Tip 3.1 – Cyprus Tax – Related Party Transactions to be at arm’s length in Cyprus
Article 33 of the Income Tax Law
The Cyprus income tax law forbids related party transaction to be carried out on preferential terms. Effectively disallowing any preferential treatment afforded due to the relation of the parties.
The Cyprus Income Tax Law taxes any income which would arise in the absence of such special treatment. Freeform translation of Article 33 of Cyprus Income Tax:
1 (a) When a business participates directly or indirectly in the management or the control of the capital of another business; or
1 (b) the same person participates directly or indirectly in the management, the control of the capital of two or more business
And in any one of the above situations, terms are inserted in the commercial or financial arrangements between them which would not be otherwise available save for the relationship that they have, then any profits that may be included in the profits of the company shall be taxed accordingly.
(2) […]
(3) For the purposes of this article:
(a) A person is connected to another person if they are husband and wife or relative up to the second degree, or a relative of the spouse.
(b) […]
(c) a company is connected to another company:
(i) If the same person has control of both companies, or if one person controls one company and a connected person control the other.
(ii) If a group of two or more people has control of each company, and the groups are formed by connected people.
(d) A company is connected to another person if it exercises control over its affairs.
Article 33A
Article 33A was introduced in 2019. It disallows any deduction of Cyprus Tax resulting from any arrangement or series of arrangements, put in place for the purpose of eliminating the tax base and which have as a purpose the obtainment of a tax advantage.
FAQ – Related Party Transactions
When is one company connected wih another company (Article 33(3) Cyprus Tax Law)
- The same person and persons conneted withthat person hold directly or indirectly a participation in at lease 25% of the voting rights or share capital or have a right to a share of at least 25% of the income of both companies;
- A group of two or more persons hold directly or indirectly a participation in at least 25% of the voting rights or share capital or have a right to a share of at least 25% of the income of each company and the groups either consist of the same person or could be regarded as consisting of the same person by treating (in one or more cases) a member of eithre group as replaced by a person with whom they are connected;
When is one company connected with another person (Article 33(3) Cyprus Tax Law)
- That person and persons connected with him hold directly or indirectly a participation in at least 25% of the voting rights or share capital or have a right in at least 25% of the income of that company.
- any two or more persons acting together to secure directly or indirectly, at least 25% of the voting rights or share capital or a right to a share of at least 25% of the income of a company, shall be treated in relation to that company as connected with one another and with any person acting on the directions of any of them to secure directly or indirectly 25% of the voting rights or share capital or a right to a share of at least 25% of the income of that Company.
Other Publications on Cyprus Tax Law
EU Blacklist
The EU Blacklist is the newest tool to tackle the risks arising from tax abuse and unfair tax competition. It targets jurisdictions that do not meet and do not intend to meet EU tax good governance criteria. The idea was that a single EU list would hold more weight than several national lists. The EU Blacklist was officially launched on the 5th of December 2017
Cyprus 2019 NID rate
The Cyprus Department of Taxation has published the rates applicable for the 10-year government rate of each state, which once increased by 3%, constitutes the reference rate for the purposes of the Cyprus Notional Interest Deduction (NID) for the year ended 2019.
Cyprus Kazakhstan Tax Treaty
The Cyprus Kazakhstan Double Tax Treaty has entered into force as of the 17th of January 2020. As a result, the Treaty is now in force and shall have an effect as of the 1st of January 2021. As of the day of writing this publication Cyprus is not mentioned as a country that has an agreement for the avoidance of double taxation with Kazakhstan.
Cyprus Notional Interest Deduction (NID)
In September 2015, Cyprus introduced the Notional Interest Deduction (“NID”) regime. A new and powerful tax tool provided to business enabling them to create a return on new equity injected into a local business. The return is achieved by deducting a ‘notional’ interest expense from their taxable income subject to the value and the applicable reference rate.
Cyprus-Egypt Double Tax Agreement
On the 8th of October 2019 the Republic of Cyprus and the Arab Republic of Egypt signed a new protocol for the Elimination of Taxation with Respect to Taxes on Income and the Prevention of Fiscal Evasion and Avoidance (“Double Tax Agreement”). The news comes from an announcement on the website of the Cyprus Ministry of Finance.
Related Party Transactions to be at arm’s length in Cyprus
The Cyprus income tax law forbids related party transaction to carry out on preferential terms. Effectively disallowing any preferential treatment afforded due to the relation of the parties. The Cyprus Income Tax Law taxes any income which would arise in the absence of such special treatment.
Harris Sharpe
Author - Photographer
For many years he has worked and devoted his skills and efforts towards building a successful career as a leading executive. From humble beginnings, his aim has always been to yield results; with a keen focus to attention to detail and client satisfaction. His experience has always been varied and not specific, at times he preferred it. With that in mind, he has dealt with CySEC on licensing and ongoing regulation, international private equity and credit fund managers, NASDAQ and NYSE listed companies occasional millionaires as well as self-made millionaires. His passion though is difficult transaction work organizing and deploying people for a common goal. Harris enjoys reading and studying the Cyprus law and sharing that information on this website.
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