Cyprus update on Intra-Group Financing Arrangements
The Cyprus Tax Department (CTD) has notified the Institute of Certified Public Accountants of Cyprus (ICPAC) of their policy change in terminating the application of the pre-agreed minimum profit margins of 0.125% – 0.35% on qualifying intra-group back to back financing arrangements, with effect from 1 July 2017.
According to the information provided by the CTD to ICPAC, from the 1st of July 2017 onwards, all tax rulings confirming the applicability of the above profit margins on intra-group back to back financing arrangements will cease to be effective and acceptable taxable profit margins on intra-group back to back financing arrangements will be determined by Transfer Pricing rules. Although Transfer Pricing rules have not yet been finalized by the CTD, they are expected to follow the relevant OECD guidelines and subject to conditions, they will require tax payers to support the applicable profit margins with a Transfer Pricing study, to be prepared by an independent expert.
The change of the CTD’s policy and approach on this matter derives from the latest developments from the EU Code of Conduct for business taxation as well as the wider OECD/G20 BEPS initiative on tax reform.
Cyprus introduces rules to implement Country by Country reporting requirements
The Cyprus Minister of Finance issued a Decree on 30 December 2016, introducing a mandatory Country by Country (CBC) reporting requirement for multinational enterprise groups generating consolidated annual turnover exceeding €750m (MNE Group). The Decree is compliant with the EU Directive 2016/881 amending Directive 2011/16 relating to mandatory automatic exchange of information in the field of taxation and the OECD BEPS Action 13 on transfer pricing documentation and country by country reporting.
Consequently, MNE Groups with an ultimate Cyprus tax resident parent, are required to annually file a Country by Country report which includes specific financial data covering income, taxes, and other key measures of economic activity by territory. Cyprus tax resident entities belonging to an MNE group that has a non-Cyprus tax resident ultimate parent may under certain conditions be obliged to submit a CBC report in Cyprus (under the secondary filing mechanism) or be designated by the MNE Group as the sole substitute of the ultimate parent entity (under the surrogate parent mechanism). The first CBC report should be prepared for the financial year of the MNE Group starting on or after January 1, 2016. MNE Groups need to disclose the amount of revenue, profit before tax and corporate taxes paid and accrued, capital retained earnings and tangible assets and number of employees as well as identify each entity within the group doing business in a certain jurisdiction with a description of its economic activity.
Under certain conditions, a CBC reporting requirement may also apply for Cyprus tax resident entities belonging to an MNE Group. Cyprus tax resident constituent entities of an MNE Group should notify the Cyprus tax authorities of whether they are the reporting entity and if they are not, the details of the reporting entity of the MNE Group. In line with the relevant EU Directive, the Cyprus tax authorities will apply the EU automatic exchange of information mechanism in order to exchange CBC reports filed by MNE Groups in Cyprus with the tax authorities of the other EU Member States in which the MNE Group operates.
Amendment of Cyprus-India DTT
The Double Taxation Avoidance Treaty (DTT) between Cyprus and India has been signed on 18th of November 2016. According to official statements, with the signing of the DTT Agreement, the Republic of Cyprus shall be removed from the Indian tax authorities list of “Notified Jurisdictional Area”, with retrospective effect from the 1st of November 2013.
The DTT Agreement text agreed between the two countries settles all commitments between the two countries that have been pending for a number of years, providing stability and certainty to investors, whilst contributing to further development of trade and economic activities between Cyprus and India, as well as other neighbouring countries.
The DTT Agreement provides for the taxation of capital gains from the disposal of shares at source. It is noted that a certain grace period is also applicable for investments that have been undertaken or will be undertaken by the 1st of April 2017, so that any taxation of future disposal of said investments will remain in the contracting State of the residence of the seller.
The continuous updating, preservation and extension of the existing DTT Network, which are of utmost economic and political importance to the government of Cyprus, aims to draw additional foreign investments and further promote Cyprus as an established international business centre.
Cypriot citizenship by Investment Revised Scheme
The main goal of the revised scheme is a further encouragement of Immediate Foreign Investments. The Minister of Finance, Mr Georgiades, stated that the government intends to attract investors who will base their economic activity and residence in Cyprus. What makes Cyprus an attractive destination for investments is the high expertise of human resources, the reliable legal and regulatory framework, the fixed fiscal system and the security and stability conditions that prevail in the country.
Most notably, the revised scheme amends the provision for collective investment of €12 million by an individual investment of €2 million and the purchase of a residence in Cyprus valued at a minimum of €500,000.
The most significant amendments are:
- · Citizenship will be granted to individual investors investing €2 million who also purchase a residence valued at least €500,000. An additional residence valued at €500,000 will have to be purchased if an investor’s parents also wish to apply for citizenship.
- · Investors also have the option to purchase government bonds up to a maximum of €500,000.
- · Real estate ownership is for an indefinite period of time, while investments must be kept for a minimum of three years. In order to confirm that investments are held for at least 3 years, the Ministries of Interior and Finance must be informed annually, reporting the value of the initial investment.
Economic criteria introduce that the applicant should invest at least €2 million on purchase or construction of immovable property or creation of commercial or residential developments, development projects in the tourist industry or other infrastructure.
The investor may also invest in Cyprus companies.
Provisions for Cypriot citizenship will be evaluated in order to confirm that the businesses or companies are based in Cyprus, have a substantial activity and an important cycle of works, and they employ at least five (5) Cypriot citizens or citizens of the European Union. The minimum number of employees will increase in case that, one or more applicants invest at the same time in the same business or company. At the time of the application, employees should have a five year legal and continuous stay in Cyprus.
Applicants may also proceed in a minimum €2 million investment in Alternative Investment Organizations founded in the Republic of Cyprus, licensed and inspected by the Securities Commission and of which all investments are exclusive in the Republic of Cyprus and approved by the Ministry of Finance.
Cyprus signs double taxation treaty with Jersey
The Republic of Cyprus signed an agreement for the avoidance of double taxation (‘DTT’) with Jersey, during a ceremony at London’s Cyprus High Commission on 11 July 2016.
This DTT is based on the OECD model convention for the avoidance of double taxation on income and capital. Some of the main benefits are listed below, but they are not an exhaustive list as to the full extent of the economic activities benefitting from the DTT.
The agreement covers all taxes on income levied by either party or by any of a party's subdivisions or local authorities, including taxes on capital appreciation and on gains from the alienation of movable or immovable property. The relevant applicable taxes are income tax (for Jersey) and income tax, corporate income tax, Special Contribution for Defence, capital gains tax and immovable property tax (for Cyprus). Interest arising in one contracting party and paid to a resident of the other is taxable only by the contracting party in whose territory the recipient is resident.
Cyprus-resident natural persons receiving interest income from Jersey will be subject to a lower tax charge by disclosing the interest and opting for taxation in Cyprus, rather than imposition of withholding tax in Jersey under the 2004 taxation of savings income agreement.
Royalties arising in one contracting party and paid to a resident of the other are taxable only by the contracting party in whose territory the recipient is resident. Dividends paid by a resident of one contracting party to a resident of the other contracting party are taxable only by the contracting party in which the recipient is resident.
In relation to new developments in international cooperation between tax authorities it is important to highlight how this new DTT operates. The exchange of information article mirrors article 26 of the OECD Model Convention verbatim.
A Protocol to the DTT provides robust safeguards against abuse of the information exchange provisions by requiring the contracting party that requests information to fulfil specified procedures to demonstrate the foreseeable relevance of the information to the request. No request is to be submitted unless the party making the request has reciprocal procedures and means of obtaining similar information, and every request must be accompanied by requesting specific details in writing outlining all key information. Apart from complying with local legislation on data privacy, the written consent of the Attorney General must be obtained before any information is released to an overseas tax authority. The DTT does not include any provisions regarding assistance in the collection of taxes.
According to the announcement of the Cyprus Ministry of Finance, the agreement reached will contribute to the further development of the commercial and economic ties between the two countries.
The Ministry’s announcement also iterated that updating, maintaining and expanding the existing DTT network aims at further strengthening and attracting foreign investment and promoting Cyprus as an international business centre.
Announcement of the Cyprus Ministry of Finance on the double taxation treaty with the Republic of India
The Cyprus Ministry of Finance has officially announced that the negotiations on the double tax treaty (‘DTT’) with the Republic of India have been successfully completed on 29 June 2016, in New Delhi. According to the Ministry’s announcement, once the relevant DTT enters into force, the Indian authorities will rescind the classification of Cyprus as a Notified Jurisdictional Area, with retrospective effect as from 1 November 2013.
This DTT provides for source based taxation for gains arising from the alienation of shares. Nevertheless investments undertaken prior to 1 April 2017 are “grandfathered” with the view that taxation of disposal of such shares at any future date remains with the contracting state of the seller’s residence.
It is expected that the agreement reached, will further enhance the trade, business and economic relations between Cyprus and India.
Double Tax Treaty between Cyprus and Latvia signed
The Republic of Cyprus and the Government of the Republic of Latvia signed in Brussels, on 24 May 2016, a Treaty for the Avoidance of Double Taxation on Income (‘DTT’).
The DTT was signed by the Minister of Finance, Harris Georgiades, on behalf of the Republic of Cyprus, and the Minister of Economics, Dana Reizniece-Ozola, on behalf of the Republic of Latvia.
The treaty is based on the “model convention for the avoidance of double taxation on income and capital” of the Organisation of Economic Cooperation and Development (‘OECD’). Maintenance and further development of the existing network of DTTs, aim at further enhancing and attracting foreign investments and promoting Cyprus as an international business centre. This DTT will enter into force once Cyprus and Latvia exchange notifications that their formal ratification procedures have been completed. The provisions thereof with respect to taxes will have effect in both countries on or after 1 January following the date the treaty enters into force.
Tax Withholding Rates: The main withholding tax rates with respect to dividends, interest and royalties are mentioned below:
Dividends: 0% withholding tax will apply to dividend payments made to a company resident in the other contracting state that is the beneficial owner thereof. If the recipient company will not be the beneficial owner of the dividend the withholding tax rate will be 10%.
- Interest: 0% withholding tax will apply to interest payments made to a company resident in the other contracting state that is the beneficial owner thereof. If the recipient company will not be the beneficial owner of the interest the withholding tax rate will be 10%.
- Royalties: 0% withholding tax will apply to royalty payments made to a company resident in the other contracting state that is the beneficial owner thereof. If the recipient company will not be the beneficial owner of the royalty the withholding tax rate will be 5%.
Capital Gains: Profits made by a resident of Cyprus from the alienation of immovable property situated in Latvia may be liable for tax in Latvia.
Profits derived by a Cyprus resident from the disposal of shares in a company deriving more than 50% of their value directly or indirectly from immovable property situated in Latvia may also be taxed in Latvia.
Profits derived by a Cyprus resident from the disposal of shares other than those referred to above will be taxable only in Cyprus being the country of tax residence of the person disposing the shares.
Permanent Establishment: A building site or construction or installation project will constitute a permanent establishment only if it lasts more than 9 months.
Exchange of Information: The treaty is compliant with OECD exchange of information provisions.
Forthcoming Tax Law amendments with respect to Country-by-Country Reporting
On 27 April 2016 the Cyprus Ministry of Finance announced the forthcoming amendment of the Cyprus tax legislative framework in relation to Country-by-Country Reporting, further to the draft EU Directive amending Directive 2011/16/EU, which is expected to be approved by ECOFIN on 26 May, 2016. Such amendment will be in line with the recommendations of Action 13 of the OECD Reports on Base Erosion and Profit Shifting (BEPS). The Ministry of Finance, also stated that it fully supports the Action 13 provisions in relation to the Country-by-Country Reporting and that all necessary steps will be taken to adopt the relevant provisions in the Cyprus tax legislation.
Pursuant to the provisions of Action 13, national tax authorities must develop rules concerning the documentation of transfer pricing of multinational entities, for the purposes of enhancing transparency, and at the same time taking into account the compliance cost for such entities.
A Country-by Country Report will be submitted by the parent company of a multinational group to the tax authority of the jurisdiction of its tax residency and it will be communicated to the tax authorities through the automatic exchange of information procedure. This report will be required in case of multinational entities with consolidated turnover in excess of Euro 750 million in the preceding year. The information to be included in the reports will relate to the global income of the group, from affiliated and non-affiliated entities, their tax liabilities, number of employees, share capital, retained earnings, assets and business activities by tax jurisdiction. The exchange of the reports shall be performed within 15 months from the last day of the relative tax year. For the first exchange, the Directive allows the exchange of the reports within 18 months from the last day of the tax year the report relates to.
Pursuant to the draft EU directive, Member States must amend their legislation by 31 December 2016 and the relevant provisions should be effective from 1 January 2017.
Cyprus Exits Memorandum
Cyprus, having met the targets set and having fulfilled the necessary prerequisites agreed upon between the troika and the government of Cyprus, has exited the economic adjustment programme on March 7, 2016, nearly a month ahead of time.
Nevertheless, the climate after the Brussels Eurogroup summit is by no means that of complacency. The Government has reinforced its commitment to proceed with further reforms and abide by the economic plan as laid out and implemented in the past 3 years. "The last Eurogroup on Cyprus’ memorandum. Three years of work and consistency. We continue the serious effort" twitted President Anastasiades.
Cyprus is the fourth euro area member state to exit its bailout following Ireland, Spain and Portugal. The island-state used €7.25 of the total €10 billion earmarked in the financial bailout, due to improved public finances.
Tax law amendments regarding loan restructurings
Following the Eurogroup session of 7 March 2016, IMF Managing Director, Christine Lagarde congratulated the people and the Government of Cyprus for their accomplishments and stated that “the banking system is on a much more solid footing and workouts of non-performing loans are accelerating, opening space for new productive lending.”
The recent enactment into laws of a number of tax law amendments regarding loan restructurings, reflect the willingness of Cyprus to encourage the restructuring of non-performing loans.
The relevant amendments, effective from 31 December 2015, temporarily exempt loan restructurings from tax, where such restructurings include the transfer of immovable property to the creditor/financial institution in exchange for the repayment of debt.
Under the amendments any benefit, profit or gain arising from such restructurings is exempt from income tax (IT) and any gain from the disposal of property is exempt from capital gains tax (CGT). Both IT and CGT laws provide that in case of a property disposal or possession (for the lender’s own use), the tax acquisition cost for the lender is considered to be the restructuring price and the disposal value is reduced by any amount returned to the borrower. Also upon a restructuring, where any part of the disposal value is refunded to the borrower, the tax that was exempt for the borrower is payable up to the amount refunded.
Moreover any accounting profits arising from a restructuring are not subject to the deemed distribution provisions of the Special Contribution for Defence Law; any contracts, mortgages or other documents used are exempt from stamp duty, while no fees or charges should be levied for transfer or registration of property in the restructuring context.
Cyprus signs a Treaty with Ethiopia for the Avoidance of Double Taxation
Cyprus continues to develop its extensive network of Double Taxation Treaties (‘DTTs’) by entering into a new DTT with the Federal Democratic Republic of Ethiopia on the 30th of December 2015. The DTT will enter into force once both countries have exchanged notifications that their formal ratification procedures have been completed.
This new DTT is expected to contribute to the development of business and economic relationships between the two countries, as well as with other Sub-Saharan counties, which form a network of rapidly developing countries with significant investment opportunities.
The agreement is based on the OECD Model Convention for the Avoidance of Double Taxation on Income.
It includes a permanent establishment definition which is in line with the definition provided under the OECD model.
The relevant withholding tax rates are as follows, provided that the recipient is the beneficial owner thereof:
- 5% withholding tax on dividend payments;
- 5% withholding tax on interest payments; and
- 5% withholding tax on royalties payments.
In relation to capital gains tax, gains from the disposal of immovable property are taxed in the country where the immovable property is located. Gains from any disposal of shares are taxable in the country of which the seller is located.
Cyprus announces plans to amend IP tax Regime
Cyprus, an already established business and financial centre, has recently implemented a new IP regime which aims to boost the growth in IP exploitation, research and development, and the ability to design effective and safe IP holding structures. Being based on a common law legal system, Cyprus has also entered into a number of International Conventions on the Protection of IP which aims to safeguard IP owners. The IPs involved may be registered in Cyprus or abroad. This background already placed Cyprus high on the list of the most attractive and preferred IP location in the EU and globally.
Main advantages of the New IP Regime:
• Effective Tax rate of 2% (or less upon other qualifying criteria);
• 80% exemption on royalty income and capital gains on disposal of IP;
• IP gross income reduced by expenses relating to the production of such income;
• There is no tax recapture system for previously generated losses (can only be carried forward for 5 years);
• Profit of foreign branches is exempt from Cypriot tax under certain conditions (i.e. when the branch is acting as the IP owner;
• Competitive amortization provisions over a 5 year period (for IP rights acquired or developed after the 1st of January 2012);
• No exit taxes;
• A wide range of IP rights can qualify which include patents, trademarks, designs/models, internet domain names, software copyrights, formulas, expertise, work in process R&D, clientele lists, general copy rights related to scientific, literary or artistic work, or rights related to industrial and commercial work.
Cyprus – Switzerland Double Tax Treaty enters into force
The double tax treaty (‘DTT’) signed between Cyprus and Switzerland on 25 July 2014, has now been ratified by Switzerland and will come into effect as from the 1st of January 2016.
This DTT provides that dividend payments by Switzerland will be subject to a withholding tax (‘WHT’) of 15% that can be reduced to 0% under certain conditions. Interest and royalty payments from Switzerland will be exempt from any WHT in Switzerland, while gains arising by a Cyprus company from the disposal of shares of a Swiss company, deriving more than 50% of their value from immovable property situated in Switzerland, may be taxed in Switzerland. The new DTT with Switzerland does not contain a limitation of benefits clause.
It also includes the latest version of the OECD Model Convention article on the exchange of information, thus demonstrating Cyprus’ commitment to internationally agreed standards. Nevertheless, it also incorporates strong safeguards against the abuse of the relevant procedure.
Cyprus – Ukraine double taxation avoidance protocol
Cyprus and Ukraine have signed in Kiev, on 11 December 2015 a double taxation avoidance protocol in respect of income taxes. It will enter into force on the 1st of January 2019, the date on which the existing DTT will expire.
The Cyprus Ministry of Finance, in an official announcement, has stated that the protocol will contribute to the enhancement of the economic relations between the two countries; and that the adoption of a most favourable clause for taxes on interest, dividends, royalties and capital gains, is of great importance as it safeguards that Cyprus will be treated equally with other competing jurisdictions.
Upgraded rating for compliance with OECD standards
The assembly of the Global Forum for Transparency and Exchange of Information for Tax Purposes, has upgraded Cyprus’ rating to “overall largely compliant”, thus restoring the reliability of Cyprus.
Cyprus has been assigned a rating of largely compliant for the key elements of availability of ownership and identity information; availability of accounting information and exchanging information, while the rating of compliant was assigned for the remaining seven essential elements.
Amendment of the Double Tax Treaty between Cyprus and Ukraine
In 2012 a protocol was signed between the Cyprus Ministry of Finance and the Deputy Minister of Finance of Ukraine.
The agreed Protocol will enter into force not earlier than the1st January 2019 because of the existing Double Tax Treaty agreement which will expire at that date. The existing DTT agreement was signed on November 2012 and entered into force on January 2014.
The new double tax treaty provides an advantageous development in relation to taxes on interest, dividends, royalties and capital gains. The updated protocol introduces amendments such as an increase to 5% of the rate of withholding tax on interest paid by a Ukrainian debtor to a beneficial owner in Cyprus (the current DTT rate is 2%). Moreover, the current DTT provides for withholding tax at 15% on dividends paid by Ukrainian companies to Cypriot shareholders, with a reduced rate of 5% if the beneficial owner owns more than 20% of the share capital of the company paying the dividend or has invested more than €100,000 in the shares.
Royalties have been agreed at 5% (or 10% in the event of film royalties), whilst Cyprus retains the exclusive taxing right on the disposal of Ukrainian shares.
Also, capital gains derived from movable property, including shares in property holding companies, the assets of which mainly comprise of immovable property, are taxable only in the country of residence of the person making the disposal.
This will amend and replace the existing treaty which was established under the USSR and will provide new opportunities for cooperation between Cyprus and Ukraine.