Cyprus holding companies often use leverage to fund subsidiary acquisitions. Interest deductibility is governed by Section 11(7) ITL (general framework), Article 11A ITL (thin-cap rule), and anti-abuse principles. We walk through the framework + worked examples.8 min read · By Nexora Cyprus editorial team · Reviewed by an ICPAC-registered Cyprus tax adviser engaged by Nexora
Three-layer framework
(1) General deductibility — interest deductible if 'wholly + exclusively' for production of taxable income (Section 11(7) ITL). (2) Thin-cap rule — Article 11A caps net deductible interest at 30% EBITDA / €3M de minimis. (3) Anti-abuse — interest on debt funding non-taxable / exempt income (e.g., participation-exempt dividends) may be disallowed under anti-abuse principles.
1. Section 11(7) — general framework
Cyprus Income Tax Law 118(I)/2002 Section 11(7) — interest is deductible IF:
Incurred wholly + exclusively for the production of TAXABLE income.
Not capital in nature.
Arm's-length rate (TP-compliant).
Not anti-abuse-triggering.
2. Holding-company complication
Cyprus HoldCo problem: it typically derives PARTICIPATION-EXEMPT dividend income (Article 28 ITL) + 0% CGT on share disposals (Article 9(1)(g)). If interest funds the acquisition of an EXEMPT-INCOME-generating subsidiary, anti-abuse may disallow the interest:
Interest on debt acquiring shares in subsidiary generating EXEMPT dividend income: anti-abuse review.
Interest on debt funding GENERAL Cyprus HoldCo activities (mixed income types): partial allocation between exempt + taxable streams.
Cyprus Tax Department practice: case-by-case analysis with focus on commercial purpose + economic substance.
3. Article 11A thin-cap layer
Article 11A caps net deductible interest (after Section 11(7) framework applies) at the higher of:
30% of tax-adjusted EBITDA, OR
€3,000,000 de minimis.
Excess interest carries forward up to 5 years.
Group-ratio override available for consolidated-group structures.
4. Worked example — leveraged acquisition
Cyprus HoldCo acquires foreign OpCo for €100M, funded by €60M bank debt + €40M equity:
Bank interest expense: 6% × €60M = €3.6M per year.
Foreign OpCo dividend income to HoldCo: €5M (participation-exempt under Article 28).
Cyprus Tax Department position: case-specific. Some interest may be allowable based on commercial substance + planning purpose. Other interest may be disallowed.
Best practice: structure with TP-compliant terms + clear commercial rationale + ICPAC + Cyprus Bar counsel.
AuthorNexora Cyprus editorial teamReviewed byAn ICPAC-member accountant or Cyprus Bar Association lawyer engaged by NexoraLast updatedMay 2026
Disclaimer: This article is for informational purposes only and does not constitute legal, tax, or financial advice. Tax laws change frequently. Consult a qualified Cyprus adviser for guidance specific to your situation. The information on this page is general guidance only and does not constitute legal, tax, accounting, immigration or financial advice. Specific advice should be obtained based on the facts of each case.