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Allowable Expenses Provided by the Income Tax Law of Cyprus
The main principle is that for an expense to be deductible from profits / income, it must have been incurred wholly and exclusively for the production of income. These are running expenses for carrying out the company's business. Such expenses deducted from income/profit reduce the tax payable.
Keeping in mind the nature of the Cyprus Tax Law, international business companies and locally operated companies treat the payment of interest as part of their expenditure which has benefits. Interest payable by a company is treated as an expense in some circumstances. For example interest payable for the purchase of assets to be used by the company for its business purposes is clearly stipulated in section 9(1) of the Law as a deductible expense.
Recently the Tax Authorities in Cyprus circulated clarifications to all professionals to facilitate how companies treat interest:
- Section 11 of the Law provides for certain restrictions on interest and expenses whether they can be deductible. Accordingly expenses that are not wholly and exclusively incurred for the production of income are classified as non-deductible.
- Interest as well as all expenses concerning the purchase of private assets, not used for business purposes, are not deductible from income and these assets include investment in shares of public or private companies, land and buildings, leisure boats, works of art.
- Irrespective of their use, interest paid for the acquisition of private motor vehicle is not a deductible expense. Such restriction is extended for seven years from the acquisition of the asset.
- Interest derived from titles or other securities such as bonds and debentures do not fall under the restrictions of section 11(15) of the Law. However where interest derived from related company dealings is established, the arm's-length principle is observed.
- Interest relating to the acquisition of shares or other company assets are exempt from the restrictions of section 11 (15) and allowable for income tax purposes.
- Provided that the timing between receipt and assignment of the loans is not more than six months, interest payments for established back to back loans are also exempt from the restriction clause.
Guidelines provided by the Inland Revenue Department intend to eliminate disputes between tax payers and authorities as well as to aid a better understanding of the law. These guidelines will facilitate the compliance with the new Cyprus law.
Your Taxand contact for further queries is:
T. +357 22 699 222