Following the publication of the EU Anti-Tax Avoidance Directive (ATAD I) on 12 July 2016, the House of Representatives voted into Cyprus Law its provisions on 5 April 2019.
The three measures explained below are applicable from 1 January 2019. Additional measures based on ADAD II are expected to be voted by the House of Representatives by 1 January 2020. These measures apply to all companies and entities that are subject to Cyprus tax, including entities that while are not Cyprus tax residents, they have a Cypriot permanent establishment.
Interest limitation rule
The purpose of this rule is to prevent provision of group financing to companies based in high tax jurisdictions from companies based in low tax jurisdictions and limits the deduction of interest resulting from this financing facilities.
More specifically, this rule provides that exceeding borrowing costs are deductible in the tax period they incurred up to 30% of taxable income before interest, tax, depreciation and amortisation (EBITDA) and up to €3.000.000 per year per company or Cypriot group.
Whenever, a company is a member of a Cypriot group, the rule is applied at the level of the Cypriot group as defined in the Income Tax Law, including permanent establishment in Cyprus.
The rule does not apply to:
• Financial undertakings (credit institutions, insurance/reinsurance companies, pension institutions, alternative investment funds (AIF), undertaking for collective investment in transferable securities (UCITS), derivative counterparties, central securities depositories and securitisation special purpose entities (SSPE)
• Standalone entities
• Loans concluded before 17 June 2016 until any subsequent modifications
• Loans used to fund long-term infrastructure projects which are considered to be in the general public interest
Furthermore, the rule has an escape clause in the case the company is a member of a consolidated group for financial accounting purposes. It may receive the right to fully deduct exceeding borrowing costs if it can demonstrate that the ratio of its equity over its total assets is equal to or higher than the equivalent ratio of the group. This applies when the ratio is equal or at most lower by 2% of the group ratio and all assets and liabilities are valued using the same method as in the consolidated financial statements.
Taxpayers may carry forward such borrowing costs and deduct them from taxable profits for the next 5 years.
Control Foreign Companies (CFC) rule
This rule aims to prevent the redistribution of revenue within groups towards entities that are based in low tax jurisdictions.
A company or a permanent establishment which is not subject to Cypriot tax is considered a CFC when the following conditions are met:
• A Cyprus tax resident company itself or together with associated entities holds a direct or indirect participation of more than 50% of the voting rights or of the capital or is entitled to received more than 50% of the profits of such entity
• The corporate income tax actually paid by the entity is less than the 50% of such tax that would be paid in Cyprus
The rule states that the non-distributed income of a CFC, which arose from non-genuine arrangements that have been put in place for the essential purpose of obtaining a tax advantage, should be added to the tax base of the Cyprus tax resident entity. Non-distributed income relates to post accounting profits that has not yet been distributed within the year the profit is derived or within a period of seven months after the year end.
The CFC rule is not applied when accounting profits are less than €750.000 or accounting profits do not exceed 10% of the operating costs of the period.
In addition, there should be no CFC charge if there are not significant people functions in Cyprus that are essential in generating income of the CFC. In such case, a transfer pricing study will be required.
The income or loss to be included in the tax base of the Cyprus tax resident company should be restricted to amounts generate from assets or risks associated to significant people functions performed by the same company. The income should be attributed based on arm’s length principles and it is restricted to the amount of non-distributed income of the CFC. Such income or loss should be included in the tax period of the Cyprus tax resident company in which the tax period of the CFC ends.
General Anti-Abuse rule
This rule aims to prevent abusive tax practices that have not yet been dealt with any specific provision. In particular, any arrangement or series of arrangements that have not valid commercial reasons reflecting economic reality and/or are not genuine and their main purpose is to obtain a tax advantage should be ignored in the calculation of corporate tax liabilities in Cyprus.