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.