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On the 25th of April 2019, following provisions
of the EU Anti-Tax Avoidance Directive of July 2016, the Cyprus law
introduced measures against tax avoidance methods that negatively
affect the internal markets functioning. These measures are known
as Anti-Tax Avoidance Directives – ATAD. In July 2020, the
Official Gazette of Cyprus published the law implementing the
remaining ATAD I provisions as well as those of the ATAD II.
This concluded and ensured that Cyprus law is fully in line
with the EU anti-tax avoidance regulatory framework. See below the
four directives that were established of the years:
- Interest Limitation Rule (applicable from
01/01/2019):
This directive was introduced with the intention to prevent
group companies from providing finance from their subsidiaries in
low jurisdiction countries to companies that are based in high
jurisdiction countries. As per this rule, any exceeding borrowing
costs (EBC) will be deducted in the tax year in which incurred,
only up to 30% of the taxable earnings before interest, tax,
depreciation and additions (EBITDA). EBC is defined as net interest
expense. Losses brought forward are not taken into account when
calculating taxable earnings as well as any income that is not
taxable. Interest limitation rule is applicable to both related and
unrelated companies.
When a company is part of a Cyprus group, then the interest
limitation rules will apply on the group as a whole, including
permanent establishments in Cyprus. While if a company is not a
member of a Cyprus group, then the rules will apply on the company
itself.
Law states that any exceeding borrowing costs above
€3,000,000 per tax year are not subject to limitation.
There are also exceptions in regards to the interest limitation
rule. Exemptions are listed below:
- Standalone companies (companies with no associates, not members
of a group, no permanent establishments); - Financial Undertakings (banks, investment funds, pension funds
etc.); - Loans that were used to fund long-term public infrastructure
projects; - To companies with exceeding borrowing costs below
€3,000,000;
There is also a maximum when it comes to the amount that can be
claimed. Maximum is the higher of the actual amount of exceeding
borrowing costs if below €3,000,000 and 30% of EBITDA.
If a company during its current tax period has unused exceeding
borrowing costs and interest capacity that are not deductible, then
this can be carried forward for the following five years.
- Controlled Foreign Company (CFC) rule (applicable
from 01/01/2019):
Income from subsidiaries or a permanent establishment, that are
normally not subject or are exempt from Cyprus tax, may be taxed in
Cyprus if conditions of the CFC rule are met. If conditions are met
and income arises from non-genuine arrangements, then such income
from a low-taxed controlled foreign company is transferred to its
controlled parent company. Any tax that has been paid in another
country on the income from the controlled foreign company or from
the permanent establishment will be credited against the tax
payable in Cyprus.
A Cyprus Controlling Entity must recognise to its taxable
income, the profits of the CFC, assuming the below conditions are
met:
- CFC has profits that have not been distributed to the extent
that such profits would have been taxable in Cyprus; - The arrangements between the Controlling Entity and the CFC are
not genuine and have been placed for the purpose of a tax
advantage; - The Controlling Cypriot Entity follows the operations of a
significant individual, which operations contribute to the
generation of income of the CFC;
The CFC rule does not apply to non-Cyprus tax resident companies
if a CFC has either:
- Accounting profits that do not exceed €750,000 and
non-trading income which do not exceed €75,000; or - Accounting profits that do not exceed 10% of its operating
costs for the tax year;
This rule has been imposed to ensure that when calculating tax
liabilities of a company, an arrangement or a series of
arrangements that have been performed are that are non-genuine
should be ignored. Non-genuine arrangements are defined as any
arrangement that takes place that has no economic or commercial
purpose.
- Exit Taxation (applicable from
01/01/2020)
When a Cyprus tax resident company or a non-Cyprus tax resident
company that holds a permanent establishment in Cyprus moves assets
either from their head office to a permanent establishment in
another Member State or a third country or vice versa, or moves its
tax residence to another Member State or a third country, then this
company will in certain cases be subject to exit taxation. If
this is the case, then the company will be taxed on the market
value of the transferred assets at exit time, less their value for
tax purposes. Market value is defined as the amount that unrelated
buyers and sellers that engage in a direct transaction are keen to
exchange an asset.
There are a few exemptions on specific assets under which Cyprus
will not impose exit tax. The exemptions are listed below:
- Assets that are posted as collateral;
- Asset transfers that are done for the purpose of meeting
capital requirements or liquidity management, assuming the assets
are to revert to Cyprus within a time period of 12 months; - Outbound transfers from the financing of securities;
In certain circumstances the taxpayer has the option to defer
exit tax payment and pay it in instalments over a 5 year period.
Such a deferral will be subject to interest.
- Hybrid Mismatches (applicable from
01/01/2020):
A hybrid mismatch arises when there is a difference between tax
regimes of two of more jurisdictions. In some cases such the
outcome of such a mismatch cannot be acceptable. Such cases are
when a double deduction or a deduction without inclusion
arises:
Double Deduction: When assessing
whether a double deduction is acceptable or denied, we
need to identify and distinguish between investor jurisdictions. If
the investor’s jurisdiction is Cyprus, then the hybridity is
neutralised since Cyprus will deny the deduction of any expense,
loss or payment. If the investor’s jurisdiction is
outside Cyprus and Cyprus is the payer’s jurisdiction, then
the deduction is allowable, assuming that the investor’s
jurisdiction has denied the deduction. In any event, all
deductions remain liable for offsetting against future or current
dual-income, whether it arises in current or following period;
Deduction without inclusion: If
Cyprus is the payer’s jurisdiction, then the hybridity is
neutralised by Cyprus denying deduction of payment or deemed
payment between head office and a permanent establishment or two or
more permanent establishments of the same entity. If the recipient
jurisdiction is Cyprus, then the income will be included in its
taxable base unless an exemption applies. Exemptions are
listed below:
- Payers jurisdiction does not deny deduction;
- Payments are made to a disregarded permanent
establishment; - Payments are made to hybrid entities where the mismatch outcome
is due to differences in allocation of payments made to the hybrid
entity; - Payments to entities with one or more permanent establishments
where the mismatch outcome is due to differences in allocation of
payments; - If a deemed payment is made between head office and permanent
establishment or between two or more permanent establishments, when
the mismatch is a result of the payment disregarded under laws of
payee jurisdiction;
Purpose of this rule is to ensure that deductions and credits
only take place in one jurisdiction and there are no situations in
which deductions of a payment are made in one jurisdiction without
this income being taxed in the other jurisdiction.
Reverse Hybrid
Mismatches (applicable from 01/01/2020):
If one or more associated non-tax resident companies that hold
in aggregate either directly or indirectly interest of 50% or more
of voting rights in a Cyprus hybrid entity, are located in a
jurisdiction or jurisdictions that regard the hybrid entity as a
taxable person, the hybrid entity shall be regarded as a Cyprus tax
resident and will be taxed on its income under Cyprus tax law.
Income will be taxed under income tax and special defence
contribution to the extent that income is not otherwise taxed under
Cyprus or any other jurisdiction tax laws.
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.