Cyprus companies are popular for use in foreign direct investment structures where investors look to benefit from Cyprus’ range of double tax and bilateral investment treaties. Additionally, it is a common feature of these structures that the Cyprus entity will be wholly owned by a company based in another international or offshore jurisdiction. In this post, we focus on cases where a Cyprus company (CyprusCo) is wholly owned by a company (ListedCo) incorporated in another jurisdiction which is on the EU list of non-cooperative jurisdictions for tax purposes, otherwise known as the blacklist (EU List).

Following the amendments to the Special Contribution for Defence Law 2002 (SCD Law), previously described in our blog-post here, Cyprus now applies withholding tax (WHT) on certain outbound dividends and interest payments (royalties may also be impacted under other provisions), where the recipient is a ListedCo, as follows:

• Dividends at the rate of 17 per cent
• Interest at the rate of 30 per cent

In this respect, we address below the WHT levied in the scenario where a ListedCo directly receives from a CyprusCo subsidiary (the Subsidiary), the following:

Dividends

The SCD Law provides that WHT at the rate of 17 per cent applies, on dividends distributed by a CyprusCo – where the recipient of the dividends is a ListedCo. To qualify, the ListedCo must meet a Control Test, which comprises (a) participation in more than 50 per cent of the voting rights in the Subsidiary, or (b) participation in more than 50 per cent in the capital of the Subsidiary, or (c) entitlement to receive more than 50 per cent of the profits in the Subsidiary.

In short, a ListedCo receiving payments of dividends from its Subsidiary meeting the Control Test will face WHT from the Subsidiary. In other words the Subsidiary will be required to withhold the relevant amount, which in the case of dividends is set at the rate of 17 on the amount of dividend payment.

However, as an exception to the above WHT will not apply to dividends received by a ListedCo:

• Where the dividends are paid in respect of securities listed on any recognised stock exchange;
• Where the CyprusCo is not a subsidiary of the ListedCo because it does not meet the Control Test, for example where the ListedCo has only a minority interest in the CyprusCo; or
• Where the ListedCo, despite its incorporation and domicile in an EU List jurisdiction, is tax resident in another jurisdiction that is not on the EU List.

Interest

In accordance with the SCD Law, WHT at the rate of 30 per cent is levied on the amount of interest  (not the gross repayment amount) received by a ListedCo or credited to a ListedCo from a CyprusCo.

However, as an exception to the above WHT will not apply to interest received by a ListedCo:

• Where the interest arises from securities listed on any recognised stock exchange. This would be most relevant to fixed income investments; or
• Where the ListedCo, despite its incorporation and domicile in an EU List jurisdiction, is tax resident in another jurisdiction that is not on the EU List.

Unlike in the case of dividends, the Control Test is not  relevant to WHT in respect of interest payments.

Royalties

Furthermore, under the Income Tax Law 2002, royalty payments made to a ListedCo from a CyprusCo are subject to WHT at the rate of 10 per cent on the gross amount.

However, as an exception to the above WHT will not apply to interest received by a ListedCo, where the ListedCo, despite its incorporation and domicile in an EU List jurisdiction, is tax resident in another jurisdiction that is not on the EU List.

Unlike in the case of dividends, the Control Test is not  relevant to WHT in respect of royalty payments.

Further considerations

Importantly, it should be clarified that in the reverse scenario, where the ListedCo is owned by a CyprusCo or otherwise where a CyprusCo receives a payment from a ListedCo, then no withholding taxes would apply.

Further, where WHT does apply, it may be possible for the CyprusCo to defer such payments, considering there may be a reasonable prospect of removal from the EU List before the payments would be required to be made. However, professional advice should be taken on this before any positions are incurred.

For more information relevant to the above, please see our previous blog posts here and here.

Please note that the above does not constitute legal advice as it is for information purposes only. You should consult your tax advisors as appropriate before taking any action.