Corporate Tax

Company Tax 2021 – Tax

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Overview of corporate tax work over the last year

Types of corporate tax work

The geographic location of Cyprus and its position as an
international finance centre tends to mean that the corporate work
undertaken by tax specialists on the island is both complex and
varied. It also frequently intersects with personal tax issues
since Cyprus is home to many high-net-worth individuals who are
significant corporate investors. The COVID-19 pandemic did
initially lead to the deferral of several significant corporate
deals; however, several of these are now starting to come to
fruition and other avenues for tax specialists have been opened
earlier than anticipated as the government seeks to kickstart the
economy. Specific areas of activity are the following.

Transfer pricing

Many corporates based in Cyprus are international or
multinational businesses. Cyprus implemented transfer pricing rules
in 2017, hence transfer pricing is a substantial compliance
priority for many organisations on the island. They require
assistance to introduce practical transfer pricing solutions into
their overall global business operations and objectives, to prepare
documentation to support their transfer pricing practices, and if
necessary to represent them for the purposes of resolving
disputes.

Corporate migrations

Cyprus is keen to establish itself as a headquartering location
and is meeting this with some success. During the past decade,
several household names including NCR, Kardex, Amdocs and Bernhard
Schulte Shipmanagement have all opted to headquarter on the island
and utilise the experience of local tax professionals. Two sectors
that have been particularly targeted have been Shipping and
High-tech. Considerable work is therefore directed towards
assisting corporates to navigate the EU-approved shipping tonnage
scheme and the EU-approved IP Box regime.

Joint ventures

The work in this area has increased substantially for two
principal reasons. The first is the desire of the Cyprus government
to promote Cyprus as a regional energy hub – both for
hydrocarbon fuels and renewables. The second is a stated aim by the
government to accelerate a variety of large capital development
projects such as the Larnaca Port development. By their very
nature, both of these areas of activity lend themselves to the
joint-venture structure. The discovery of natural gas and potential
oil deposits in Cyprus’ exclusive economic zone has attracted
industry giants such as Total, Royal Dutch Shell and ExxonMobil to
explore the area and most have established joint-venture vehicles
for this purpose. The favoured bidder for the Larnaca development
is also a joint-venture company. Professional input is required to
structure the most tax-efficient vehicle and to advise on
additional tax benefits that may be accessible.

M&A

The level of M&A work in Cyprus tends to be high and
generally of an international rather than domestic nature. The
intervention of the EU in the banking sector post-2013
significantly increased, albeit temporarily, the level of domestic
M&A activity. However, the market for domestic transactions
involving a Cyprus entity remains much larger in both value and
volume. In most deals, the role of the Cypriot law firm is to
advise on the Cyprus tax law aspects of the deal as part of a
consortia of firms operating under the direction of a main advisor
to the client. For example, the merger of FedEx Express
International BV and TNT Express Worldwide BV required local
professionals to advise on the impacts for two Cyprus subsidiaries.
It is noteworthy that the level of activity in the hospitality and
tourist sector has shown a definite upturn, which appears to be
growth driven by rather than as a result of COVID-19-induced
financial distress. A notable recent deal for tax advisors is Park
Lane Acquisitions and Hyatt Hotels agreeing with Anolia Holdings
Ltd to launch the first Hyatt hotel in Cyprus.

Significant deals and themes

Acquisition structure advice: Mediterranean Hospitality Venture
Limited (MHV) on its 100% acquisition of Parklane Hotels Limited.
This most recent purchase enabled MHV to add internationally
branded luxury hotel complex “Parklane, a Luxury Collection
Resort & Spa, Limassol”, the only internationally branded
luxury resort in Cyprus, to its portfolio of high-end hospitality
venues.

Public bids: CPI Property Group SA and Aroundtown SA utilised a
Cyprus entity to make a cash offer for all of the share capital of
Globalworth Real Estate Investments Limited (a Guernsey
incorporated real estate company listed on AIM). Corporate tax
advice was required regarding the structuring and implementation of
the offer and acquisition of the shares, which was made via the
Cyprus entities.

Advanced business structuring: Mintra Holding AS’s
cross-border acquisition of German-based maritime digital learning
and crew competence management specialists Safebridge GmbH and its
Cyprus subsidiary Safebridge Limited. Advice was required on
structuring the deal to be tax efficient on an ongoing basis.

Greenmont AIFLNP’s EUR 15.6 million acquisition of Watium
Energia SL. Tax experts were required to provide tax advice
throughout the structuring of the deal and the financing of the
arrangement through a mix of debt and equity.

Key developments affecting corporate tax law and practice

Purely domestic changes

The Draft Budgetary Plan (DBP), prepared according to Regulation
(EU) 473/2013, was approved by the Council of Ministers of Cyprus
on 22 October 2020 and will be laid before the House of
Representatives.

The analysis and forecasts contained in the DBP are based on the
latest available results of 2020 as well as the Budget Bill for
2021 that was submitted to the House of Representatives on 9
October 2020.

Revenue and expenditure projections

Revenue from taxes on production and imports is expected to
decrease by 6% during the current year and marginally increase as a
percentage of GDP to 15.3% compared to 15.2% the year before. The
forecasted negative growth of this revenue category stems from
expected losses from reduced VAT receipts due to the restrictive
measures taken by the government related to the COVID-19 pandemic
as well as from the estimated impact from the reduction of the
special VAT rates, about 0.1% of GDP, as of 1 July 2020 until the
end of the year. In 2021, revenue from taxes on production and
imports are expected to grow by 5.4% and remain unchanged as a
percentage of GDP.

Tax measures expected in 2021

Cyprus generally supports the European Commission’s
initiatives to fight Aggressive Tax Planning (ATP), including by
adopting the Anti-Tax Avoidance Directive II (ATAD II) and the
Directive on Administrative Cooperation Vol. 6 (DAC6). Cyprus
reiterates its commitment and willingness to continue cooperation
in all appropriate fora for taxation, in full respect of the
respective competencies under the treaties and in light of the
relevant voting procedures that are applicable for such matters. In
addition to the European and international measures, Cyprus
unilaterally announced two additional measures to address ATP,
namely:

  • Introduction of withholding tax on dividend, interest, and
    royalty payments to countries in Annex I of the EU list of
    non-cooperative jurisdictions on tax matters.
  • Introduction of a corporate tax residency test based on
    incorporation, in addition to the existing “management and
    control” test.

For these two measures, draft bills have been sent to the
Attorney General’s office for legal vetting. It is also noted
that the unilateral measures have been agreed with relevant
stakeholders (Institute of Certified Public Accountants of Cyprus)
and that they are expected to come into effect by year-end.

Exchange of information

In relation to the actions taken by the Cyprus government to
deal with the concerns that the Citizenship by Investment (CBI) and
Residence by Investment (RBI) schemes may circumvent the Common
Reporting Standard initiative, the Cyprus Tax Authority, in
collaboration with the Immigration Authority, is in the process of
developing the appropriate infrastructure to enable, as soon as
possible, the spontaneous exchange of information mechanism about
individuals that have obtained residence rights through the CBI and
RBI programmes with all original jurisdictions of tax
residence.

Digital transformation

The processes for the provision of a new information system for
the Cyprus Tax Department are in progress. The aim of the project
is the simplification of processes and procedures and the use of
more modern Tax Department methods in order to increase personnel
productivity and improve operational efficiency (Hyperlink).

Notional Interest Deduction

On 16 June 2020, an amending Income Tax Law (ITL) was published
in the Official Gazette of the Republic with respect to the
Notional Interest Deduction (NID). The revised NID provisions
enhance the tax benefits for Cyprus companies financing their
operations through new equity. The provisions are in line with the
recommendations of the European Commission and offer additional
clarity for taxpayers. The key changes introduced by the amendment
are:

  • A change in the definition of “new equity”. Effective
    from 1 January 2021, this is defined as equity introduced into the
    business on or after 1 January 2015. Therefore, as from 1 January
    2021, the NID can no longer be claimed on equity arising from the
    capitalisation of pre-existing reserves.
  • A change in the prescribed rate. From 1 January 2020, the
    prescribed rate is the yield of the 10-year government bond (as of
    31 December of the year preceding the tax year the NID is claimed)
    of the country where the new equity is employed/invested plus 5%.
    If the country does not issue such bonds, the Cyprus bond rate
    applies. There is no minimum reference rate.

The amendment also clarifies that for the purposes of
calculating the NID cap, the relevant taxable profits are those
arising from the employment of the new equity.

Refugee contribution on sales of immovable property

On 22 February 2021, a law was published in the Official Gazette
of the Republic amending the provisions of the Central Agency for
Equal Distribution of Burdens (Creation, Objects, Responsibilities,
and Other Related Matters) Law. The amendment imposes a 0.4%
“contribution” levy payable by the vendor on:

  • the sale of immovable property located in the areas controlled
    by the Republic; and
  • the sale of shares in a company that owns such immovable
    property, provided that the buyer takes control of the company. For
    the calculation of the contribution, the value of the shares equals
    the latest valuation of the immovable property by the Department of
    Lands and Surveys.

The levy is to support refugees and to compensate owners of
immovable property in the occupied part of Cyprus. Full detail is
awaited on a variety of issues including how and when payment is to
be made, possible exemptions, transactions between related parties
and penalties for late or non-payment. Clarification is expected
when the associated Regulations are published.

European – CJEU cases and EU law
developments

CJEU case law

T-516/18 Luxembourg v Commission and T-525/18 ENGIE, ENGIE
Global LNG Holding Sàrl and ENGIE Invest International SA v
Commission

In this case, the General Court approved the Commission’s
approach, which entailed looking at the economic and fiscal
reality, rather than adopting a formalistic approach that takes
into consideration each of the transactions completed under the
intra-group financing structure in question on a separate basis.
Additionally, the General Court concluded that it could not be
disputed that the ENGIE group was conferred preferential tax
treatment in light of the non-application of national provisions
relating to abuse of law. It is therefore clear that the test of
reality is of utmost importance and that preferential tax treatment
can be predominantly ascribed to the non-application of a national
measure relating to abuse of law.

EU-level developments and exit taxation

On 3 July 2020, Cyprus fully adopted the provisions of ATAD I
and II. Consequently, companies and groups with international
activities may find themselves liable to pay an “exit
tax”. That is, they may be subject to corporate tax on an
amount equal to the market value of the transferred assets at the
time of exit, less their value for tax purposes, in any of the
following circumstances:

  • Transfer of assets to the Head Office or to a permanent
    establishment (PE) in another EU Member State or in a third country
    insofar as Cyprus no longer has the right to tax the transferred
    assets.
  • Transfer of tax residence to another EU Member State or to a
    third country, except for those assets that remain effectively
    connected with a PE in Cyprus and for which Cyprus has the right to
    tax.
  • Transfer of the business carried on in Cyprus by a PE in
    another EU Member State or in a third country insofar as Cyprus no
    longer has the right to tax the transferred assets due to the
    transfer.

Hybrid mismatch rules

Companies and groups of companies with international activities
should note that on 3 July 2020, Cyprus fully adopted ATAD I and
II. Provisions relating to hybrid mismatches came into effect from
1 January 2020. Provisions relating to reverse hybrid mismatches
take effect from 1 January 2022. The aim of the provisions is to
ensure that tax deductions or credits are only taken in one country
and that a deduction is not taken in one country without taxation
of the corresponding income in the other country. Cyprus rules
follow ATAD minimum standards. They apply to Cyprus registered
companies and foreign registered companies with a PE in Cyprus.

BEPS

ATAD I and II

On 5 April 2019, the House of Representatives approved
legislation implementing ATAD in Cyprus with the aim of improving
the internal market’s ability to deal with cross-border tax
avoidance practices.

ATAD contains five legally binding anti-abuse measures, which
all Member States must apply. The measures are the following:

  1. introduction of controlled foreign company (CFC) rules (Action
    3);
  2. the switch-over rule (Action 2);
  3. introduction of exit taxes;
  4. interest limitation (Action 4); and
  5. introduction of the general anti-abuse rule (GAAR) (Action
    6).

The provisions relating to interest deductibility rules, CFCs
and GAAR, as included in ATAD, entered into force on 1 January
2019. On 3 July 2020, the remaining two amendments for full
implementation of ATAD were published in the Official Gazette of
the Republic: the first concerns the introduction of an exit tax
regime (ATAD I), which applies retroactively from 1 January 2020;
and the second is related to hybrid mismatches (ATAD II), which
focuses on Action 2 and also applies retroactively from 1 January
2021. The so-called reverse hybrid mismatch rules will apply from 1
January 2022.

GAAR

Transactions that are not carried out for valid commercial
reasons will give rise to tax liability calculated in accordance
with the ITL. Cyprus already incorporates within its tax
legislation numerous anti-abuse rules. It is expected that relevant
Articles within the tax legislation will be introduced to provide
greater and specific powers to the Inland Revenue Director to
ignore non-genuine arrangements that do not have a valid commercial
reason that reflects economic reality. GAAR only applies to
corporate transactions.

Thin capitalisation/interest deductibility
rules

A limitation on the possibility of deducting exceeding borrowing
costs in the tax period in which they are incurred is set at 30% of
taxable earnings before interest, taxes, depreciation and
amortisation (EBITDA). Taxable EBITDA is defined as the total of
net taxable income calculated in accordance with the ITL, increased
by the exceeding borrowing costs.

The exceeding borrowing costs restriction does not apply to
amounts below EUR 3 million per taxpayer. In addition, the
restriction does not apply to companies not forming part of the
group and that do not have a related business (participation of at
least 25% in the share capital or participating at least 25% in the
profits).

The law further excludes financial undertakings from the scope
of the interest limitation rules (i.e., credit institutions,
investment firms, alternative investment fund managers and
management companies of undertakings for collective investment in
transferable securities).

CFC rules

An entity, or a PE whose income is not taxable or is exempt in
Cyprus, is treated as a CFC where the following two conditions are
met:

  • in the case of a non-Cypriot tax-resident entity, the Cypriot
    tax-resident company alone, or together with its associated
    enterprises, holds a direct or indirect participation of more than
    50% in such an entity; and
  • the non-resident entity or PE is low-taxed (i.e., the income
    tax it pays is lower than 50% of the Cypriot corporate income tax
    that it would have paid by applying the provisions of the
    ITL).

Cyprus has opted for the ATAD Model B CFC rules since they give
EU Member States the ability to “carve out” CFCs via the
thresholds provided by ATAD. “Carving out” applies to
entities that have: (i) accounting profits of no more than EUR
750,000 and non-trading income of no more than EUR 75,000; or (ii)
accounting profits of no more than 10% of operating costs.

Other specific measures transposed into Cyprus law include:

  1. the amendment of the IP Box regime to follow the nexus approach
    in response to Action 5;
  2. elimination of back-to-back reduced margins in response to
    Actions 8–10;
  3. amendment as to the taxability of dividends where such are
    products of a hybrid instrument in response to Action 2;
  4. ratification of the Multilateral Convention to Implement Tax
    Treaty Related Measures (MLI) in response to Action 6;
  5. country-by-country reporting in response to Action 13; and
  6. the introduction of transfer pricing files (master and local)
    in response to Action 13.

It is therefore vital, from a tax planning perspective, that the
Cyprus position be examined in terms of its entire structure and
its adherence to BEPS and ATAD.

MLI

On 22 January 2020, the instrument of ratification of the MLI,
together with the positions of Cyprus and an explanatory statement,
were published in the Official Gazette of the Republic.

The MLI is designed to allow countries to swiftly incorporate
new tax treaty provisions into their existing bilateral tax
treaties (in line with measures arising from the G20/OECD BEPS
Project). The MLI does not operate in the same manner as an
existing treaty protocol amendment – rather, it
“complements” existing treaties and is to be read in
conjunction with the treaty at hand. While the MLI provides
flexibility on each state’s sovereign right over the adoption
of the MLI positions, some elements contained therein (inter
alia, the provisions on the prevention of treaty abuse and
dispute resolution) are considered G20/OECD “minimum
standards” for those jurisdictions participating in the BEPS
initiative.

Cyprus approved the minimum Actions as prescribed by the MLI
– Action 6 (Purpose of Covered Tax Agreement), Action 7
(Treaty Abuse) and Action 14 (Making Dispute Resolution Mechanisms
More Effective).

The publication of the above completes the domestic procedures
by Cyprus for entry into force of the MLI, with deposit of the MLI
having taken place on 23 January 2020. The entry into force will
follow Article 34 of the MLI, i.e., “the first day of the
month following the three months following the deposit”, being
1 May 2020. For provisions relating to withholding taxes, the
earliest entry into effect will be 1 January 2021 (provided that
the other contracting jurisdiction has also submitted its
instrument of ratification with the OECD prior to, or during,
2020). For provisions relating to other taxes, the earliest entry
into effect will be 1 November 2021 (provided that the other
contracting jurisdiction has also submitted its instrument of
ratification with the OECD prior to, or during, January 2020).

COVID tax implications

Corporate level

The Cyprus Tax Department issued a circular on 27 October 2020
clarifying the provisions of the ITL (Article 2) on “tax
residence” and “permanent establishment” amidst
COVID-19 as well as an additional circular on 25 January 2021
extending the validity of the previous circular for as long as the
restrictions continue to apply globally.

Creating an unintended PE

Cyprus is dealing with the unusual travel problems caused by
COVID-19 by adopting the OECD’s “stopping the clock”
approach to the extent that the current circumstances should not
create any changes in the definition of a PE. Cyprus appreciates
the exceptional circumstances producing the result that activities
are being conducted in a jurisdiction where, without the
restrictions imposed by governments, they would not normally occur,
such as, for example, working or concluding contracts remotely or
on construction sites.

Creating a forced change of residency for legal
entities

Cyprus embraces the OECD’s approach that the inability of
the decision makers to travel should not affect the application of
the Article 4 tiebreaker rule for the purposes of determining a
company’s place of residence. Non-Cyprus tax-resident companies
would not be deemed to acquire tax residence in Cyprus merely
because their staff, directors, representatives, or employees under
a service contract are stranded in Cyprus solely because of the
current restrictions.

By the same token, the failure of a director to travel to Cyprus
to attend a board meeting, when such a failure is due to the
restrictions, will not affect the company’s tax residence in
Cyprus. It is worth noting that pursuant to certain amendments to
the Cyprus companies laws, a director can be present at a meeting
via teleconference. Meetings can be organised and considered duly
held through the use of electronic fora to also include general
meetings.

VAT

The standard rate of VAT is 19%. Reduced rates of 5% and 9%
apply to certain supplies. COVID-19 vaccines and diagnostic tests
are 0% rated.

Mandatory disclosure rules update

On 18 March 2021, the Cyprus Parliament approved the draft bill
of the Law of Administrative Cooperation in the Field of Taxation
(Law 205(I)/2012) implementing DAC6. This said bill was fully
enacted into local Cyprus law on 31 March 2021.

DAC6 requires EU-based intermediaries or taxpayers to disclose
certain cross-border arrangements that were implemented on or after
25 June 2018 to their local tax authority, who must then share the
information with the tax authorities of all other EU Member
States.

On 26 February 2021, the Cyprus Tax Authority, in response to
difficulties arising from COVID-19, issued a directive wherein it
was announced that there will be no imposition of administrative
fines for overdue submission of DAC6 information that should be
submitted until 30 June 2021. This date was further extended until
30 September 2021 via an announcement made on 3 June 2021 in the
following cases:

  1. reportable cross-border arrangements that have been made
    between 25 June 2018 and 30 June 2020 and had to be submitted by 28
    February 2021;
  2. reportable cross-border arrangements that had been made between
    1 July 2020 and 31 December 2020 and had to be submitted by 31
    January 2021;
  3. reportable cross-border arrangements made between 1 January
    2021 and 31 August 2021 that had to be submitted within 30 days
    from the date they were made available for implementation or were
    ready for implementation or the first step in the implementation
    has been made, whichever occurred first; and
  4. reportable cross-border arrangements for which secondary
    intermediaries provided aid, assistance or advice between 1 January
    2021 and 31 August 2021 and had to submit information within 30
    days beginning on the day after they provided aid, assistance, or
    advice.

Tax climate in Cyprus

Cyprus resident companies must be set up in a manner that
satisfies international tax compliance and acceptance. The
international legal framework has taken a sharp stance in
safeguarding substance of companies, specifically through the EU
Parent/Subsidiary Directive, which allows for the refusal of
benefits for arrangements that are considered
“non-genuine” and which have been put into place solely
for purposes of obtaining a tax advantage. In addition, ATAD, BEPS
Action 5 on harmful tax practices, and the MLI as well as the new
Article 29 contained within the OECD Model Double Tax Treaty
(referring to the Principal Purpose Test and Limitation of
Benefits) reinforce the need for proper substance. Cyprus follows
all of the aforesaid EU and international standards by having them
embedded into its national legislation.

Tax incentives

IP Box regime

Special allowances and incentives are granted for intellectual
property rights in Cyprus.

Taxable profits from intellectual property would consist of:

  • Revenues.
  • Less expenses linked with revenue generation.
  • Less capital allowances on the cost of the intellectual
    property.
  • Less NID on the value of any intellectual property injected
    into the Cyprus company in exchange for equity in the Cyprus
    company.
  • Less 80% deduction under the nexus approach.

The effective corporate tax rate of a successfully implemented
Cyprus intellectual property owner may, under certain conditions
(full enjoyment of deductions listed above), reduce the effective
corporate rate up to 2.5%.

As a general note, Cyprus currently applies the “modified
nexus” approach in line with Action 5 of the BEPS Action Plan.
Such a regime is subject to stricter substance requirements (the
“nexus” approach), notably, the hiring of new employees
or relocation of employees in Cyprus and conducting research and
development in Cyprus.

In particular under the new regime, which applies on qualifying
assets developed after 1 July 2016, qualifying profits and
qualifying expenditure are taken into account in arriving at the
effective tax rate that will be subject to taxation in Cyprus, and
this applies mainly in relation to software and patents.

In other words, the tax relief is not fixed or pre-determined as
per the previous regime.

Tonnage tax

This matter is governed by the Merchant Shipping (Fees and
Taxing Provisions) Law of 2010 as amended by Law 39(I)/2020
(together, the Tonnage Tax Law). As a result of this amendment, the
tonnage tax system of Cyprus has been prolonged until 31 December
2029, giving effect to the Decision of the European Commission
dated 16 December 2019 to prolong the Cyprus tonnage tax system and
to approve it as being in line with the relevant EU policy and
community guidelines on state aid to maritime transport. The
Tonnage Tax Law gives qualifying Cyprus resident shipping and ship
management companies the option to be taxed on the basis of the
tonnage of the vessels they operate, simplifying and reducing the
tax burden. It widens the range of exempt gains to include profits
on the disposal of vessels, interest earned on funds and dividends
paid directly or indirectly from shipping-related profits, in
addition to profits from shipping operations.

Film and audio-visual production industry

In September 2017, the Cyprus government approved an initiative
to encourage the development of the film and audio-visual
production industry in Cyprus by means of grants, tax incentives
and other assistance.

Law 139(I) of 2018, which took effect on 11 December 2018,
amends the ITL to provide tax exemption of income from production
of films and audio-visual media in accordance with the
government’s programme.

The amending law adds a new sub-paragraph to Article 8 of the
ITL providing up to 50% exemption from tax of income derived from
the production of films, series and other relevant audio-visual
programmes as described in the government programme. The deduction
is limited to 35% of the eligible costs approved by the competent
authority implementing the programme. Any restriction on the
exemption resulting from the limitation to 35% of costs can be
recovered over the next five years. No exemption is available if
the taxpayer has received a grant under the programme.

In addition, small enterprises as defined in Article 17 of
Regulation (EU) 651/2014 may claim an annual deduction of 20% of
the cost of cinematographic infrastructure and technological
equipment providing it is used in Cyprus for at least five years.
Medium-sized enterprises may claim an annual deduction of 10% of
such costs.

Industry sector focus

Please see the “Tax climate in Cyprus” section
above.

The year ahead

Tax residency-related considerations

COVID-19 has tested the strength of the global economy and
health system as well as fully demonstrated the need of businesses
in investing in modern working practices, IT infrastructure, and
human resource management as staff had to work remotely through
various electronic fora.

COVID-19 has produced some “novel” issues for tax
authorities looking to apply standard tax treaties to non-standard
situations. This has led the OECD Secretariat as well as competent
authorities around the globe to issue initial guidance on an
emergency basis on tax residency-related matters, among others.

The imposition of emergency measures by governments around the
globe, such as travel restrictions, has created an array of
complications that will need constant review and refinement.

There has also been the introduction of a corporate tax
residency test based on incorporation, in addition to the existing
“management and control” test as explained above.

Substance- and “beneficial ownership of
income”-related considerations

Further to the discussion under the “Tax climate in
Cyprus” section above, during the last few years, many foreign
taxpayers have not been automatically granted treaty benefits
unless there is evidence that the recipient is the actual
beneficial owner of the income. Tax authorities around the world
are becoming stricter and more sophisticated and proper tax
planning is therefore required for safeguarding the taxpayer’s
interest.

Transfer pricing-related considerations

Significant changes to the taxation of back-to-back financing
arrangements between related companies took effect on 1 July 2017
in response to Actions 8–10.

Cyprus does not currently contain a list of permissible pricing
methods. Instead, the law incorporates a general requirement based
on the use of the arm’s length standard and requires that all
documentation support said standard.

There are no penalties for improper transfer pricing but general
penalties may potentially apply. Cyprus is expected to introduce a
requirement of transfer pricing files (master and local) as per
Action 13.

A three-tiered standardised approach to transfer pricing
documentation has been developed:

  1. The “master file”, which will provide tax
    administrations with high-level information regarding the global
    business operations of multinational enterprises (MNEs) and their
    transfer pricing policies.
  2. The “local file”, which will provide detailed
    transactional transfer pricing documentation specific to each
    country, identifying material related party transactions, the
    amounts involved, and the company’s analysis of the transfer
    pricing determinations.
  3. The country-by-country report – large MNEs are required
    to annually provide the following for each tax jurisdiction in
    which they conduct business:
    • revenue;
    • profit before tax;
    • income tax paid;
    • income tax accrued;
    • number of employees;
    • share capital;
    • retained earnings;
    • tangible assets; and
    • a requirement for such MNEs to identify each entity within the
      group doing business in a particular tax jurisdiction and to
      provide an indication of the business activities each entity
      engages in.

DAC6

Please see the “Mandatory disclosure rules update”
section above.

Tech hub/headquartering-related incentives

Cyprus is positioning itself as a tech hub and the IP Box
regime, along with the application of the NID as well as various
tax and employment incentives at an employer and individual level,
is expected to spur foreign investment and domiciliation
services.

The setting up of regional headquarters in Cyprus is heavily
sought by the government, which is currently in an advanced stage
of discussions with the professional bodies, for establishing a
“regime” that aims to provide business, employment and
tax-related incentives in order to attract foreign investment in
Cyprus. Moreover, an added aspect of such “regime”
targets the relocation of specialists from abroad to form a strong
board of directors and middle management in Cyprus and/or to use
the local employment market to find suitable employees expanding
their physical presence on the island.

Cross-border transactions

The test of “reality” as well as the increasing
importance of transparency and substance are expected to lead to
business restructuring or enhancement of the level of the substance
of all companies within a specific group and not only at a local
level. Substance is also important in the context of exchange of
information and transfer pricing, among others. All cross-border
transactions will be screened pursuant to EU (i.e., ATAD I and II)
and international regulations.

Lastly, digital taxation as well as other tax reforms that are
in the EU and G20 agenda may play a very important role in the
establishment and future operations of MNEs.

Special defence tax

Legislation for the extension of the 3% defence tax on corporate
bonds to include both individuals and company recipients is
currently before Parliament.

This article was first published in Global Legal Insights
– Corporate Tax 2021.

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.

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