Tax treatment of non-returnable capital contributions

The Cyprus Tax Department’s Interpretative Circular EE 25 dated 3 September 2018 clarifies the tax treatment of non-returnable capital contributions by Cyprus taxpayers to companies which are tax-resident abroad.

Article 33 of the Income Tax Law N.118 (I)/2002 allows the tax authorities to adjust transactions between related entities onto an arm’s length basis and assess tax accordingly. The circular makes clear that these provisions will not apply to debit or credit balances generated by non-repayable capital contributions to non-tax resident companies, provided that all the following conditions are satisfied, with full documentary evidence:

  • The contributor has no legal right to request repayment of the contribution;
  • Repayment of the contribution has been validly made by the reduction of capital or through dissolution or liquidation of the recipient, in accordance with the law of the jurisdiction governing the recipient, or if the taxpayer produces satisfactory evidence that the relevant law does not require a formal reduction of capital.
  • Repayment takes place no earlier than two years from the end of the tax year in which the capital contribution was made.
  • The contributor has a direct interest in the recipient’s capital.
  • The recipient is not entitled to tax relief in the relevant jurisdiction for deemed costs arising as a consequence of non-repayable capital contributions.

Non-returnable capital contributions meeting all these requirements are not eligible for any relief under article 9 of the Income Tax Law, particularly the deduction of costs of investment in innovative enterprises and the notional interest deduction, or subject to disallowance under article 11. No deduction will be allowed in respect of the costs of financing such contributions.

The circular applies with effect from the beginning of the 2017 tax year, and supersedes any existing advance tax rulings on the issue.

For further information please contact Constantinos Christofi or your usual contact at Elias Neocleous & Co LLC.