A new tax circular EE25 of the Cyprus Tax Department was issued clarifying the treatment of NRCC. When a Cyprus company contributes to the net assets of its foreign subsidiary company (usually Russian) without the latter issuing new shares in the form of NRCC there was a dispute whether the said contribution is treated as a loan (therefore interest to be included in the tax computation) or its part of the capital.

The contribution in order to be treated as NRCC and not as a loan will need to fulfill the below terms:

  1. The Cyprus company providing the contribution must have a direct shareholding in the company that receives it.
  2. The Cyprus company will not have the legal right at any point in time to request repayment of the amount contributed.
  3. The repayment of the NRCC is possible only in the event of a capital reduction or dissolution / liquidation of the recipient based on the legal framework of the jurisdiction of the recipient. This requirement may not apply if the legal framework of the jurisdiction of the recipient allows the recipient the possibility to return the NRCC without a capital reduction.
  4. The return of the contribution cannot take place sooner than two years from the end of the year that the contribution is made.
  5. The company receiving the contribution can claim tax relief in the form of deemed interest expense with respect to the NRCC.

Any expenses relating (directly or proportionately) to the above NRCC are disallowed for tax purposes which is the same as with shares and other exempt financial instruments.

 

The provisions of the above circular can apply from the 2017 tax year.