Cyprus and the Interest Limitation Rule

In this episode, we break down Cyprus’s Interest Limitation Rule (ILR) — a cornerstone of the EU’s Anti-Tax Avoidance Directive (ATAD) framework.

The rule is designed to curb profit shifting through excessive interest deductions and ensure Cyprus remains a transparent, compliant, and competitive jurisdiction.

We’ll explain how the 30% EBITDA cap works, what the main exemptions are, and how businesses can manage compliance effectively under this regime.

🧩 Key Topics Covered

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• Purpose of the Rule
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• The ILR targets base erosion and profit shifting (BEPS) strategies that exploit intra-group financing.
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• ➤ In simple terms, it stops multinational groups from using high-interest loans in Cyprus or other high-tax jurisdictions to artificially reduce taxable income.
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• Main Mechanism
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• • Deduction Cap: Exceeding Borrowing Costs (EBCs) are deductible only up to 30% of EBITDA.
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• • De Minimis Threshold: A safe harbor of €3 million in net interest expense per year.
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• • Scope: Applies to all Cyprus tax-resident companies and foreign companies with a permanent establishment in Cyprus.
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• What Counts as Borrowing Costs
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• All interest-related and financing expenses — including bond premiums, arrangement fees, and similar costs — are included.
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• Tax-exempt income and carried-forward losses are excluded from EBITDA.
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• Group Application
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• For groups with 75% ownership participation, the 30% limit and €3M threshold apply at the group level.
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⚖️ Exemptions & Reliefs

The rule provides several targeted exemptions:

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3. Standalone Entities:
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5. Companies not part of a group and without 25% ownership links are exempt.
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9. Financial Undertakings:
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11. Excludes banks, insurers, pension funds, AIFs, and UCITS.
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15. Grandfathered Loans:
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17. Loans concluded before 17 June 2016 are exempt, unless modified.
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21. EU Public Infrastructure Projects:
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23. Projects of clear public interest are carved out from the rule.
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💼 Carry-Forward Rules

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• Disallowed EBCs: Can be carried forward for up to five years.
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• Unused Interest Capacity: Also available for five years.
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• €3M Threshold: Cannot be carried forward.
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🧮 The Equity Escape Clause

Cyprus also allows a full EBC deduction if a company’s equity-to-asset ratio is at least equal to that of its consolidated group (within a 2% tolerance).

All valuations must follow IFRS standards for consistency.

This “escape” recognizes well-capitalized businesses that are not using debt to erode the tax base.

🧠 Key Takeaways

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• Deductibility capped at 30% of EBITDA, with a