Upcoming International Tax Changes – Cyprus

STELIOS AMERICANOS & CO LLC | View firm profile

Anti-Tax Avoidance Directive. The Cyprus Ministry of Finance has presented to the Parliament
legislation in view of the implementation of the European Union Anti-Tax
Avoidance Directive.

The main issues
addressed by the Directive and included in the law are:

  1. Interest limitation: to challenge artificial debt arrangements
  2. Controlled foreign company rule (CFC) : for profit shifting to tax heaven or low tax jurisdictions
  3. General Anti-avoidance rule, which addresses tax planning when there are no regulations or law that apply for a specific situation

It is expected
that in the coming months further regulations will be introduced which are
included in the directive and cover the Exit Tax payment, when relocating
assets, and the Hybrid mismatches which take advantage national mismatches to
avoid taxation.

Multilateral Instrument (MLI). Following the OECD Base Erosion and Profit Shifting (BEPS)
initiative a Multilateral Instrument (MLI) was introduced which was adopted by
68 countries including Cyprus. The MLI
covers Hybrid Mismatches, Treaty abuse, Arbitration and Dispute resolution
between the countries, as well as avoidance or permanent establishment status.
In the case of treaty abuse, there will be a limitation of the benefits of the
taxpayer if there are only tax reasons for establishing and using a specific
international structure.

Transfer Pricing. In 2017
the Cyprus Tax Department has introduced transfer pricing requirement for back
to back intragroup loan transactions. A predefined profit margin of 2% after
tax is expected, otherwise a full transfer pricing study is expected to be
presented to justify the use of a lower rate. It is expected that new
guidelines will be issued for other forms of income that will cover sales of
goods, services and licensing.

Substance and tax residency requirements. Both the OECD through the BEPS Action Plan and the EU through the
parent subsidiary directive have introduced increased substance and tax
residency requirements. In effect
statutory substance will not be enough and will need to be combined with
Physical substance (office/telephone/qualified staff) and economic substance
for execution of day to day activities.

How can we help? It is
imperative that actions need to be taken to adopt structures to the new
environment. Our firm can assist you to absorb the right and cost-effective
changes by:

  • Amending current structures and agreements to abide by the new regulations
  • Providing transfer pricing studies and analysis
  • Providing physical and economic substance by establishing fully fledged offices in Cyprus
  • Using Alternative Investment Funds and sub-funds for tax residency and substance purposes

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