Cyprus: Cyprus Introduces Legislation Implementing The Provisions Of The EU Anti - Tax Avoidance Directive

A. INTRODUCTION

The Cyprus House of Representatives has recently voted a new law transposing the provisions of the European Union Anti-Tax Avoidance Directive (the "ATAD" or "Directive") into the local legislation.

The ATAD provides for minimum standards that need to be applied by all Member States and constitutes part of the Anti-Tax Avoidance Package established by the EU. The Directive aims to tackle tax avoidance practices and aggressive tax planning.

The ATAD provisions set rules for the following aspects:

Applicable as from 1st of January 2019:

1. Controlled Foreign Company (CFC) rule

2. Interest Limitation rule

3. General Anti abuse rule (GAAR)

Applicable as from 1st of January 2020:

4. Exit Taxation rule

5. Hybrid Mismatches rule.

The main provisions of the above rules which are in force as from 1st of January 2019 are analyzed below. The provisions of the rules applicable as from 1st of January 2020 are not yet introduced into the Cyprus legislation however this is expected to be done before the end of 2019.

B. ANALYSIS OF THE ATAD PROVISIONS APPLICABLE AS FROM 1ST OF JANUARY 2019

1. Controlled Foreign Company (CFC) rule

The rule provides that the CFC income of a CFC is included in the taxable income of a Cyprus tax resident entity and is taxed according to the provisions of the Cyprus legislation. The CFC rule applies to Cyprus tax resident companies and to the permanent establishment in Cyprus of non-Cyprus tax resident companies.

Definitions

CFC: According to the provisions of the Law, a CFC is a non-Cyprus tax resident company or a foreign permanent establishment of a Cyprus tax resident company where its profits are not taxed or are exempt from taxation in Cyprus and the following conditions are met:

  1. 50% of the voting rights or of the share capital or the rights on the profits of the non-Cyprus tax resident company are held directly or indirectly by a Cyprus tax resident Company (either alone or together with other connected entities),

AND

  1. The actual income tax paid (the effective tax) on the profits of the non-Cyprus tax resident company is less than 50% of the tax that would have been paid in Cyprus if calculated based on the provisions of the Cyprus Income Tax Laws.

CFC Income: According to the provisions of the Law, the CFC income is the undistributed income of the CFC which was generated from non-genuine arrangements that have been put in place for the essential purpose of obtaining a tax advantage.

The CFC income that is added to the taxable income of the Cyprus Company is calculated based on the percentage holding of the Cyprus company and relates only to the income that originates from assets and risks directly linked with the Significant People Functions performed by the Cyprus Controlling Entity.

The level of income of the CFC that originates from the Significant People Functions performed by the Cyprus Controlling Entity must be determined through a Transfer Pricing Study.

Non-Genuine Arrangements: If the Significant People Functions in relation to the CFC are performed at the level of the Cyprus controlling entity to the extent that the CFC would not have been in a position to have in its possession the assets and to undertake financial risks that generate the income.

Exception

The CFC provisions do not apply if:

  1. the accounting profits of the CFC Company do not exceed €750.000 AND the passive income is not more than €75.000.

Or

  1. The accounting profits of the CFC Company do not exceed 10% of its operating expenses for the tax year.

Elimination of double taxation

The Law provides for the avoidance of the double taxation profits distributed as dividends from a CFC or profits from the sale of a CFC to be reduced by previously regarded CFC income which was taxed under the CFC rules.

Tax credit

In accordance to the Law, the Cyprus controlling entity is eligible to claim, with no restriction, any overseas tax paid on the CFC profits included in its tax base.

2. Interest Limitation Rule

The rule provides that the exceeding borrowing costs that are more than 30% of the Tax-Adjusted EBITDA (Earnings Before Interest Tax Depreciation Amortisation) shall not be deducted for the purpose of calculating the taxable income of the company. However, the rule provides that exceeding borrowing costs up to EUR 3 million to be excluded from the above limitation.

The interest limitation rules apply to both Cyprus tax resident companies and non- Cyprus tax resident companies having a permanent establishment in Cyprus.

Main objective of this rule is to "limit deductibility of taxpayers' exceeding borrowing costs" due to the fact that groups tend to engage in base erosion and profit shifting, in order to reduce their global tax liability, through the deductibility excessive interest payments.

Definitions

Exceeding Borrowing Cost (EBC)

EBC is defined as the amount by which the borrowing cost of a taxpayer which is deductible for tax purposes, exceeds the taxable income from interest and other economically equivalent revenues which are taxable according to the Income Tax Law in Cyprus.

The term 'Borrowing costs' follows the definition of the Directive and includes the loan interest expense on all forms of debt, other costs economically equivalent to interest and expenses incurred from the raising of financing (both intra-group and third party loans).

Tax adjusted EBITDA

Based on the Law provisions, the tax adjusted EBITDA is calculated by adding to the taxable income of the year the exceeding borrowing cost and the adjusted amounts for deductions, allowances and additions with regards to fixed and intangible assets. Losses brought forward are not taken into account for the calculation of EBITDA.

Exemptions

Interest limitation rule shall not apply to:

  1. Stand-alone entities (an entity not part of a consolidated group for accounting purposes and which has no associated entities or PE)
  2. Loans concluded before 17 June 2016 (unless amended)
  3. Financial undertakings (credit institutions, AIFs, insurance)

The Law also includes an equity escape rule allowing full deduction of borrowing costs if the local taxpayer's ratio of equity to total assets is not more than two percentage points lower than the equivalent group ratio.

Any exceeding borrowing costs not allowed for deduction in a tax year due to the restrictions of the limitation rules, may be carried forward for the next five years.

Interest Limitation on a group level

If the taxpayer is part of a Cypriot group as defined in section 13 of the Income Tax Law then the rule will apply on a group level. In this respect the 3 million limitation will apply for the whole group and the Tax adjusted EBITDA used will be the one of the group.

3. General Anti-Abuse Rule (GAAR)

The rule aims to ignore a non-genuine arrangement or series of non-genuine arrangements for purposes of calculating the corporate income tax liability if they have been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law.

The taxpayer's tax liability will be computed in accordance to the provisions of the Cyprus Income Tax Law in the instance where arrangements are disregarded as explained above.

C. PURPOSE OF THE ATAD PROVISIONS APPLICABLE AS FROM 1ST OF JANNUARY 2020

1. Exit-taxation

Aims to tax the difference between tax book value and market value upon asset transfers between entities, head office and PEs and different PEs, as well as tax residency transfers.

2. Anti-hybrid mismatch rules (1/1/2020)

Aims to deny deduction or to include income in case of hybrid mismatches that result in a double deduction or a deduction without inclusion.

D. CONCLUSION

Considering the practical implementation of the above rules it is expected that the Cyprus Tax Authorities will provide further clarifications through interpretative circulars.

The new provisions introduced in the Income Tax Law, are expected to affect a significant number of companies operating in Cyprus. In this respect, is of imperative importance the corporate taxpayers to perform an ongoing review on their business structures irrespective of their activities in order to ensure compliance with the laws and regulations.

E. HOW KINANIS LLC CAN ASSIST

Kinanis LLC is in a position to assist you with the provision of the following services:

  • General tax advice on the above rules.
  • Review of client's structure and advice the implication based on the above new rules.
  • Obtaining of tax rulings on specific issues.
  • Issuing of tax opinions.
  • Preparation of a transfer pricing study for establishing the level of taxable income of the CFC.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
C.Savva & Associates Ltd
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
C.Savva & Associates Ltd
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions