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Cyprus finance Company a beneficial owner


Overcoming the problem of beneficial ownership on Cyprus back to back loans arrangements

Possible uses of back to back loan arrangements

Back to back loans arrangements are often used when foreign investors set up a Company in a favourable tax jurisdiction (i.e. Cyprus) to use it as a financing company in order to finance other associated companies. Under such arrangement interest is paid to a Cyprus tax resident company from a company located in a treaty country with zero or reduced withholding tax in the country from where the interest is paid. The Cyprus Company pays a substantial part of the interest to a country located in another favorable tax jurisdiction or a tax haven, thus the actual income which is taxed is significantly reduced. 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.

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:

  1. there is a two tier financing structure;
  2. taxation is on full amount of interest;
  3. funds received as interest are not transferred immediately to the holding company by means of dividends etc.;
  4. addressing tax residency and management and control issues

Illustrative example

Foreign investors set up a two tier financing structure in a favourable tax jurisdiction (i.e. Cyprus) in order to finance other associated companies. 

–       CypCoA receives a loan from a foreign / parent entity

–       Received funds are used by CypCoA to make a capital contribution to CypCoB

–       CypCoB grants an interest bearing loan to Foreign Company

–       Interest expense at CypCoA level will be tax deductible as the investment is made to a 100% subsidiary after 1 January 2012*

–       Interest expenses of CypCoA could be deducted from interest income of CypCoB due to application of group relief as per Cyprus Income Tax Law


  1. The use of two tier finance structure justify for the time being that the Cyprus lender CypCoB is the beneficial owner of interest, since it does not pay a substantial part of interest to a non – treaty country
  2. Taxation of CypCoB is on full amount of interest;
  3. Cyprus tax resident company has the right to use and enjoy the interest received unconstrained i.e. by passing interest income received from foreign companies to CypCoA by means of dividend.

*Note: As from 1st of January 2012 where a company in Cyprus borrows in order to invest in the share capital of another company which is a 100% subsidiary, either directly or indirectly, then any interest payable on such a loan is tax deductible unless the subsidiary has assets that are not being used in the business.

(Published: Oct. 2014)


PKF / ATCO Limited is a member firm of the PKF International Limited network of legally independent firms and does not accept any responsibility or liability for the actions or inactions on the part of any other individual member firm or firms. This publication is for information purposes only and should not be considered as professional advice.