K. Treppides & Co Ltd
The House of Representatives voted on 5 April 2019, a series of provisions amending the Income Tax Law which were published in the Official Gazette of the Republic on 25 April 2019. The long-awaited law introduces in the Cyprus Tax legislation certain provisions of the EU Anti-Tax Avoidance Directive (“ATAD”), which was adopted by the European Union (“EU”) in 2016 with the aim to create a minimum level of protection against corporate tax avoidance throughout the EU and prevent aggressive tax planning. The amendments will be effective retroactively as of 1 January 2019.
The new law is complicated, and it is expected that the Tax Department will issue a tax circular providing clarifications for the practical application of the provisions of the law.
The rules covered by the recent amendments and their main provisions are:
1. Interest Limitation rule
The rule provides that it shall not be allowed for income tax purposes the exceeding borrowing cost that exceeds the 30% of the company’s taxable earnings before interest, tax, depreciation and amortization (EBITDA).
For the purposes of this provision the EBITDA is calculated by adding to the taxable income the exceeding borrowing costs, the adjusted amounts for depreciation of fixed assets and amortization of intangibles assets.
The definition of borrowing cost includes interest expenses on all forms of debt, other costs economically equivalent to interest and expenses incurred in connection with the raising of finance. The exceeding borrowing cost is defined as the amount by which the deductible borrowing cost exceeds the taxable interest income.
If a company is a member of a Cyprus Group for the purposes of group loss relief, then the interest limitation rule will apply at the level of the Cyprus Group.
The exceeding borrowing cost is tax deductible up to the amount of €3 million per tax year, per company or Cyprus Group.
The interest limitation rule does not apply to financial undertakings and to standalone entities as well as to exceeding borrowing cost in relation to loans concluded before 17 June 2016 (and not subsequently amended) and to loans used to fund certain long-term public infrastructure projects.
2. Controlled Foreign Company (“CFC”) rule
This rule provides that the non-distributed income of an entity which is treated as CFC, that arises from non-genuine arrangements, is added to the taxable income of the Cypriot company.
The non-distributed income is defined as the after-tax accounting profit of the CFC that was not distributed to the Cyprus company during the same tax year or within the seven months from the end of the year.
A foreign company or a permanent establishment (PE), whose profits are not taxable or are exempt from tax in Cyprus, is considered as CFC when the following conditions are met:
a) the Cypriot company, alone or together with its associated enterprises, has a direct or indirect participation in a foreign company of more than 50% interest in the share capital, voting rights or profits distributions of that company; and
b) the actual corporate tax paid on the profits of the foreign company or PE is lower than 50% of the tax that would have been charged, if such profits were taxed in Cyprus.
3. General anti abuse rule
The rule provides that for the purposes of calculating the corporate tax liability, it shall be excluded, an arrangement or series of arrangements which are not genuine.
Non-genuine arrangements are defined those arrangements that are not put into place for valid commercial reasons which reflect economic reality.
It is worth noting that the provisions of the EU Anti-Tax Avoidance Directive in relation to Exit Taxation and Hybrid mismatches rules are expected to be introduced in the Cyprus tax legislation by the end of 2019 and will apply as from 1 January 2020.
The new law may affect the Cypriot taxpayers and their structures and therefore it is recommended to proceed with an assessment of the impact of the new rules on their business, consider alternative options and take appropriate actions where possible.
K. Treppides & Co Ltd, the largest independent consulting firm in Cyprus, with established international presence and offices in London and Malta, itoffers 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: Kristellina 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