CYPRUS Law and Practice Contributed by: Stella Strati, Patrikios Legal
The Cypriot government is implementing an action plan designed to attract foreign companies to oper - ate from – or expand their activities in – the country, and also to attract foreign individuals to relocate to Cyprus. Furthermore, Cyprus has shown its commitment to follow the BEPS recommendations and remain OECD- compliant. The implementation of the BEPS recom - mendations on a local level has so far been balanced against the various advantages provided by the Cyp - riot tax system. Such implementation has, in fact, con - tributed to the proper development of the Cypriot tax As outlined in 9.4 Competitive Tax Policy Objectives , Cyprus has a competitive tax system offering various incentives to local and foreign investors. The more vulnerable areas of the Cypriot tax regime (such as the old IP box regime) have been abolished or mod - ernised. Also, a reform of the Cyprus tax system has been implemented, pursuant to which, the corporate tax rate is, as of 1 January 2026, 15%. However, at the same time, other applicable taxes (such as the SDC) were reduced or abolished. The aim of the Cypriot government is to promote the creation of substance and transparency while simul - taneously providing incentives to foreign business to relocate their headquarters to Cyprus. regime by enhancing transparency. 9.5 The Competitive Tax System There are limited approved state aid schemes in Cyprus. However, such schemes cannot be consid - ered constraints on the tax system, given that the majority of them aim to enhance productivity in spe - cific areas (eg, rural tourism and hi-tech and innova - tive enterprises). 9.6 Hybrid Instruments and BEPS Implementation Cyprus has had legislation dealing with hybrid instru - ments in place since 2016. Specifically, an exception applies in that dividends received from a foreign com - pany will be subject to corporation tax if paid out from hybrid instruments.
Furthermore, as of January 2020, hybrid mismatch rules apply that aim to tackle the usual tax effects of hybrid mismatches, including a double deduction or a deduction with no inclusion. These new provi - sions apply only where there is sufficient connection between the parties. This includes mismatches that arise between: • a taxpayer and its associated enterprises; • associated enterprises; • a head office and a permanent establishment; • two or more permanent establishments of the same entity; and • mismatches resulting from a structured arrange - ment involving a taxpayer. The reverse hybrid entity rule is also effective as of 1 January 2022. 9.7 Interest Deductibility and Territorial Tax Regime Cyprus does not have a territorial tax system. All com - panies that are tax residents in Cyprus are taxed on income accrued or derived from all sources in Cyprus and abroad. Cyprus always grants credit to Cyprus tax residents on foreign tax suffered on foreign income, irrespective of the existence of a DTT. Effectively, a comparison is made between the equivalent Cyprus tax on the foreign-sourced income and the foreign tax incurred – with credit granted being the lower of the two. In any case, the ILR was introduced in 2019 as part of the wider implementation of the ATAD. The aim of the ILR is to limit the provision of financing facilities to companies (which are based in high-tax jurisdictions) in low-tax jurisdictions through subsidiaries belonging to the same group. The ILR requires that the excess borrowing costs (EBC) that is greater than 30% of taxable income before EBITDA is not deductible for income tax purposes. As such, it limits the otherwise deductible EBCs to 30% of taxable EBITDA. However, the EBC is deducted up to a de minimis threshold of EUR3 million per fiscal year. Standalone entities (not part of a group) are excluded from the ILR. In any case, grandfathering has been provided for loans concluded before 17 June 2016.
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