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Cyprus. Tax treatment of non-returnable capital contributions

The Cyprus Tax Department published an Information Circular (Circular), which clarifies the procedure for taxing non-refundable capital contributions by Cyprus tax payers to companies that are not tax residents of Cyprus.
The Circular confirms that Article 33 of the Income Tax Law N.118 (I) / 2002 (as amended) (the Law) will not apply to debit or credit balances obtained from non-refundable contributions to companies that are not residents of Cyprus, provided that a number of conditions are satisfied with full documentary evidence.

The conditions to be satisfied are as follows:
  • The contributor does not have the legal right to demand the return of the amount paid for the non-refundable capital contribution at any time.
  • The return of the non-returnable capital contribution is valid only by reducing the capital or dissolving / liquidating the company. This requirement does not apply in cases where the legislation in the jurisdiction of the receiving company does not require a reduction in capital for the return of capital, provided that the taxpayer collects relevant documentary evidence.
  • Repayment of the non-refundable capital contribution occurs no earlier than two years after the end of the tax year in which the capital contribution was made.
  • The contributor has a direct interest in the capital of the recipient.
  • The recipient is not entitled to tax benefits in the relevant jurisdiction for the estimated costs arising from non-refundable capital contributions.
If all of the above conditions are satisfied, the amount made as a non-refundable capital contribution is considered part of the assets of the company that are not eligible for benefits in accordance with Article 9 and 11 of the Law, and therefore the non-returnable capital must be interpreted in accordance with these provisions.
The Circular applies to all non-refundable capital contributions  of companies that are not tax residents of Cyprus, which were registered from January 1, 2017, and replaces any existing tax decisions on this matter.
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