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Cyprus and the Interest Limitation Rule
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In this episode, we break down Cyprus’s Interest Limitation Rule (ILR) — a cornerstone of the EU’s Anti-Tax Avoidance Directive (ATAD) framework.
The rule is designed to curb profit shifting through excessive interest deductions and ensure Cyprus remains a transparent, compliant, and competitive jurisdiction.
We’ll explain how the 30% EBITDA cap works, what the main exemptions are, and how businesses can manage compliance effectively under this regime.
🧩 Key Topics Covered
- Purpose of the Rule
- The ILR targets base erosion and profit shifting (BEPS) strategies that exploit intra-group financing.
- ➤ In simple terms, it stops multinational groups from using high-interest loans in Cyprus or other high-tax jurisdictions to artificially reduce taxable income.
- Main Mechanism
- • Deduction Cap: Exceeding Borrowing Costs (EBCs) are deductible only up to 30% of EBITDA.
- • De Minimis Threshold: A safe harbor of €3 million in net interest expense per year.
- • Scope: Applies to all Cyprus tax-resident companies and foreign companies with a permanent establishment in Cyprus.
- What Counts as Borrowing Costs
- All interest-related and financing expenses — including bond premiums, arrangement fees, and similar costs — are included.
- Tax-exempt income and carried-forward losses are excluded from EBITDA.
- Group Application
- For groups with 75% ownership participation, the 30% limit and €3M threshold apply at the group level.
⚖️ Exemptions & Reliefs
The rule provides several targeted exemptions:
- Standalone Entities:
- Companies not part of a group and without 25% ownership links are exempt.
- Financial Undertakings:
- Excludes banks, insurers, pension funds, AIFs, and UCITS.
- Grandfathered Loans:
- Loans concluded before 17 June 2016 are exempt, unless modified.
- EU Public Infrastructure Projects:
- Projects of clear public interest are carved out from the rule.
💼 Carry-Forward Rules
- Disallowed EBCs: Can be carried forward for up to five years.
- Unused Interest Capacity: Also available for five years.
- €3M Threshold: Cannot be carried forward.
🧮 The Equity Escape Clause
Cyprus also allows a full EBC deduction if a company’s equity-to-asset ratio is at least equal to that of its consolidated group (within a 2% tolerance).
All valuations must follow IFRS standards for consistency.
This “escape” recognizes well-capitalized businesses that are not using debt to erode the tax base.
🧠 Key Takeaways
- Deductibility capped at 30% of EBITDA, with a €3M safe harbor.
- Applies to both domestic companies and foreign PEs in Cyprus.
- Several targeted exemptions preserve competitiveness.
- Five-year carry-forward for both disallowed costs and unused capacity.
- Equity escape clause rewards genuine capitalization and compliance.
🔍 Mentioned in This Episode
- EU Anti-Tax Avoidance Directive (ATAD I & II)
- OECD BEPS Action 4
- Cyprus Income Tax Law (as amended)
- IFRS Valuation Standards
🎙️ About This Series
Global Tax Frontiers brings you sharp, policy-driven insights into international tax reform, cross-border structures, and compliance developments shaping global finance.
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