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The EU Directive on Interest and Royalties

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Taxation of interest income depends on whether it was obtained in the ordinary course of business or activity that is closely connected with the ordinary. In such cases, the interest income is taken into account when calculating the tax base for corporate tax and is taxed at 10%. Interest earned by banks, finance companies, leasing companies and companies engaged in activities on hire purchase are treated as received in the ordinary course of business.

════════════ Interest earned on the following operations are considered as closely associated with normal activities and are also subject to corporate income tax rate of 10%:

(A) ══ operations in which products (goods) is sold in installments, and the buyers are charged interest payments, for example, the motor trade, construction, etc.

(B) ══ Interest on current bank accounts

(C) ══ interest earned by companies that act as an intermediary through which the Group provides financing for their companies. The formal definition of "group" in the Cyprus tax law does not, however, assumed that a group refers to the relationship, when the company ultimately controlled by one entity. Accordingly, the two companies owned by one individual without creating a holding company, the Panel does not consider

════════════ In all other cases where the interest is deemed to be received is not in the ordinary course of business, half the amount as income for tax purposes, corporate tax and the total amount is taxed on defense at 10%. Thus, the overall tax burden on such interest income is 15%. Interest on deposit accounts and interest on loans to third parties, also belong to this group.

════════════ Tax deduction for the tax on defense is provided for all taxes withheld at source, regardless of whether an international treaty on avoidance of double taxation.

═════════ The EU Directive on Interest and Royalties

═══════════ The EU directive on interest and royalties came into force on 1 January 2005. It provides that payments of interest and royalties will be exempted from taxation in the territory of a Member State in which they arise, if the beneficiary is a company with a certain kind, established in another EU member state.

═══════════ The directive applies only to the interdependence of companies. The company is interdependent with respect to another company if that other company owns at least 20% of its share capital. In January 2007, this level will drop to 15%, and in January 2009 - up to 10%.

═══════════ Company EU member state is recognized as the recipient (beneficiary) of interest or royalties, only in case if it receives such payments in their own interests, rather than as a broker, agent or trustee acting in the interests of others.

═══════════ Interest and royalties are determined based on market value (arm's length principle). The directive does not apply to payments that exceed the fair market value.

═══════════ Regime of low tax burden on Cyprus made the country an ideal mechanism for generating income residents of the EU on its business in the EU. Interest and royalties offset the costs for taxpayers in the EU, reducing its tax base, and are subject to a low, almost zero tax in Cyprus.

═══════════ It should be noted that Greece, Czech Republic, Slovakia, Poland, Portugal, Spain, Latvia and Lithuania were granted a transitional period for the implementation of the directive. The above countries may retain the income tax at source at the maximum rate of 10% until 2007, and 5% by 2011. Network of international tax agreements include an agreement with Cyprus, Greece, Czech Republic, Slovakia and Poland.

═══════════ The overall tax burden on interest and royalties transferred to Cyprus from these countries, the transitional period does not apply, because Cyprus offers a tax deduction for the taxes withheld by these countries