While the main aim of the changes was to increase the attractiveness of the taxation regime for mutual funds and collective investment schemes, the authorities have also taken the opportunity to simplify the taxation of interest generally. The key factor determining the treatment of interest under Cyprus tax law is whether it is active or passive in nature. Active interest is interest received as part of the core activity of the business or closely connected to the core business, such as interest received by a bank. Passive interest is interest received which is incidental to the main activity, such as interest received on surplus funds invested by a retailer.
For interest earned from 1 January 2009 the following rules will apply:
- The net amount of interest received in the ordinary course of business or closely connected to the ordinary course of business, after deducting expenses and interest paid, is subject to income tax or corporation tax at standard rates.
- Interest received by Collective Investment Schemes, after deducting expenses, is taxed under the Income Tax Law at the standard corporation tax rate of 10%.
- Any other interest receivable is subject to Special Contribution for Defence ("SDC") at 10% without any deductions.
Interest will therefore be subject only to income tax or only to SDC.
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.
