In brief

The Cyprus Parliament voted on 19 June 2020, the Cyprus transposition of the European Union (EU) Anti-Tax Avoidance Directive (ATAD) for Exit taxation and Hybrid mismatch rules. These provisions will become law following publication in the Cyprus Gazette, which is expected to take place shortly and have an effective date as from the current 2020 tax year i.e. as from 1 January 2020, with the exception of certain reverse hybrid mismatch provisions that have an effective date as from tax year 2022. This latest development completes Cyprus' transposition of the EU ATADs i.e. ATAD I and II that were adopted by the EU in 2016 and 2017 respectively.

In detail

Exit taxation


A Cyprus Corporate Income Tax payer (the taxpayer) will be subject to the Cyprus exit taxation provisions in cases where assets are transferred outside the Cyprus income tax net (outbound transfers) in any of the following circumstances:

  • the assets are transferred from the taxpayer's head office (HO) in Cyprus to its PE outside Cyprus, insofar as Cyprus no longer has the right to tax the transferred assets, due to the transfer;
  • the assets are transferred from the taxpayer's Cyprus PE to its HO/another PE outside Cyprus insofar as Cyprus no longer has the right to tax the transferred assets, due to the transfer;
  • the taxpayer transfers its tax residence outside of Cyprus and acquires tax residence in another jurisdiction (assets which remain effectively connected to a Cyprus PE following the transfer are excluded from the exit taxation provisions); and
  • the taxpayer's business carried on by its Cyprus PE is transferred to another jurisdiction and in doing so the taxpayer ceases to have a taxable presence in Cyprus whilst acquiring a taxable presence in another jurisdiction without becoming tax resident in that other jurisdiction, and Cyprus no longer has the right to tax the transferred assets, due to the transfer.

Under certain conditions temporary transfers of assets falling within the above mentioned categories are excluded from the scope of the exit taxation provisions.

Amount subject to tax

In the circumstances outlined above, at the time of the transfer the taxpayer is deemed to have transferred the assets at an amount equal to their market value at that time, such that any profit thereon is calculated as the difference between that market value less their value for tax purposes at that time. Such profit is subject to Cyprus' income tax provisions, for example the transfer of a qualifying 'title' (such as shares in a company) will be exempt upon transfer as qualifying titles are exempt from Cyprus income tax.

Deferral of payment of tax

Where there is a transfer subject to Cyprus corporate income tax (refer above) it is chargeable to tax at the time of transfer. In certain cases the taxpayer has the choice to make the relevant corporate income tax payment in instalments over a period of 5 years. Deferral of payment is a possible option for the taxpayer only in cases where the transfer is to another EU Member State, or a European Economic Area (EEA) State with which Cyprus (or the EU) has an agreement on the recovery of tax claims equivalent to the mutual assistance provided for in the EU Directive (2010/24/EU) concerning mutual assistance for the recovery of claims relating to taxes, duties and other measures.

When a taxpayer opts for payment of tax in instalments then the Cyprus Tax Authority (CTA) will charge interest and additionally the CTA may in certain cases request a guarantee.

If certain future events occur, deferral of payment of tax will be immediately discontinued and the balance of the tax debt will become immediately payable.

Inbound transfers

Where assets are transferred to Cyprus from another EU Member State under the same scope as for outbound transfers (refer above) then the assets' starting value for tax purposes in Cyprus is the value at the time of transfer as established by the transferor EU Member State (unless this does not reflect the assets' market value at that time).

Hybrid mismatch rules


The hybrid mismatch rules cover situations of 'double deduction' or 'deduction without inclusion' relating to hybrid entities, hybrid financial instruments, hybridity involving PEs, imported mismatches and tax residency mismatches. The new tax provisions also include rules on hybrid transfers and on reverse hybrid entities.

Generally, in order for the hybrid mismatch rules to be in scope the hybridity needs to involve associated enterprises, a HO and a PE (or two or more PEs of the same entity) or a structured arrangement (this is when the mismatch is priced into the terms of an arrangement).

The hybrid mismatch rules aim to 'neutralise' the hybrid tax position, for example by denying a tax deduction in Cyprus for a hybrid payment made by a Cyprus entity. The 'neutralising' rules only apply to those taxpayers subject to Cyprus Corporate Income Tax with the exception of the reverse hybrid rule which may apply more broadly.

The Cyprus transposition law provides that the annual deduction on new equity granted under the Cyprus Notional Interest Deduction (NID) regime, as well as similar deductions granted by other jurisdictions, do not fall within the scope of Cyprus' hybrid mismatch rules.

Double deduction

To the extent that a hybrid mismatch results in a double deduction for tax purposes of a payment, expense or loss, the deduction shall be denied in Cyprus, if Cyprus is the investor jurisdiction. If Cyprus is not the investor jurisdiction but rather is the payer jurisdiction then Cyprus would again deny deduction but only in the case where the investor jurisdiction has not itself denied the deduction.

Nevertheless, any deduction shall be eligible for off-setting against current or future dual inclusion income. Dual inclusion income is income which is included for tax purposes in both Cyprus and in the other jurisdiction.

Deduction without inclusion

To the extent that a hybrid mismatch results in a deduction without inclusion for tax purposes of a payment (or deemed payment between a HO and PE or between two or more PEs of the same entity), the deduction shall be denied in Cyprus, if Cyprus is the payer jurisdiction. If Cyprus is not the payer jurisdiction but rather is the recipient jurisdiction then Cyprus should tax the income except in the following cases as Cyprus has opted under the possibilities provided for in the Directive not to apply the hybrid rule of taxation of income to: (i) a payment to a hybrid entity, or, (ii) a payment or a deemed payment involving PEs and hybridity. However, refer below for the specific cases of disregarded PEs and reverse hybrid entities.

Temporarily excluded from the 'deduction without inclusion' rule, are, under certain conditions, hybrid mismatches resulting from intra-group financial instruments issued with the sole purpose of meeting the issuer's loss-absorbing capacity requirements (e.g. regulatory hybrid capital). This temporary exclusion for such financial instruments applies until 31 December 2022.

The law provides that these new provisions do not apply in cases where Cyprus will include (for tax purposes) dividend income for dividends that have a deduction (for tax purposes) in the jurisdiction of their payment. This is because the rules in effect in Cyprus since 2016 already deal with this hybridity.

Imported mismatch

Imported mismatches are essentially payments from Cyprus which indirectly fund hybrid mismatches between parties outside of Cyprus. These can also result in a denial of deduction in Cyprus for the payment in cases where the other parties involved in the hybrid mismatch have not made adjustments to neutralise the hybrid mismatch.

Disregarded PE income

Cyprus requires income inclusion for tax purposes to the extent a hybrid mismatch involves income of a disregarded exempt foreign PE, unless a double tax treaty concluded with a third country (i.e. with a non-EU Member State) requires Cyprus to exempt the income. A disregard PE is one where the HO jurisdiction considers the resident taxpayer to have a PE in another jurisdiction, but the other jurisdiction views matters differently and does not consider there to be a PE in its jurisdiction.

Hybrid transfer

To the extent a hybrid transfer is designed to produce withholding tax relief for more than one of the parties involved, then Cyprus shall limit the relief it grants to the Cyprus taxpayer in proportion to the net taxable income in Cyprus. A hybrid transfer is where an arrangement to transfer a financial instrument results in the underlying return on that instrument being considered for tax purposes to be derived simultaneously by more than one party in the arrangement.

Reverse hybrid entities

A reverse hybrid entity is an entity that is not considered to be a taxpayer in its jurisdiction of incorporation or establishment (e.g. a partnership where the partners are considered to be the taxpayer and not the partnership itself) but is considered as a taxable entity when viewed from the investor's jurisdiction perspective.

A reverse hybrid entity, under conditions, shall be regarded as company a resident of Cyprus in cases where Cyprus is the jurisdiction of incorporation or establishment of the entity, and shall be subject to Cyprus Corporate Income Tax (and Cyprus Special Contribution for Defence) on its income to the extent this income is not otherwise taxed in Cyprus or in any other jurisdiction.

This rule shall not apply to collective investment vehicles set up in accordance with the Open-Ended Undertakings for Collective Investment (UCI) law and the Alternative Investment Funds (AIFs) law.

This rule has a later effective date than the other hybrid mismatch rules and shall be effective as from 1 January 2022.

Tax residency mismatches

To the extent that the dual (or more) tax residency status of a taxpayer results in a double deduction of a payment, expense or loss, Cyprus shall deny deduction insofar as the duplicate deduction is set off in the other jurisdiction against non-dual-inclusion income (dual inclusion income is income which is included for tax purposes in both Cyprus and the other jurisdiction).

In cases where the other jurisdiction is another EU Member State, the "loser" State under the tax residency tie-breaker rule of the relevant double tax treaty between Cyprus and that other EU Member State shall deny the deduction.

The takeaway

This second Cyprus ATAD transposition law is further clear indication of Cyprus' willingness to comply fully with EU tax initiatives and to adapt fully to a "post-BEPS" international tax environment and follows the first Cyprus ATAD transposition law (on the areas of: interest limitation, Controlled Foreign Companies (CFCs) and General Anti-Abuse Rule (GAAR)) which has been effective in Cyprus as from 1 January 2019.

Clarifying interpretative circulars are expected to be issued by the Cyprus Tax Authority (CTA) in the coming months in order to provide more practical guidance on this transposition law.

The new hybrid mismatch rules represent a large expansion of Cyprus' rules in the area of hybridity. Earlier hybrid mismatch rules were limited to the taxation in Cyprus of dividends that have a deduction for tax purposes in the jurisdiction of the dividend payment. This much wider scope may impact many more taxpayers and taxpayers should assess whether their arrangements will now be impacted.

The exit taxation provisions are limited in scope to the specific cases set out in the law and even within these cases the usual Cyprus corporate income tax rules should apply such that transfers may be exempt.

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.