Marios A. Cosma
K. Treppides & Co Ltd
In the last few years we have entered into a new era of global tax transparency. The Organisation for Economic Co-operation and Development (OECD’s) base erosion and profit shifting (BEPS) project is dramatically altering the international tax system by encouraging governments to close loopholes, improve transparency and align taxation of profits with economic activity. The European Commission has taken measures for the implementation of BEPS in a coordinated manner across EU Member States through the implementation of the Anti-Tax Avoidance Directive (ATAD), and Cyprus as an EU Member State should harmonise its legislation with such measures. In this regard, in the years 2019-2020, Cyprus will transpose into its national law the provisions of the EU Anti Avoidance Directive, with three measures of the Directive being effective from 1st of January 2019.
In the midst of all these, Cyprus has managed to continue to be regarded as one of the most attractive European tax jurisdictions by major business organisations throughout Europe by maintaining and enhancing the many tax benefits offered for multinational companies and individual investors. The simplicity of the Cyprus tax regime, one of the lowest headline corporate tax rates in the EU at 12.5%, an attractive holding company regime as well as the provisions for Notional Interest Deduction (NID), the tax residency non domicile provisions for individuals and the new IP Box regime all make Cyprus a favourable location for international businesses seeking a tax efficient jurisdiction to set up and operate from.
In the last years we have also seen efforts by the Cyprus Tax Department to upgrade its procedures through extensive use of technology. This initiative should continue in 2019, making it easier for the Tax Department to collect and analyse data but also for taxpayers, enabling them to carry out their business more efficiently.
ATAD and effect on Cyprus companies
The proposed amendments under the ATAD that will come into effect from 1 January 2019 and further summarised below, should not have a significant effect on the attractiveness of the Cyprus tax system:
Cyprus has managed to continue to be regarded as one of the most attractive European tax jurisdictions by major business organisations throughout Europe
- Interest Limitation Rule whereby exceeding borrowing costs are restricted to 30% of EBITDA (taxable income/earnings before interest, tax, and wear & tear allowances). It should be noted that the Notional Interest deduction (NID) does not form part of the interest
expense which is included in the “exceeding borrowing cost” therefore the NID continues to be a very attractive provision of the Cyprus tax legislation. A safe harbour threshold of exceeding borrowing costs of three million Euro (€3.000.000) will also be introduced therefore this rule is not expected to have a significantly impact on Cyprus companies
- CFC Rules whereby the undistributed income of a Controlled Foreign Company (the “CFC”) resulting from non-genuine arrangements should be included and taxed at the level of the Cyprus controlling entity. An entity is treated as a CFC in case it is an exempt foreign permanent establishment or a foreign company in which a Cyprus tax resident company has, directly or indirectly, more than 50% interest in share capital, voting rights or profit distributions, and whose actual corporate tax burden is lower than 50% of the tax that would have been charged on the company or PE under the applicable Cyprus corporate tax system.
The attractiveness of the Cyprus tax system should not be significantly affected by this rule given the dividend income exemption applicable under the Cyprus tax regime and other beneficial provisions of the Cyprus tax legislation reducing significantly the cases in which a CFC would be identified, making Cyprus more advantageous compared to other EU jurisdictions in which similar rules will be implemented
- General Anti abuse rule which targets wholly artificial arrangements that lack commercial rationale and do not reflect economic reality
Other proposed amendments to the Cyprus Tax Framework
In 2019, the introduction of a holistic framework for addressing transfer pricing is also expected to be implemented along with the introduction of Advanced Pricing Agreements (APA), both bilateral and multilateral. The existence of APAs is very important in today’s environment as it will allow taxpayers to confirm their transfer pricing methodology for intercompany transactions in advance and therefore obtain certainty over the treatment and avoid future tax adjustments and double taxation.
Although there are many challenges and the international tax framework is moving towards alignment of taxation with value creation, the Cyprus tax system should continue to improve by providing incentives for companies to transfer executive staff to Cyprus and develop appropriate operations in Cyprus. The challenges also create opportunities that Cyprus should exploit by improving its product in a holistic manner, thus providing a destination for business, investment and living.
K. Treppides & Co Ltd, the largest independent consulting firm in Cyprus, with established international presence and offices in London and Malta. Οffers a full range of legal, tax, accounting, consulting and financial advisory services to international Investors that are operating within a wide range of industry sectors. The company possesses many years of experience and a team of experienced members of staff who remain on hand to assist individuals and businesses throughout the entire investment process, in and through Cyprus.
Nicosia: Treppides Tower, Kafkasou 9, Aglantzia, CY 2112, Nicosia, Cyprus
Limassol: Kristelina Tower, 12 Arch. Makarios III Avenue, Mesa Geitonia, CY 4000 Limassol, Cyprus
London : 7 Milner Street, London SW3 2QA
Malta: Level 1, Somnium, Tower Road, Swatar, Birkirkara BKR 4012
Tel: +357 22678944, +357 25822722