Tax remedy of loans to the shareholders / administrators of the Cypriot firm – taxes

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Cyprus:

Tax Treatment of Loans to the Shareholders / Directors of the Cyprus Company

May 10, 2021

Areti Charidemou & Associates LLC

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If a non-Cyprus / Cyprus resident tax advisor acts as a director / shareholder of a Cyprus resident tax holder and receives a loan from that company, it will have tax implications.

What is the tax treatment?

It is assumed that it is a benefit in kind, which corresponds to 9% per year monthly balance a loan or other financial facility granted to the director or shareholder (including spouse and relatives up to the second degree of kinship).

Under Cyprus Income Tax Law, a Cyprus resident individual director or shareholder (including the director’s spouse or shareholder and up to the second degree of director or shareholder) of a Cypriot company receives a loan, cash facility or withdrawal from a Cypriot company monthly benefit calculated on the basis of the respective balance at an interest rate of 9% per year. The service is offset against the taxable income of the individual.

If the benefit is less than € 19,500 and the person has no other source of income, there is no tax liability. If the benefit, together with another source of income, exceeds € 19,500, such excess is taxable and the company is required to calculate and pay the tax on behalf of the individual through Pay-As-You-Earn (PAYE).

The Cyprus Tax Department practice for a Cyprus
non-tax resident was that the advantage
could be reduced according to the number of days the individual spends outside of Cyprus (Cyprus Income Tax Act (118 (I) / 2002, 5 (2) (ζ))

On November 14, 2017, the Cyprus Tax Department clarified that the benefit calculated for a non-taxable person resident in Cyprus will be calculated throughout the year regardless of the number of days outside Cyprus (Interpretation circular 14).

Examples

  1. On January 1st, a Cy company grants the Cy Tax resident director / shareholder a loan of € 4 million with 0% interest.

In this case, the Cy Tax resident director / shareholder has benefits in kind. The additional material benefit is € 4 million * 9% = € 360,000. The company must calculate (using the following formula (Note 1) and pay the tax on behalf of the person via Pay-As-You-Earn (PAYE).

  1. On January 1, a Cy company makes a $ 4 million loan to a non-Cy taxable director / shareholder at 0% interest. The director / shareholder actually spent 20 days in Cyprus during the tax year.

In this case, the non-Cy taxable director / shareholder will again have benefits in kind. The additional material benefit is € 4 million * 9% = € 360,000. The tax treatment is the same regardless of example (a) if the director / shareholder has only spent 20 days in Cyprus (Interpretation circular 14).

  1. On January 1, a Cy company granted a non-Cy taxable director / shareholder a loan of € 4 million at 3% interest.

In this case, the non-cy-tax resident director / shareholder again has benefits in kind. The additional material benefit is € 4 million * 6% = € 240,000. Again, the company must calculate (using the following formula (Note 1) and pay the tax on behalf of the person via Pay-As-You-Earn (PAYE). The 6% differ between 9% and 3% (real interest rate).

The 3% is considered income for the company. The company should pay the SDC (30%) and no corporation tax (12.5%).

Note 1
Income tax rates:

0 € – 19 500 € 0%
19,500 € – 28,000 € 20%
28,000 € – 36,300 € 25%
€ 36300 – € 60000 30%

The content of this article is intended to provide general guidance on the subject. A professional should be obtained about your particular circumstances.

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