Cyprus Implements EU Anti-Tax Avoidance Directive

Cyprus Implements EU Anti-Tax Avoidance Directive

The new law addresses Exit Taxation (preventing companies from avoiding tax in the event of re-location of assets) and Hybrid Mismatches (limiting companies from deducting the same expenses multiple times across jurisdictions).

 

The law for the implementation of the remaining provisions of the EU Anti-Tax Avoidance Directive (ATAD EU 2016/1164) of July 2016, has been published in the Cypriot Official Gazette on 04/07/2020.

The law is entered into force retrospectively, with effect as of 01 January 2020 as regards exit taxation and hybrid mismatches and tax residency mismatches and 01 January 2022 as regards reverse hybrid mismatches.

Exit taxation

A Cypriot corporate taxpayer (i.e. a Cyprus tax resident company or a Cyprus permanent establishment of a non-Cyprus tax resident company) is subject to tax as per the provisions of the Cyprus income tax law. The taxable amount is equal to the market value of the transferred assets (at the time of exit of the assets) less their value for tax purposes, in any of the following circumstances:

  • A Cyprus tax resident company transfers asset from its head office in Cyprus to its permanent establishment in another Member State or in a third country in so far Cyprus no longer has the right to tax the transferred assets due to the transfer,
  • The Cypriot permanent establishment of a nontax resident company transfers assets from the Cypriot permanent establishment to its head office or another permanent establishment in another Member State or in a third country in so far Cyprus no longer has the right to tax the transferred assets due to the transfer,
  • A Cyprus company transfers its tax residence to another Member State or to a third country, except for those assets which remain effectively connected with a Cypriot permanent establishment,
  • The Cypriot permanent establishment of a non-tax resident company transfers the business carried on by the permanent establishment to another Member State or to a third country in so far as Cyprus no longer has the right to tax the transferred assets due to the transfer.

In the event that a company or a permanent establishment which is tax resident in another Member State, transfers its assets, business or residency to Cyprus, the starting value of the transferred items for tax purposes, shall be equal to the value accepted by the Member State unless this does not reflect the market value (the amount for which an asset can be exchanged or mutual obligations can be settled between willing unrelated buyers and sellers in a direct transaction).

Exit taxes shall not be imposed in outbound transfers related to the financing of securities, assets posted as collateral or where the asset transfer takes place in order to meet prudential capital requirements or for the purpose of liquidity management, in the event where such assets are set to revert to Cyprus within a period of 12 months.

Deferral of exit tax payments

There is an option for deferral of the tax by paying it in instalments over a period of five years introduced in the Cyprus Assessment and Collection of taxes law, in the event of intra-EU transfers (including transfers within the European Economic Area). Deferral of exit tax payment is subject to interest and the provision of guarantees to leverage non-recovery risks where appropriate.

Our opinion about Cyprus exit taxation rules

Implementing EU exit taxation puts Cyprus in the row of EU member states that dilutes the EU Freedom of Movement of Capital by punishing company relocations. It furthermore contradicts the basic tax principle to tax profits, as exit taxation aims taxing the loss of tax income during a future period. On the other hand, Cyprus exit taxation is not expected having a big impact on Cyprus companies as companies rather relocate from high-tax countries to lower-tax countries.

Related circulars by the Tax Authorities are expected to clarify details of Cyprus exit taxation.

 

Hybrid mismatches

Hybrid mismatches which result from the discrepancies in the tax treatment of two or more jurisdictions, have been considered as abusive by the EU. Hybrid mismatches may arise between associated enterprises, a taxpayer and an associated enterprise, a head office and its permanent establishments, or under a designed arrangement for a deduction without inclusion or a double deduction.

Deduction Without Inclusion (DWI)

Hybrid mismatches under a structured arrangement for a DWI is neutralized by Cyprus denying the deduction of a payment or deemed payment between a head office and a permanent establishment or between two or more permanent establishments of the same entity, if Cyprus is the payer jurisdiction. If Cyprus is the recipient jurisdiction, Cyprus will include the income in its taxable base unless an exception applies.

By implementing the ATAD provisions, Cyprus has decided on adopting the available exemptions where Cyprus is the recipient jurisdiction and the deduction is not denied by the payer jurisdiction. In this respect, Cyprus will not include in the tax computation of the recipient taxpayer the income deriving from:

  • A payment to a hybrid entity when the mismatch outcome is the result of differences in the allocation of payments made to the hybrid entity,
  • A payment to an entity with one or more permanent establishment when the mismatch outcome is the result of differences in the allocation of payments,
  • A payment to a disregarded permanent establishment,
  • A deemed payment between the head office and permanent establishment or between two or more permanent establishments when the mismatch outcome is the result of the fact that the payment is disregarded under the laws of the payee jurisdiction.

Double deduction

Hybrid mismatches under a structured arrangement for a Double deduction is neutralized by Cyprus denying the deduction of any payment, expense or loss in Cyprus in the event Cyprus is the investor jurisdiction. If Cyprus is not the investor jurisdiction but rather is the payer jurisdiction, then the deduction is allowed but only in the case where the investor jurisdiction denied the deduction. Nevertheless, any deduction shall be eligible for off-setting against current or future dual inclusion income whether arising in a current or subsequent tax period. In the event of payments by a hybrid entity or permanent establishment, the payer jurisdiction is the jurisdiction where the hybrid entity or permanent establishment is established or situated.

Our opinion about Cyprus hybrid mismatches rules

The Cyprus hybrid mismatching provisions address practices that are rarely used by Cyprus companies. Therefore, the impact of the new rules on Cyprus companies will be at a very low level.

For more information about Cyprus Anti-Tax Avoidance Directive, please contact us through the Contact Form below, Shanda Consult will be happy to advise and to assist you in all related aspects.