CYPRUS Law and Practice Contributed by: Stella Strati, Patrikios Legal
tions between related entities. For financing trans - actions between related parties, the threshold is EUR10,000,000. The 25% relationship test applies to define the concept of related parties. 6. Taxation of Foreign Income of Local Corporations 6.1 Foreign Income Exemptions Local corporations are taxed on their worldwide income. However, any foreign tax incurred is cred - ited against the equivalent Cyprus tax on the foreign income. The tax credit in respect of the foreign tax cannot exceed the equivalent Cyprus tax in any cir - cumstances. Credit is always granted to Cyprus tax residents on foreign tax incurred on foreign income, irrespective of the existence of a DTT. 6.2 Non-Deductible Local Expenses As mentioned in 6.1 Foreign Income Exemptions , Cyprus tax-resident companies are taxed on their worldwide taxable income, as taxation in Cyprus is based on the management and control of the com - pany and not on the source of the income. If an income is exempt (eg, dividends under condi - tions, sale or disposal of shares), any direct expenses associated with the specific activity are not allowed for tax purposes. Furthermore, indirect expenses must be apportioned across the Cyprus company’s various activities. If the activity will generate exempt income, then the corresponding allocation of the indirect expenses will not be treated as tax-allowable. 6.3 Dividends From Foreign Subsidiaries Dividends received by Cyprus companies from for - eign subsidiaries are not subject to corporation tax in Cyprus. Nevertheless, an exception applies in that dividends received from a foreign company will be subject to corporation tax if paid out from hybrid instruments. Moreover, dividends received by Cyprus tax-resident companies from foreign entities are not subject to the SDC, unless the passive dividend rule applies. According to this rule, the SDC is applicable if:
• the company distributing the dividend engages directly or indirectly in more than 50% of activities leading to investment income; and • the foreign tax burden on the income of the paying company is lower (less than 7.5%) than the Cypriot tax burden. 6.4 Taxation of Intangibles Developed by Local Corporations Intangibles developed by local corporations can be used by non-local subsidiaries in their business, pro - vided that such intangibles are licensed to the non- local subsidiaries on an arm’s length basis. With - holding taxes apply (10%) if the intangible is used in Cyprus by the non-local subsidiaries. 6.5 Controlled Foreign Corporation-Type Rules The controlled foreign companies (CFC) rule is appli - cable in Cyprus as of 1 January 2019. The application of this rule results in the re-attribution of the income of a low-taxed controlled non-Cyprus subsidiary to its parent company in order to avoid revenue diversion to a jurisdiction with a more favourable tax regime. The CFC rules apply to Cyprus tax-resident compa - nies and non-Cyprus tax-resident companies with a Cyprus permanent establishment. A CFC is defined as a low-taxed non-Cyprus tax-res - ident company or permanent establishment in which the: • Cypriot taxpayer, alone or together with its associ - ated enterprises, holds a direct or indirect interest of more than 50%; and • the actual corporate tax paid on the profits of the company or the permanent establishment is lower than 50% of the tax that would be paid in Cyprus. The non-distributed income of a CFC that results from non-genuine arrangements is added to the taxable income of the Cyprus tax-resident controlling com - pany. The CFC rule is not applicable when the company or the foreign permanent establishment has either:
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