Cyprus finance Company overview and taxation on interest
Back to back loans arrangements are often used when foreign investors set up a Company in a jurisdiction like Cyprus to use it as a financing company in order to finance other associated companies. Many countries would argue that the Cyprus Company is not the beneficial owner of the interest thus the treaty between Cyprus and the relevant country should not apply or interest income received by a Cyprus company may also be taxed in that other jurisdiction where interest was paid.
What is then the definition of a beneficial owner?
The beneficial owner (Cyprus Company) shall be a person who has a right to use and enjoy the interest received unconstrained by a contractual or legal obligation to pass on the payment received to another person.
When the beneficial ownership test can be passed in Cyprus?
In the case of Cyprus back to back loan arrangements, there are strong arguments that the test of ‘beneficial ownership’ can be passed when:
Foreign investors set up a financing structure in Cyprus in order to finance other associated companies.
+ Cyprus financing company receives funds from a foreign / parent entity
+ Cyprus financing company uses the funds by increasing its share capital i.e. in a form of equity
+ Cyprus financing company grants an interest bearing loan to Foreign Company at arm’s length
+ Interest is received by Cyprus financing company from Foreign company at arm’s length
The Cyprus financing company can be the beneficial owner of interest if:
Last updated: August 2017
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