Introduction

In today’s globalized economy, international financing structures are under increasing scrutiny. Withholding taxes (WHT), anti-abuse rules, and BEPS measures make tax-efficient structuring more complex than ever. One solution that remains relevant and practical for professionals is the strategic use of Double Tax Treaties (DTTs).

This article derives from a real-world scenario involving a British investor (now a Monaco resident) seeking to finance a UK business and evaluating Cyprus as a lending platform.

Why Cyprus?

- EU Member State with access to EU Directives
- 65+ Double Tax Treaties, including an exceptionally favorable treaty with the UK
- 12.5% corporate tax rate (can be further reduced via Notional Interest Deduction)
- No WHT on outbound interest payments (except to blacklisted or “low tax” jurisdictions)
- Flexible substance requirements and a robust legal and regulatory environment

Cyprus–UK Double Tax Treaty: How It Works

Under Article 11 of the Cyprus–UK DTT:
- Interest paid from the UK to a Cyprus tax-resident company is exempt from UK WHT if:
  • The Cyprus company is the beneficial owner, and
  • The interest is not connected to a UK permanent establishment

Cyprus does not levy WHT on outbound interest, making it an ideal intermediary.

Substance & Compliance Requirements

- Tax residency: Managed and controlled in Cyprus (board meetings, strategy decisions)
- Economic substance: Ideally includes local directors, office space, and bank accounts
- Beneficial ownership: Must bear credit risk and act independently (not as a conduit)
- Transfer Pricing (TP):
  • Loans > €5 million: full TP report required
  • Loans ≤ €5 million: benchmarking documentation is sufficient

Annual compliance includes:
- Audited financial statements
- Tax filings and TP disclosures
- Summary Information Table for controlled transactions

Risks and Legal Considerations

- Anti-treaty shopping and GAAR scrutiny
- BEPS/ATAD measures (interest limitation, hybrid mismatches)
- Local banking regulations may also impose burdens

Professionals must ensure the Cyprus structure is defensible and aligned with economic reality.

Alternative Jurisdictions & Treaty Comparisons

Cyprus definitely offers itself as an ideal intermediary. However, it is not the only option since there are plenty of other treaty jurisdictions that can be considered. Countries such as the Netherlands, Luxembourg, France, Germany, and even non-EU jurisdictions like Switzerland, UAE, and the US offer similarly favorable DTT terms, but each comes with unique conditions regarding substance, licensing, and regulatory approval.

Strengthening the Cyprus Advantage

For high-net-worth individuals or fund sponsors, relocating to Cyprus can strengthen the structure:
- 183-days rule or 60-day rule for tax residency
- “Non-domicile” status: exemption on passive income for 17 years
- Other qualitative benefits: lifestyle, safety, legal system, business environment, climate

Conclusion

Cyprus remains a powerful jurisdiction for cross-border financing, especially when paired with the UK or other major economies. The Cyprus–UK DTT, along with the absence of outbound WHT and competitive tax treatment, provides a unique opportunity for tax optimization, provided the necessary substance and compliance standards are met.

Key advice for professionals: collaborate across jurisdictions, verify treaty eligibility, and document substance.
 

As for the British investor in our real-word scenario? It proved impossible to convince him to move out from Monaco and relocate to Cyprus.

Presentation of PGE&Co:

PGE&Co (P.G. Economides & Co Ltd) is a firmly established accounting and audit firm headquartered in Limassol, Cyprus. Founded in 1972, it has grown exponentially both in size and reputation and is one of the leading firms of its kind in Cyprus.

The firm is guided by a dynamic and experienced management team. Staff comprises 40+ professional with a wide spectrum of experience and expertise.

The firm holds a Platinum Approved Employer Status by the Association of Chartered Certified Accountants (ACCA), in recognition of the high standards of training and development opportunities the organisation provides to trainees and professionals.

Structured in a modern approach, it aims towards efficiency, flexibility and high quality standards.

PGE&Co offers a wide range of high quality services, covering multiple industries and geographic locations.

Services include:

• Audit and assurance: Following a risk-based approach audit methodology, ensuring alignment with the International Standards of Auditing (ISAs). Our committed audit teams are tailored to the needs of each engagement, optimizing value for our clients and all stakeholders.
• Consolidation accounts: Our consolidation team is equipped with vast experience in all types of industries and expert knowledge in preparing group financial statements under the International Financial Reporting Standards (IFRSs).
• Tax compliance: We ensure that our clients comply with all relevant laws, rules and regulations concerning all types of Cyprus taxation. Areas of tax expertise include Corporation tax, Personal income tax, Capital gains, VAT, Taxes on passive income, Social security etc.
• Bookkeeping: Our dedicated teams focusing on bookkeeping ensure that proper books and records are kept for our clients, in compliance with all the rules and regulations in Cyprus as well as the requirements of specific industries. Furthermore, following completion of the bookkeeping process, we are able to proceed with the preparation of the financial statements under IFRSs.
• Payroll: We undertake the complete payroll function on behalf of our clients, offering them ease of mind and assurance that their business complies with all the rules and regulations concerning their workforce.
• Advisory services: We are capable to provide our clients with valued advisory services such as feasibility studies, general business consultancy, financial due diligence, business valuations, wealth management/asset protection advise and much more.

Neophytos Sofocleous (Neo):

Neo has over 20 years of experience with a demonstrated history of working in the accounting profession.

Skilled in internal and external auditing, tax planning and tax compliance, financial reporting and management accounting, as well as business advisory, business planning and business development.

He is a fellow member (FCCA) of the Association of Chartered Certified Accountants in England and a member of the Institute of Certified Public Accountants of Cyprus (ICPAC) since 2008.

He is also a part time tutor on the subjects of Financial Reporting and of Cyprus Taxation.

Neo’s main responsibilities at PGE&Co are the Business Development, IT infrastructure including keeping up-to-date with new technologies and processes, as well as other internal functions of the firm. He also maintains a portfolio of clients, offering audit and tax services.