Director and Shareholder Loans and Employee Benefits

Loans to Directors or Shareholders

Loans or financial aid given to directors, individual shareholders, or their close family (spouse or relatives up to the second degree) are considered a benefit. This benefit is assessed as a deemed monthly interest rate of 9% per annum, based on the sum received. This calculated interest is regarded as part of the recipient’s taxable income and must be reported accordingly.

ℹ Persons Covered – Article 5(1)(ζ) ITL

The 9% deemed benefit applies to loans or financial facilities granted to the following natural persons:

Directors of the company
Direct or indirect shareholders (individuals)
Spouses of directors or shareholders
Relatives up to the second degree of kinship (parents, children, siblings, grandparents, grandchildren)

Note: The provision applies only to natural persons. Loans to companies (even if controlled by the above persons) do not trigger the 9% deemed benefit under Article 5(1)(ζ). Commercial transaction balances are excluded.

⚠ 9% Deemed Benefit – Calculation Guidance

The 9% rate is applied per annum on the outstanding loan balance
For variable balances, the benefit is calculated on monthly outstanding amounts
The benefit is treated as taxable income of the recipient (director, shareholder, or related person)
The company providing the loan or facility has reporting obligations to tax authorities

Extension to Indirect Shareholders

✦ New from 2026

The 9% deemed benefit on financing transactions has been extended from direct shareholders to also cover indirect shareholders. This expansion means that loans or financial facilities granted to individuals who hold shares indirectly through intermediate companies or other structures are now subject to the same 9% deemed benefit rules. Companies and individuals with financing arrangements involving indirect shareholdings should carefully review these provisions to assess their tax position.

What is an Indirect Shareholder:

An indirect shareholder is someone who holds shares through one or more intermediate companies or entities
Example: If Person A owns Company B, which owns Company C, Person A is an indirect shareholder of Company C
There is NO minimum ownership threshold specified — any indirect shareholding can trigger the 9% benefit
The provision also covers relatives (up to 2nd degree) of indirect shareholders

Worked Example — Multi-Tier Indirect Shareholding

Person A owns 100% of Holding Co (Cyprus), which owns 80% of Operating Co (Cyprus). Operating Co grants a €500,000 interest-free loan to Person A.

Result: Person A is an indirect shareholder of Operating Co. The 9% deemed benefit applies: €500,000 × 9% = €45,000 taxable income attributed to Person A annually. This applies even though Person A is not a direct shareholder or director of Operating Co.

Multi-layer chain: If Person A → HoldCo 1 → HoldCo 2 → Operating Co, Person A remains an indirect shareholder at every level. A loan from any entity in the chain to Person A (or their spouse/relatives to 2nd degree) triggers the 9% deemed benefit.

Compliance Checklist: Companies should (1) map all direct and indirect shareholders including relatives to the 2nd degree, (2) identify all loans, advances, or financial facilities extended to any such person, (3) calculate the 9% deemed benefit monthly on outstanding balances, (4) report the benefit on the TD63A employer’s return and include in the recipient’s taxable income, (5) retain documentation for the 6-year retention period.

📋 Previous Provisions

Until 2025, the 9% deemed benefit was limited to loans or financial facilities granted to direct shareholders, directors, and their close relatives. The 2026 reform extends this provision to indirect shareholders, broadening the scope of the tax provision and closing a potential planning gap.

Constructive (Disguised) Dividends

✦ New from 2026

The 2026 tax reform introduces new provisions regarding constructive (disguised) dividends. Where a company provides assets, benefits, or advantages to shareholders (or individuals related to shareholders) without adequate commercial justification or at an undervalue, such provisions may be treated as disguised dividends and subject to Special Defence Contribution.

Tax Treatment: Disguised dividends received by Cyprus tax resident domiciled individuals are subject to a 10% Special Defence Contribution withholding tax (double the normal 5% SDC rate on regular dividends). This higher rate is designed to discourage the use of corporate assets for private purposes.

What Constitutes a Disguised Dividend:

Private Use of Company Assets: When a shareholder (or a related individual) uses a company asset for private purposes without commercial justification. The taxable amount is determined as the market value of the asset at the commencement of personal use multiplied by the percentage of personal use (or 100% if the asset is not connected to the company’s business).
Asset Disposals at Undervalue: When a company disposes of assets to a shareholder (or related individual) at a consideration below fair market value. The taxable disguised dividend amount equals the market value of the asset at the time of disposal minus the consideration paid by the shareholder.
Changes in Personal Use Percentage: Increases in the percentage of personal use of a company asset result in additional disguised dividend charges based on the increased personal use percentage valued at current market value. Conversely, reductions in personal use do not result in refunds of previously charged SDC.

Exceptions to the Disguised Dividend Rules: The disguised dividend provisions do not apply in the following circumstances:

When assets are donated to the company by the shareholder (or related individual) for the private use that gave rise to the disguised dividend
Where Income Tax Law benefit in kind provisions otherwise apply
During capital reductions, dissolutions, or liquidations (these are treated under separate dividend rules)

Important Notes: Non-doms and non-Cyprus tax residents are not subject to the disguised dividend provisions. Additionally, the SDC on disguised dividends is not refundable.

📋 Practical Calculation Example

Scenario: A company allows its shareholder to use a company-owned apartment (market value €500,000) for 100% private purposes. The disguised dividend is €500,000 × 100% = €500,000. SDC at 10% = €50,000 payable.

Change in Use: If the shareholder later increases personal use from 60% to 80%, the additional 20% triggers further SDC on (€500,000 × 20% = €100,000), resulting in additional SDC of €10,000.

Share-Based Payment Schemes for Employees and Directors

✦ New from 2026

The 2026 reform introduces a preferential flat 8% tax rate on benefits from approved share-based payment schemes for employees and directors. Key conditions include a minimum 3-year vesting period from Commissioner approval, a benefit cap of 2x annual remuneration per award, and a €1,000,000 lifetime cap over any 10-year period. Article 33 related parties are excluded.

From the employer/company perspective: Benefits provided to employees through approved schemes that have been taxed in the hands of the employee are fully deductible as a business expense. Companies must submit schemes for Commissioner approval and maintain records of all vesting events and benefit calculations.

For the full conditions table, calculation guidance, related party exclusions, and employee election advice, see Individuals Special Modes of Taxation.

Employment Income – Inception and Termination Benefits

✦ New from 2026

The 2026 reform introduces specific taxation rules for employment-related income that arises upon inception or termination of employment:

Benefits for Employment Inception: Benefits provided as incentives for an individual to accept employment or take up office, granted prior to the commencement of employment, are subject to tax at normal progressive income tax rates.

Ex Gratia and Termination Payments: Ex gratia payments related to retirement (including early retirement) or termination of employment or office are subject to the following special tax treatment:

Amounts up to €200,000 are subject to normal progressive income tax rates
Any amounts exceeding €200,000 are taxed at a flat rate of 20%
Amounts in excess of €200,000 are not deductible for the employer

What Qualifies as “Ex Gratia”: Ex gratia payments are those that go beyond what the employee is contractually entitled to receive. The following do NOT qualify as ex gratia:

Regular salary and wages
Accrued leave and holiday pay
Statutory severance or redundancy compensation required by law
Contractually specified termination benefits

Early Retirement Scheme Benefits: Benefits granted through an Early Retirement Scheme are taxed on the same basis:

Amounts up to €200,000 are subject to normal progressive income tax rates
Any amounts exceeding €200,000 are taxed at a flat 20% rate
Excess amounts are not deductible for the employer

Termination Compensation: Compensation for termination of employment or office, when not specifically provided for in the terms of employment, is taxed as follows:

Amounts up to €200,000: normal progressive rates
Excess over €200,000: flat 20% rate
Excess amounts are not deductible for the employer

Court-Adjudicated Amounts: Any amounts adjudicated by a court with respect to income taxable under these provisions follow the same tax treatment as described above. Even if a court awards compensation, the same thresholds and tax rates apply.

Important — €200,000 Threshold Applies Separately to Each Termination Category: The €200,000 threshold and the 20% flat rate on excess applies independently to each of the following termination-related benefit types:

Category (a): Ex gratia and retirement payments (including early retirement)
Category (b): Early retirement scheme benefits
Category (c): Other termination compensation not provided for in the terms of employment

Note: Inception benefits (benefits granted prior to commencement of employment) are not subject to the €200,000 threshold or 20% flat rate — they are taxed at normal progressive income tax rates in full.

A person receiving multiple types of termination benefits can apply the €200,000 threshold to each category separately. For example, an employee receiving both ex gratia payments and early retirement scheme benefits can apply the €200,000 threshold to each category independently.

Tax Planning Consideration: The €200,000 threshold and 20% flat rate on excess applies independently to each of the three termination-related categories (ex gratia and retirement payments, early retirement scheme benefits, and other termination compensation not provided for in the terms of employment). Note: inception benefits do not benefit from the €200,000 threshold — they are taxed at normal progressive rates in full. Careful structuring of such payments, in consultation with tax professionals, may help optimize overall tax treatment.

Employee Benefits

Any benefits provided to an employee or their family members, whether in cash or in kind, are taxable under income tax regulations. Benefits in kind are assessed based on the fair market value of the benefit provided and are subject to progressive income tax rates in the hands of the employee.

Common examples of benefits in kind include:

Provision of company vehicles for private use
Housing accommodation provided by the employer
Loans at below-market interest rates
Personal expenses paid by the employer
Goods or services provided at a discount
Gifts and entertainment benefits

For a comprehensive understanding of how benefits in kind are taxed, refer to the detailed guidelines provided by the Cyprus Tax Department. These guidelines cover specific valuation methods for different types of benefits and special rules that may apply to certain categories of employees or benefits.

Disclaimer

Please note that the information provided here is for general guidance only and does not constitute professional tax advice. Tax laws and interpretations are subject to change, and individual circumstances can significantly affect tax obligations and benefits.

Contact Us

For personalized tax advice tailored to your specific situation, we strongly recommend consulting with a qualified tax professional. Our team is equipped with the expertise to navigate the intricacies of Cyprus tax law and provide you with customized solutions. Contact us to ensure that you are making the most informed decisions for your tax-related matters.