If a non-Cyprus/Cyprus tax resident acting as Director/Shareholder of a Cyprus tax resident company and obtain loan from that company, there is tax implication.

What is the Tax Treatment?

It's considers to be as Benefit in kind equal to 9% per annum on the monthly balance of loan or other financial facility granted to the director or shareholder (including the spouse and relatives up to the second degree of kindred).

According to the Cyprus Income Tax Law, a Cyprus resident individual director or shareholder (including shareholder spouse of director or shareholder and relative up to the second degree of the director or shareholder) of a Cyprus company, receiving a loan, cash facility or withdrawal from a Cyprus company is deemed to have a benefit calculated on a monthly basis on the respective balance at an interest rate of 9% per annum. The benefit is added on the taxable income of the individual.

If the benefit is under €19,500 and the individual has no other source of income then there is no tax liability. If the benefit together with any other source of income exceeds €19,500 such an excess is taxable and the company is required to calculate and pay the tax on behalf of the individual through the Pay-As-You-Earn (PAYE).

The practice followed by the Cypriot tax department for a Cyprus non-tax resident individual was that the benefit could be reduced according to the individual's number of days spent outside Cyprus (Cyprus Income Tax Law (118(I)/2002 ,5(2)(ζ))

As of 14 of November 2017, the Cyprus Tax Department clarified that the benefit deemed to be calculated on a Cyprus non-tax resident individual, will be calculated throughout the year regardless of the number of days spent outside Cyprus (Interpretative Circular 14).

Examples

  1. On 1st of January a Cy company give loan to Cy tax resident director/shareholder amounting to €4m with 0% interest.

In this case the Cy tax resident director/shareholder has benefit in Kind. The additional benefit in Kind is €4m*9%=€360.000. The company is required to calculate (using the below formula (Note 1) and pay the tax on behalf of the individual through the Pay-As-You-Earn (PAYE).

  1. On 1st of January a Cy company give loan to Non - Cy tax resident director/shareholder amounting to €4m with 0% interest. The director/shareholder actually spent 20 days in Cyprus during the tax year.

In this case the Non - Cy tax resident director/shareholder has benefit in Kind again. The additional benefit in Kind is €4m*9%=€360.000. The tax treatment is exactly the same with example (a) independently if the director/shareholder spent only 20 days in Cyprus (Interpretative Circular 14).

  1. On 1st of January a Cy company give loan to Non / Cy tax resident director/shareholder amounting to €4m with 3% interest.

In this case the Non / Cy tax resident director/shareholder has benefit in Kind again. The additional benefit in Kind is €4m*6%=€240.000. Again, the company is required to calculate (using the below formula (Note 1) and pay the tax on behalf of the individual through the Pay-As-You-Earn (PAYE). The 6% is the different between 9% and 3%(real interest).

The 3% will consider as income for the company. The company should pay SDC (30%) and not corporation tax (12.5%).

Note 1
Income tax rates:

€0         - €19500       0%
€19500 - €28000       20%
€28000 - €36300       25%
€36300 - €60000       30%

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.