Cyprus Financing Company

Perhaps the most common structure used by investors when a financing structure is involved is the use of a Cypriot company in a “back - to - back” financing.

In this “back - to - back” financing structure, an EU/non EU parent company establishes a Cypriot company which it finances by means of a loan. The Cypriot company then lends those funds to its own EU/non EU operating subsidiary. This gives rise to:

1. Low or no withholding tax on interest payments due to the applicability of a favorable Cyprus double tax treaty network or EU directives.

2. Potential deductibility of interest expenses in the borrowing company.

3. No withholding tax on interest payments from Cyprus at all times.

 

 


The table below clarifies the minimum spreads that are officially acceptable by the income tax authorities:

 

LOAN AMOUNT

SPREAD

€mln

%

Less than 50

0,35

50 – 200

0,25

More than 200

0,125

 

For non – interest bearing loans the minimum acceptable spread is 0,35% irrespective of the loan amount.

Based on the above, the effective interest tax on “back – to – back” loans entered by a Cypriot company could be as low as 0,15625%.

Additionally, any foreign exchange difference (either realized or unrealized) should neither increase nor decrease the taxable result.

The spreads outlined apply in cases where a Cypriot company borrows from a related party and then within a period of six (6) months uses the funds to finance a loan to another related party. Funds borrowed and lent may be interest-bearing or interest-free. The minimum acceptable spreads are calculated after the deduction of expenses directly or indirectly attributable to the specific financing transaction, i.e. they represent net spreads.

Companies entering into a loan agreement in order to finance a number of loans receivable, as well as companies entering into a number of loans in order to finance a single loan receivable, may also apply the minimum spreads to each transduction. Nevertheless, each loan or financing transaction entered into by a Cypriot company should be viewed separately for the application of the relevant spreads. Therefore, any companies entering into multiple back-to-back loans may not view such loans in aggregate for the purpose of determining the minimum acceptable spread.

The spreads specified above are also applicable in the case where a Cypriot company obtains a loan from a bank (provided such a loan is guaranteed by other companies within the same group), and uses funds obtained to finance loans to related companies.

The minimum acceptable spreads may also apply in cases where credit instruments other than loans are used (subject to pre-approval from the tax authorities).

In addition to the above, there is the possibility of obtaining advance rulings from the Commissioner of Inland revenue regarding minimum acceptable spreads. Rulings provide an excellent tool to companies wishing to obtain certainty regarding the spreads applicable to any possible back-to-back financing transactions entered into (especially in cases involving sizeable transactions or grey areas, such as using financing instruments other than loans).