Cyprus has recently amended its Income Tax Law and its Special Contribution for Defence Law with a view to increasing the attractiveness of the taxation regime for mutual funds and collective investment schemes, and simplifying the taxation of interest generally.
Prior to the changes, active interest earned by companies (interest earned in the ordinary course of business or closely connected to it, such as interest earned by a bank or finance company) was subject to corporation tax at 10% and exempt from Special Defence Contribution (SDC tax). Passive interest (interest incidental to the company's main activity, such as interest earned on deposits or cash balances) was subject to SDC tax at 10% and to corporation tax at 10% on half the amount received. The effective tax rate on active interest was 10% and on passive interest 15%. These rules will apply to interest earned up to December 31 2008.
For accounting periods beginning on or after January 1 2009 interest will be subject either to income tax or SDC tax (but not both), on the following basis:
- Interest receivable by mutual funds is subject to corporation tax at the standard rate of 10%.
- The net amount of interest received by companies in the ordinary course of their business or closely connected to the ordinary course of their business (after deducting expenses and interest paid) is subject to corporation tax at 10%.
- Any other interest receivable is subject to SDC tax at 10% without any deductions.