CYPRUS Law and Practice Contributed by: Stella Strati, Patrikios Legal
5.3 Capital Gains of Non-Residents There is no capital gains tax applicable in Cyprus in relation to profits from the sale of shares. Profits from the disposal of titles are exempt from any tax in Cyprus. Titles are defined as shares, bonds, deben - tures, founders’ shares, and other titles of compa - nies or other legal persons incorporated in Cyprus or abroad (and rights thereon). 5.4 Tax Implications of Change of Control Any disposal to related parties should be executed on an arm’s-length basis. Moreover, Cyprus introduced exit taxation rules in 2020, within the wider implemen - tation of the EU Anti-Tax Avoidance Directive (ATAD). The relevant provisions stipulate that corporate tax - payers that move assets or their tax residency out of Cyprus will be subject to tax at an amount equal to the market value of the transferred assets at the time of exit – minus their value for tax purposes – in any of the following circumstances: • a Cyprus tax-resident company transfers assets from its head office in Cyprus to its permanent establishment in another member state or in a third country so that Cyprus does not have the right to tax the transferred assets owing to the transfer; • a non-Cyprus tax-resident company with a per - manent establishment in Cyprus transfers assets from its Cypriot permanent establishment to its head office or another permanent establishment in another EU member state or third country so that Cyprus does not have the right to tax the trans - ferred assets owing to the transfer; • a Cyprus tax-resident company transfers its tax residence from Cyprus to another EU member state or to a third country, apart from those assets that remain effectively connected to a permanent establishment in Cyprus; and • a non-Cyprus tax-resident company with a per - manent establishment in Cyprus transfers the business carried out by its permanent establish - ment from Cyprus to another EU member state or to a third country so that Cyprus does not have the right to tax the transferred assets owing to the transfer.
5.5 Formula-Based Income Attribution The tax treatment of a foreign-owned local affiliate is the same as that of any other Cyprus company. No separate rules or formulas exist to determine their income. The rule is that Cyprus companies are taxed on their worldwide income and any foreign tax incurred is credited against the equivalent Cyprus tax on the foreign income. 5.6 Deductibility of Intra-Group Management and Administrative Charges The general principle pursuant to the Cyprus Income Tax Law is that for an expense to be allowed as a deduction, it must have been incurred wholly and exclusively for the production of taxable income for the specific taxpayer – something that needs to be supported by the relevant documentation. Therefore, any expenses paid by Cyprus companies on behalf of foreign affiliates will be treated as non- tax-deductible expenses. In addition, the Cyprus tax authorities could assess that a deemed receivable from the foreign affiliate exists in the Cyprus com - pany’s books, represented by the value of the expens - es paid ‒ on which, they will seek to impose and tax deemed interest at market interest rates. 5.7 Restraints on Related-Party Borrowing Pursuant to Section 33 of the Cyprus Income Tax Law, all transactions between related parties must – for tax purposes – be carried out on an arm’s length basis (ie, at fair values and on reasonable commercial terms). This is described as the “arm’s length principle”. More specifically, under the arm’s- length principle, where conditions are made or imposed upon the com - mercial or financial relations between two businesses that differ from those that would have been made between independent parties, any profits that would have accrued to one of the parties had the two busi - nesses been independent – but have not so accrued – may be included in the profits of that business and taxed accordingly. These provisions also apply to any transactions between related parties. Pursuant to the applicable transfer pricing rules (see 4.4 Transfer Pricing Issues for Inbound Investors ), a transfer pricing study is required for all transac -
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