Income tax laws – Anti-avoidance provisions for hybrid instruments
Under current law, dividends are exempt from income tax, but for individuals and in a number of cases for companies are subject to defense tax.
In a number of cases, dividends received by a Cypriot company from a company located outside Cyprus, whereas in the case of Cyprus these amounts received are considered as dividends, in the country where the company paying the dividend is located these payments are not treated as dividends paid, but instead are treated as tax deductible expense. These are called as “hybrid instruments”.
An example of such hybrid instruments are dividends paid on preference shares, which in the case of Cyprus are considered as dividend income, whereas in the case of the country of the dividend paying company, such as Luxembourg, these payments may be considered as interest paid and allowable as a tax deductible expense.