Cyprus: Tax treatment of non-returnable capital contributions

The Cyprus Tax Department has recently published an informative circular (the Circular), which explains the tax treatment of non-returnable capital contributions by Cyprus taxpayers to companies that are non-Cyprus tax resident.

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 generated by non-returnable capital contributions to non-Cyprus tax resident companies, provided that a number of conditions are satisfied with full documentary evidence.

The conditions to be satisfied are as follows:

• The person making the contribution does not have a lawful right to request the return of the amount paid for the non-returnable capital contribution, at any time.
• The repayment of the non-returnable capital contribution is only valid through the reduction of capital or through the dissolution/liquidation of the company. This requirement shall not apply in cases where the laws in the jurisdiction of the receiving company do not require the reduction of the capital for the return of the capital, provided that the taxpayer gathers the relevant documentary evidence.
• The repayment of the non-returnable capital contribution does not take place 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-returnable capital contributions.

Where all of the above conditions are satisfied, the amount contributed as a non-returnable capital contribution shall be deemed as part of the assets of the company which shall not be eligible for relief under Article 9 and 11 of the Law and therefore, the non-returnable capital contribution shall be construed with regards to these provisions.

The Tax Department also pointed out that the deductible expenses in relation to the financing of the non-returnable capital contributions shall not be allowed.

The Circular applies to all non-returnable capital contributions in non-Cyprus tax resident companies which were incorporated from 1 January 2017 onwards and supersedes any existing tax rulings on this matter.

If you have questions on the Circular and how it will apply to you or to your business please contact Marisa Efstathiou or your usual Harneys contact.