Cyprus Interest Deduction on Acquisition of Shares (2026): The 100% Subsidiary Rule and the Non-Business-Asset Clawback

"I borrowed to buy my trading company — can I write off the interest?" For most acquisitions the answer used to be an awkward "no", because Cyprus law restricts interest that finances assets not used in the business, and shares generate exempt income. A 2012 amendment changed that for one specific and very common case: the acquisition of a wholly-owned subsidiary.Law 102(I)/2012 amending Income Tax Law N.118(I)/2002, Art. 4

This guide gives the direct answer, the exact statutory mechanism, the conditions you must satisfy, how the pro-rata clawback bites when a target holds non-business assets, and how the rule interacts with the exemption for dividends. It reflects the 15% corporation-tax rate that applies from 1 January 2026; the wider picture sits in our Cyprus corporate tax guide.

Is interest on acquiring subsidiary shares deductible in 2026?

Yes — provided the shares are in a company that is wholly owned (100%), directly or indirectly. Interest on the borrowing used to make that acquisition is deductible against the parent's taxable income, subject only to a pro-rata cut-back for any non-business assets the subsidiary holds. Anything short of 100% falls outside the carve-out.

The rule sits inside Article 11 of the Income Tax Law N.118(I)/2002, which governs deductions, and specifically its interest-restriction subsection. Left to itself, that subsection would deny a deduction for interest relating to assets not used in the business — and shares are the classic example, because they produce dividends and disposal gains that are largely outside corporation tax. The 2012 amendment carved out a defined exception so that genuine acquisition financing of a wholly-owned subsidiary is not caught.Income Tax Law N.118(I)/2002, Art. 11

What exactly did the 2012 amendment change?

Law 102(I)/2012 inserted a proviso into Article 11(15) stating that the interest restriction "does not apply in respect of interest for the acquisition of shares of a wholly-owned, directly or indirectly, subsidiary company" — on condition the subsidiary's assets do not include assets not used in the business. It applies to acquisitions made on or after 1 January 2012.

Before the amendment, the interest-restriction subsection treated a shareholding like any other non-business asset: interest that financed it was progressively disallowed. That made straightforward buy-outs and holding structures unnecessarily expensive after tax. The amendment — Article 4 of Law 102(I)/2012, published in the Official Gazette on 6 July 2012 — added a new proviso to Article 11(15) and fixed its effect to share acquisitions carried out from 1 January 2012 onward.Law 102(I)/2012, Art. 4 (Official Gazette Παρ.Ι(Ι) Αρ.4344, 6.7.2012)

Two features of the drafting matter. First, it reaches both direct and indirect wholly-owned subsidiaries — a Cyprus parent borrowing to buy 100% of a top company that itself owns operating subsidiaries is within scope. Second, the relief is expressed as a carve-out from a restriction, not as a fresh positive rule, so the underlying general conditions for deducting interest still have to be met (see below).

What conditions must be satisfied to claim the deduction?

Three things must hold: the acquired company must be 100% owned (directly or indirectly); the interest must relate to that share acquisition; and the subsidiary's balance sheet should consist of business assets. If any of those breaks, the deduction is reduced or lost to that extent.

• 100% ownership.The carve-out speaks of a subsidiary owned "wholly" — directly or indirectly. A 99% stake does not qualify; the interest funding a non-100% holding stays inside the general restriction.
• The borrowing must fund the acquisition. The interest must be on money used to acquire the shares. Refinancing an existing qualifying acquisition can remain within scope, but interest diverted to other purposes is tested on its own facts under Article 11.
• Business assets in the target.The clean case is a subsidiary whose assets are all used in a business. Where the subsidiary holds non-business assets — idle cash parked for investment, a non-operational property, or passive receivables — the pro-rata clawback below is triggered.Income Tax Law N.118(I)/2002, Art. 11(15) (as amended by Law 102(I)/2012)

How does the non-business-asset pro-rata clawback work?

The deduction is not all-or-nothing. Where the wholly-owned subsidiary holds assets not used in a business, the disallowance of interest at the parent level is "restricted only to the amount that corresponds to such assets." So you keep the deduction on the business portion and lose it only on the non-business slice.

In practice this is an apportionment exercise. If, say, a fifth of the subsidiary's assets are not used in a business, roughly a fifth of the acquisition interest is disallowed and the remainder stays deductible. The statutory language is deliberately proportionate: the default rule would deny the whole interest cost, but the proviso limits the denial to the value attributable to the non-business assets. The composition of the target's balance sheet at the relevant time is therefore the pivotal fact, which is why acquirers scrub it before completion.Income Tax Law N.118(I)/2002, Art. 11(15), proviso (Law 102(I)/2012)

How does this fit the general interest-deduction rule?

The carve-out removes one specific obstacle — it does not switch off the ordinary tests. Interest still has to satisfy Article 11's general requirement that expenditure be incurred in producing the income, and it interacts with transfer-pricing and arm's-length expectations where the loan is from a related party.

Cyprus deducts expenses that are wholly and exclusively incurred in the production of taxable income under Article 11 of the Income Tax Law. Interest generally qualifies where the borrowing is applied to a business purpose. The 2012 proviso resolves the awkward point that shares produce exempt income, but the loan itself must still be genuine and, if intra-group, priced on arm's-length terms consistent with Cyprus transfer-pricing rules and the OECD Transfer Pricing Guidelines.OECD Transfer Pricing GuidelinesDeductible acquisition interest that outstrips income becomes a loss, carried forward up to five years and potentially surrendered within a group — see loss carry-forward and group relief.

Doesn't the dividend exemption block the deduction?

No — and that is the whole point of the carve-out. Normally you cannot deduct interest financing an asset that yields exempt income. Because dividends from the subsidiary and gains on disposal of the shares are largely outside corporation tax, the pre-2012 rule denied the interest. The proviso overrides that for wholly-owned subsidiaries.

This is the feature that makes the rule commercially valuable. A Cyprus holding company can borrow to acquire 100% of a trading group, deduct the acquisition interest against its taxable base at 15%, and still receive dividends that are exempt from corporation tax — and, for a properly structured non-domiciled shareholder, exempt from Special Defence Contribution as well. The deduction and the exemption coexist by express statutory design rather than by concession, which is why the drafting pins the relief to the 100% test: it is a targeted rule, not a general licence to deduct interest on any share purchase.Income Tax Law N.118(I)/2002, Art. 8 (exempt income) and Art. 11(15)

How should you structure and document the acquisition?

Get three things right on paper before completion: that the acquisition is of 100% of the target; that the loan is traceably applied to that acquisition; and that the target's balance sheet is understood, so you can quantify any pro-rata clawback in advance rather than discover it on audit.

1. Fix the 100% position. Structure the deal so the Cyprus acquirer holds the target wholly, directly or through an intermediate holding company, and keep the share registers and resolutions to prove it.
2. Trace the money. Document the loan agreement, drawdown and payment of consideration so the interest is clearly tied to the share purchase, not to unrelated funding.
3. Map the target's assets. Obtain a completion balance sheet and flag any non-business assets, so the deductible and disallowed portions are computed and supportable.
4. Price related-party loans at arm's length. If the acquisition finance comes from within the group, support the rate with transfer-pricing analysis.
5. Have it reviewed by your auditor. The deduction feeds the corporate tax computation, which rests on audited or reviewed financial statements; align the treatment with the auditor before filing.

What are the common mistakes?

The recurring errors are assuming any shareholding qualifies, ignoring the target's non-business assets, and treating the carve-out as a substitute for the general deduction conditions. Each one turns an expected deduction into a disallowed cost on audit.

• Under-100% stakes. A 95% acquisition is outside the carve-out; the interest funding it is restricted.
• Overlooking non-business assets.A target sitting on an investment portfolio or a non-operational property triggers the pro-rata clawback — often larger than expected once passive balances are counted.
• Loose loan documentation. If the borrowing cannot be traced to the share purchase, the deduction is exposed under the general Article 11 test.
• Forgetting transfer pricing. Related-party acquisition loans priced off-market invite adjustment.