Cyprus Anti-Avoidance Rules - CFCs

In this episode, we unpack Cyprus’s Controlled Foreign Company (CFC) Rule — a key anti-avoidance measure that ensures profits shifted to low-tax jurisdictions remain subject to taxation where real economic activity occurs.

We explain how Cyprus applies its CFC rule under the EU Anti-Tax Avoidance Directive (ATAD), what counts as a “non-genuine arrangement,” and when exemptions apply.

🧩 Key Topics Covered

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• Purpose of the Rule
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• The CFC regime is designed to counteract profit shifting to subsidiaries in low-tax jurisdictions.
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• ➤ In essence, if a Cypriot company controls a foreign entity that exists mainly to avoid tax, the CFC’s income can be taxed in Cyprus.
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⚖️ How the Rule Works

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• Attribution Principle:
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• Non-distributed income of a qualifying CFC—derived from non-genuine arrangements primarily aimed at obtaining a tax advantage—must be included in the taxable income of the Cypriot controlling entity.
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• Substance Link:
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• Only income tied to assets and risks managed by significant people functions in Cyprus is reattributed.
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• This ensures that only profits linked to genuine Cypriot management are captured.
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📘 Key Definitions

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• CFC (Controlled Foreign Company):
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• A non-Cypriot entity or foreign permanent establishment (PE) that:
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• • Is controlled directly or indirectly by a Cyprus tax resident (over 50% ownership, voting rights, or profit entitlement); and
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• • Pays less than 50% of the Cyprus tax that would apply if it were resident in Cyprus.
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• Non-Distributed Income:
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• After-tax profit that is not distributed to the Cypriot controlling entity within the tax year plus seven months.
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• Non-Genuine Arrangements:
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• Structures where the CFC’s income is generated by assets or risks controlled by Cyprus-based people, but formally owned abroad, mainly to secure a tax advantage.
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