Financing of/from Cyprus Companies: Challenges and Opportunities

As we reported in another newsfeed, the fixed profit spreads’ policy adopted by the Cyprus Tax Authorities on related party financing transactions and especially financing operations which had a “back to back” nature, has been abolished as from 1 July 2017. As from that date all such transactions and operations must abide by Transfer Pricing rules in line with Actions 8 to 10 of the Base Erosion and Profit Shifting (BEPS) project of the OECD.

Another challenge mainly stemming from the new OECD Model Double Tax Treaty relates to the Beneficial Ownership provision for the recipient of income payable from one contracting state to the other. This is intended to avoid abuse of Double Tax Treaties (DTTs) through artificially structured transactions, in which the recipient of the income is nothing but a conduit of the actual beneficiary, which is resident in a country with which the country of the paying party has no DTT or a less beneficial DTT than with the country of the recipient. The DTT benefits are not to be granted on such cases. Indeed some countries, for example Russia, have even commenced applying the beneficial ownership provision unilaterally, before agreeing on an amendment of existing DTTs (which do not include beneficial ownership provisions) with their contracting parties.

The above issues create many implications with regards to the set-up and operations of companies with international operations. Concepts such as substance, good governance and transparency are becoming more and more important.

Cyprus has chosen not just to fully comply with all international developments but actually to lead the way, thus transforming itself in to a new era international business centre. At the same time it has introduced legislative provisions which can present reliable solutions to the huge wave of challenges, as well as opportunities for modern and fully compliant international business planning.

One such measure concerns the Notional Interest on New Equity injected in Cyprus companies as from 1 January 2015.. This measure could be used as a solution to Transfer Pricing and Beneficial Ownership issues related to related party financing transactions, as debt financing will be provided by Cyprus companies out of their equity funds. This will have the benefit that there will be a notional interest expense to be set against the interest to be earned/accounted for on loans receivable. At the same time there will be no obligation for the Cyprus company to make sequential payments to any party with regards to those loans, as would be the case if the operation would be in the form of “back to back” financing.

There could be alternative or additional solutions for such operations in order to become fully compliant with new requirements. It is very important to have any existing operations affected by the above mentioned changes examined and assessed the soonest possible.

We are at your entire disposal to assist with making such an assessment, in formulating the way forward, arranging for Transfer Pricing Studies, building-up and maintaining substance and in any other way needed. 

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