Tax on Interest Income in Cyprus

HOW IS INTEREST INCOME TAXED IN CYPRUS?

Interest income is of two kinds:

The first kind is interest income earned outside the ordinary course of a person’s business.
The second kind, as defined by the relevant Cypriot Law, is interest that is gained by a person from the ordinary business activities, including interest deemed to be closely connected with the business activities as well as interest which arises from mutual fund investments.
The two kinds would be considered with regards to their respective tax treatment.

Interest income under the Cypriot Income tax legislation is generally exempt as provided by section 8(19) of the Cyprus Income Tax Law 118(I) 2002 as amended.

Interest income not accruing from ordinary business activities is subject to a 10% defence contribution if received by a Cyprus tax resident (both corporate or individual).

Thus it follows that no withholding tax applies to payments of interest to non residents, whether the recipient is a body corporate or an individual.

The second kind, also known as ‘trading income’, is taxed at the Cyprus corporate tax rate of 10% after deduction of any expenses incurred wholly and exclusively for the production of this income.  Therefore, interest income derived from the ordinary activities of the business of a person, including interest which is closely connected to the said activities is not treated as interest for tax purposes but instead as income from trading activities.

The Inland Revenue Department has clarified what is meant and what is included in the definition ‘earned in the ordinary course of business activities’ and ‘interest closely connected with business activities’ by issuing a circular (circular 2003/8).

According to this circular interest derived from ordinary activities is:

o    Interest income of banking businesses.  This includes banks, cooperatives and businesses having as a primary object the provision of loans.

o    Interest income of financing businesses engaged in hire purchase, leasing and other types of financing.

Interest ‘closely connected to the ordinary course of a company’s business’ is the interest income:

o    Of trade debtors (i.e. acquisition, disposal and development of land, sale and resale of vehicles, etc)
o    Of insurance companies
o    On commercial current bank accounts
o    Of companies that act as a vehicle for the purposes of financing group companies.

All other cases that do not fall under the above categories can be submitted in writting to the commissioner of Income Tax so that an advance ruling to be issued.