On 22 January 2020, the ratification of the Multilateral Convention to implement tax treaty related matters and prevent profit shifting and base erosion was published in the Cyprus Government Gazette in both Greek and English. Along with the above, the multilateral instrument Cyprus position and an explanatory statement were published as well.
Multilateral convention was implemented as part of the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) project to assist jurisdictions in promptly modifying their bilateral tax treaties and put into operation measures that will act as shield against multinational tax avoidance. The multilateral convention provides consistency, prevents any potential abuse of treaty and can be easily uniformly used. In addition to this, the multilateral instrument convention eliminates the need for jurisdictions to re-negotiate bilateral tax treaties for each country.
In order to ensure that the minimum required compliance of the country is reached, Cyprus approved the embodiment of the following three multilateral instrument provisions to the Cyprus national legislation:
- Action 6 (Purpose of Covered Tax Agreement);
- Action 7 (Treaty Abuse);and
- Action 14 (Making Dispute Resolution Mechanisms More Effective).
The provisions apply to all existing bilateral double tax treaties that Cyprus has in place, provided that the other state has also signed the multilateral instrument and adopted the same provisions as Cyprus. Cyprus double tax treaties will be amended to include these provisions. Cyprus has elected to cover all existing double tax treaties through the multilateral convention, except in the circumstances where the application of minimum standards has already been agreed on a bilateral basis.
Under article 7 on the prevention of Treaty Abuse, the concept of the Principle Purpose Test (PPT) was adopted. According to the PPT test, an exemption or deduction of withholding taxes on income or capital will not be granted, if it is concluded that the benefit arises from a transaction or an arrangement that was performed with a leading purpose of obtaining the benefit. The test ensures that for any structure that is set up with no commercial or business substance and with the sole purpose of a treaty benefit, this benefit will not be achieved and normal tax rates will apply. If however it is verified, that the benefit is granted under conditions that are in line with the object and the purpose of the applicable provisions of the double tax treaty, then this will be acceptable.
If an individual is denied double tax treaty benefits after the application of the PPT, then this individual can apply for a re-evaluation of the situation from the jurisdiction. If the jurisdiction concludes that the benefit would have been received even in the absence of the transaction or arrangement, then the individual will be permitted to the benefit.
The multilateral convention is applicable as of the first day of the calendar year following the year of ratification. Effective date for withholding tax rates is the 01st of January 2021, while the effective date for all other taxes is the 01st of January 2022. As of 01st of January 2021, Cyprus tax resident companies must have significant substance in Cyprus and prove that obtaining benefits under bilateral tax treaties is not the only purpose of the company being established in Cyprus. The company must have business considerations for being set-up in Cyprus and preferably be carrying out multiple activities within the company. Economic substance in Cyprus can be obtained when a company holds a fully functioning office with employees, bank accounts in Cyprus and carries out effective management and control of the company in Cyprus. If this is verified, then the Cyprus tax resident company will be able to continue to benefit from reduction or exemption of withholding taxes on income received (such as dividends, interest, royalties) from a country that Cyprus has concluded a double tax treaty with, assuming that this country has also ratified the multilateral instrument.
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.
