Controlled Foreign Company Rules (CFC) were implemented in Cyprus following the approval by Cyprus of the EU Anti-Tax Avoidance Directive (ATAD), which may affect a variety of companies. Relatively limited number of companies may be affected whose profits are over € 750.000 annually provided their profits are not distributed as dividends up to 7 months from the end of the fiscal year.
A non-Cyprus tax resident entity or an exempt foreign Permanent Establishment (PE) whose revenue is not taxable or exempt in Cyprus is characterized as a CFC if the following two requirements are met:
- the Cyprus tax resident company holds a direct or indirect interest of more than 50% in the foreign company or PE;
- the foreign corporate tax paid on the profits of the foreign company or PE is lower than 50% of the corporate income tax charge that would have been payable in Cyprus had it been a Cyprus tax resident company (i.e. less than 6,25%).
Under the CFC rule, any non-distributed income of a CFC that meets the above criteria and is derived from non-genuine arrangements put in place for the purpose of obtaining a tax advantage and is controlled by the controlling Cyprus tax resident company must be included in the Cyprus company’s taxable profits.
CFC non-distributed income is defined as the accounting profit after tax of the CFC that has not been distributed to its controlling Cyprus tax resident company during the tax year in which it was derived or within the next seven months.
Taxable income of the Cyprus tax resident controlling company shall be calculated on the basis of the Cyprus taxpayers’ percentage share of the profits of the CFC.
CFC income shall only be included in the taxable profit of the Cyprus company if it is generated through assets and risks that are related to people-related functions being carried out by the Cyprus company and it must be calculated in line with the arm’s length principle.
Regardless of whether the non-distributed income is to be distributed or not, the non-distributed income is included in the tax period of the controlling Cyprus resident company to which the tax year of the CFC relates.
The loss is to be included in the taxable profit of the Cyprus CIT payer is calculated based on the Cyprus CIT payers’ percentage of entitlement of the CFC’s profits.
CFCs that create losses rather than profits are subject to the same provisions.
Exceptions from the CFC rule
According to the Law, CFCs should not include any non-distributed income if it consists of one of the following:
- Accounting profits of less than €750.000 and non-trading income of less than € 750.000;
- For the tax year, accounting profits do not exceed 10% of operating expenditures.