Section 33 of Cyprus Income Tax Law (CIT) provides the right to the tax authorities to adjust the taxable profit of a Company in case where a transaction held by the Company and a related party is undertaken other than on an arm’s length basis.

The department of Inland Revenue has now provided guidance in regards to the acceptable margin of taxable interest which applies in back to back loan transactions involving a Cyprus company as an intermediary.

The guidance provides that for the tax years 2008 and onwards the minimum tax rate margins that would be accepted by the tax authorities shall be as follows:

Amount of loan Interest   bearing loans interest free loans
Less than €50 million    0.35%  0.35%
Between €50 million and €200 million0.25%0.35%
More than €200 million0.125%0.35%

In view of the above for any loans with 0% interest, tax will be calculated on the basis of a rate of 0.35% now matter how much the loan amount is. The above will apply to Cyprus companies borrowing funds and using them within a period of six months to finance affiliated or connected entities through loans. They will also apply in cases where funds are borrowed from another affiliated or connected entities, or from a bank where the loan is guaranteed by an affiliated or connected entity.