Cyprus tightens rules on payments to low-tax jurisdictions

When does the burden of proof arise?

If a Cypriot company pays interest, dividends or royalties to a related foreign company, does not apply withholding tax and at the same time claims these payments as a tax expense, it will have to be able to prove that the recipient has genuine ‘substance’.

What is considered to be genuine substance?

In practice, this means providing evidence of, for example:

• an independent director,
• local decision-making managers,
• an office, staff and local expenses,
• actual ownership of the income (beneficial owner).

If the recipient fails to meet at least two of these conditions, the payments will be treated as if they were subject to withholding tax.

Exceptions and penalties

The rules provide for exceptions – for example, for payments to residents of Cyprus, the EU or the EEA, to groups subject to the 15% minimum tax (Pillar Two), or for structures with clear commercial reasons. Companies must retain the relevant documentation for six years, include selected information in their tax returns, and face fines ranging from EUR 2,000 to EUR 10,000 for late submission of documents.