Cyprus Holding Company Interest Deductibility 2026 — Section 11(7) + Thin-Cap + Anti-Abuse

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 HoldCo other taxable income: minimal.
• Section 11(7) review: interest funds participation-exempt-income-generating asset — anti-abuse concern.
• 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.

5. NID stacking

Cyprus Notional Interest Deduction (NID — Article 9B) provides a parallel benefit for EQUITY funding. Cyprus HoldCos often mix:

• Equity funding from parent / founder + NID deduction (10-yr bond + 5% premium ≈ 8-9% currently).
• Strategic debt for portion of acquisition (with deductibility analysis).
• Combined: equity-heavy structure with NID + modest leverage — common Cyprus HoldCo profile.

6. Best practice

1. 1Transfer-pricing study supporting interest rate at arm's length.
2. 2Documented commercial purpose of debt acquisition.
3. 3Mixed-funding (equity + NID + modest debt) rather than 100% debt.
4. 4Annual review of interest deductibility under Section 11(7) + Article 11A.
5. 5Optional ATR (Advance Tax Ruling) for material acquisition structures.
6. 6Cyprus + foreign-jurisdiction tax-adviser coordination on cross-border interest flows.

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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.