Approval Of The Restoration And Resilience Plan Of Cyprus – Tax

Cyprus:

Approval Of The Recovery And Resilience Plan Of Cyprus

03 August 2021

Ernst & Young Cyprus Ltd

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Introduction

On 26 July 2021, the Economic and Financial Affairs Council

(ECOFIN) approved Cyprus’ National Recovery and Resilience Plan

(RRP). The RRP sets out the measures that will be supported by the

Recovery and Resilience Facility (RRF). The RRF is supported by the

NextGenerationEU which will provide ?800 billion across the EU to

help EU member states recover from the COVID-19 pandemic.

In relation to Cyprus, the RRP includes several reforms and

investments ranging from accessibility and overall resilience of

the healthcare sector to furthering the green economy and measures

to improve tax collection and combat aggressive tax planning. These

measures include a set of milestones for their enactment and

assessment.

We summarise the most important measures below which will affect

the Cyprus taxation system.

Component 2.1 – Climate neutrality, energy efficiency and

renewable energy – Reform 1: Green Taxation

The objectives of this component are to improve the environment

policy through measures relating to green taxation. More

specifically, this component aims to promote a shift towards a more

efficient use of environmental resources, reduce greenhouse gas

emissions and to increase the penetration of renewable energy.

The proposed legislative changes will be based on the findings

of an independent study and should be implemented by 30 June

2026.

The expected legislative changes include:

Carbon tax for fuels used in sectors of the economy not under

the EU greenhouse gas Emissions Trading System
Levy on water
Charge on household/landfill waste

Component 3.2 – Enhanced Research and Innovation – Reform 2:

Incentives to encourage and attract investments and human capital

in Research and Innovation

The objectives of this component are inter-alia to strengthen

links between research organisations and enterprises and increase

intensity in research & development (R&D) activity and

investments by both public and private organisations. Furthermore,

it aims inter-alia to enhance financial support to start-ups,

scale-ups, SMEs and internationalise the local research and

innovation (R&I) ecosystem.

Reform 2 of C3.2. relates to the extension of the application of

the tax scheme for investing in innovative companies to legal

entities (from physical persons currently) and shall be implemented

by 30 September 2022.

Component 3.5 – Safeguarding Fiscal and Financial

Stability

The aim of this component, apart from safeguarding a financial

stability, is to ensure a fiscal stability by combating tax

evasion, tax avoidance and aggressive tax planning; and providing

policy makers with comprehensive data in order to design a fair tax

system. The envisaged measures are expected to make revenue

collection more efficient and Cyprus’ tax system fairer,

reducing the spill-over effects from aggressive tax planning.

Reform 9: Improving tax collection and effectiveness of the Tax

Department

The objective of the measure is to make tax collection more

efficient and effective, through a higher level of digitalisation

and tax compliance, and improve customer service.

The reform shall consist in integrating different tax units,

procedures and processes, so as to offer single point of taxpayer

service, legislative changes and implementing a new IT system and

digitising the Tax department. The latter shall include:

a single registration to the tax base and Taxisnet (for

electronic submission of Income Tax Returns by Individuals, Legal

Persons and Employers);
an integrated tax auditing process based on risk

assessment;
an integrated refunds audit;
an integrated and enhanced single point of service, including

the direct payment of VAT and connecting businesses to a server

held within the Tax Department, without the use of specialised

mechanisms;
a process to issue single tax clearances:
possibility for immediate adjustments of the system to

accommodate any changes in the legislation and/or procedures and

extension of secure interfaces with other information systems;
data analysis capabilities and
scanning and electronic storage of all taxpayer paper documents

regarding the real estate (immovable property) and capital gains

with relevant security, integrity and confidentiality

parameters.

The legislative changes shall include and should be implemented

by 31 December 2025.:

a recently introduced legislation to implement the mandatory

submission of tax returns by every natural person with income as

defined in Article 5 of the Income Tax Law, regardless of the

threshold starting from the tax year 2020 (subject to exceptions);

and
criminalising the non-payment of income taxes.

Reform 10: Addressing Aggressive Tax Planning

The overall objective of the measures under Reform 10 of C3.5 is

to increase the effectiveness, efficiency and fairness of the tax

system by combatting tax evasion and aggressive tax planning by

Multinational Enterprises.

The first reform sub-measures which will be enacted by 31

December 2021 and enter into force by 31 December 2022 consist

of:

Imposing a withholding tax on outbound payments of interest,

dividends and royalty payments made to jurisdictions in Annex I of

the EU list of non-cooperative jurisdictions on tax

matters1.
Introducing the corporate tax residency test which will be

additional to the management and control test. More specifically,

the first test shall be the management and control and, in cases

where a company is incorporated in Cyprus but its management and

control is done from another jurisdiction, it shall be considered

as a Cyprus tax resident and shall be taxed in accordance with the

relevant provision of the Income Tax Law, provided that the company

is not a tax resident elsewhere (to avoid dual residency

status).

The second reform sub-measure which should be enacted by 31

December 2024 consist of:

Introducing a withholding tax on outbound payments of interest,

dividends and royalty payments to low tax jurisdictions. In respect

of interest and royalty payments, the Cypriot authorities may

explore instead the approach of applying non-deductibility.

The third reform sub-measure which should be enacted by 30 June

2026 consist of:

An independent evaluation which should be completed by 31

December 2024 where Cyprus shall assess the effectiveness of the

overall set of measures related to aggressive tax planning. This

evaluation shall assess the Cyprus tax framework holistically

including all measures adopted by then. The evaluation shall lead

to policy action to be undertaken by Cyprus to address any

shortcomings identified, including in the form of legislative

changes, which shall enter into force by 30 June 2026.

Footnote

1. Taxation: EU list of non-cooperative jurisdictions

– Consilium (europa.eu)

The content of this article is intended to provide a general

guide to the subject matter. Specialist advice should be sought

about your specific circumstances.