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
- Purpose of the Rule
- The CFC regime is designed to counteract profit shifting to subsidiaries in low-tax jurisdictions.
- ➤ 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.
⚖️ How the Rule Works
- Attribution Principle:
- 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.
- Substance Link:
- Only income tied to assets and risks managed by significant people functions in Cyprus is reattributed.
- This ensures that only profits linked to genuine Cypriot management are captured.
📘 Key Definitions
- CFC (Controlled Foreign Company):
- A non-Cypriot entity or foreign permanent establishment (PE) that:
- • Is controlled directly or indirectly by a Cyprus tax resident (over 50% ownership, voting rights, or profit entitlement); and
- • Pays less than 50% of the Cyprus tax that would apply if it were resident in Cyprus.
- Non-Distributed Income:
- After-tax profit that is not distributed to the Cypriot controlling entity within the tax year plus seven months.
- Non-Genuine Arrangements:
- 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.
