

Illustrative example

CypCoA		€
Interest received (trading income) (Arm’s length rate)		500,000
Interest paid (Arm’s length rate)		(400,000)
Net interest income		100.000
Less expenses:
Wages and salaries	10,000
Rentals (Contract agreement)	5,000
Maintenance expenses	10,000
Accounting fees	3,000
Audit fees	3,000
Other expenses directly related	5,000
Traveling expenses	10.000
Entertainment expenses	10,000
Administration expenses	4,000	(60,000)
		40,000
Taxation: Income tax	12.5%	(5,000)
Net income after tax		35,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Possible Foreign tax – tax deducted from other jurisdictions are given as credit. Ie. If in the above example, the Company paid € 4,000 foreign tax then the Cypriot tax will be € 1,000.

 

Last update: August 2017

 

Contact us

For consultation please contact us on:

info@pkf-nic.com

August 2017

 

The authors expressly disclaim all and any liability and responsibility to any person, entity or corporation who acts or fails to act as a consequence of any reliance upon the whole or any part of the contents of this publication.

Accordingly no person, entity or corporation should act or rely upon any matter or information as contained or implied within this publication without first obtaining advice from an appropriately qualified professional person or firm of advisors, and ensuring that such advice specifically relates to their particular circumstances.

PKF Cyprus firms are member firms of the PKF International Limited network of legally independent firms and do not accept any responsibility or liability for the actions or inactions on the part of any other individual member firm or firms.