Cyprus: EU Anti-Tax Avoidance Directive: Changes To The Cyprus Tax Law – CFC, GAAR, Exit Taxation And Hybrid Mismatches

  1. Introduction

In our previous article, we wrote that the House of Representatives was reviewing the draft legislation which was going to introduce parts of the EU Anti-Tax Avoidance Directive (ATAD) into local law. On 5 April 2019, these were voted into law by the House of Representatives, adopting the provisions of the European Council Directive for rules against tax avoidance practices. Interest deductibility limitation rule, Controlled Foreign Companies rule and General Anti-Abuse rule come into effect on 1 January 2019. 

Exit taxation, and Hybrid mismatches rules come into effect on 1 January 2020 (it is expected that these will be transposed into law by the end of 2019).

The anti-tax avoidance measures as per the European Council Directive, are as follows:

  • Interest deductibility limitation rule;
  • Controlled Foreign Company (CFC) rule;
  • General Anti-Abuse rule (GAAR);
  • Exit taxation;
  • Hybrid mismatches rule.

We covered the interest deductibility limitation rule in our previous newsletter and our aim is to cover the rules relating to CFC, GAAR in this newsletter.

  1. Controlled Foreign Company (CFC)

CFC rule is aiming to stop income attribution to subsidiaries which are resident in low or preferential tax jurisdictions. In essence, it is the re-distribution of the revenue of low-taxed foreign subsidiaries to their parents and controlling companies.

A CFC is an entity or a permanent establishment ("PE") whose profit is not taxable or exempt in Cyprus, provided that the following two criteria are met:

  1. A Cypriot tax resident company, alone or together with its associated companies, holds a direct or indirect share of more than 50% in such entity. The threshold is determined in terms of participation in the share capital, voting rights or the entitlement to profits.
  1. A company or PE is low-taxed, i.e., the income tax it pays on profits is lower than 50% of the tax that it would have paid by applying the provisions of the Cypriot income tax law. (A PE of a CFC whose profit is either not taxable or tax exempt in the country of the CFC, shall not be taken into consideration).

The revenue of a CFC that has not been distributed, must be taken into account in the tax base of the Cypriot taxpayer, if the said revenue arises from non-genuine arrangements which have been put in place aiming to obtain a tax advantage.

The revenue that has not been distributed is the accounting profit after tax that has not been attributed to the Cyprus tax resident company during the tax year that it has resulted as well within the next 7 months from the end of the tax period.

The above do not apply where a company or a PE has the following:

  1. The accounting profits do not exceed EUR 750,000 and the revenue of the non–trading income does not exceed EUR 75,000; or
  1. The accounting profits do not exceed 10% of the operational costs for the year.

The revenue to be included in the Cypriot tax base shall be computed in proportion to the company's actual participation in the CFC.

The net income to be included in the Cypriot tax base is restricted to the amounts produced through assets and risks in relation to the important people roles carried out by the Cypriot entity. The distribution of income, shall be computed based on the arm's-length principle under the Cypriot income tax law and is restricted to the amount of the non-attributable revenue of the CFC.

The non-attributable revenue (or loss) is required to be included in the tax period of the Cyprus tax resident company in which the tax year of the CFC ends.

For avoiding double taxation, in case a CFC distributes profits to the Cyprus tax resident company that were previously included in the Cyprus tax base based on the current rules, then these are exempt from tax in Cyprus. Any foreign tax that was paid on the revenue of the CFC of PE is set-off against the tax payable in Cyprus.

  1. General Anti-Abuse rule (GAAR)

The purpose of the GAAR is to block misuse tax practices that were not included in specific provisions of the law.

The law provides that for the purposes of computing the tax payable, structures or a series of structures that are aiming to get tax advantage and are non-genuine should be ignored, hence not taken into consideration (non-genuine structures are the structures that are not put in place for commercial reasons that reflect the economic reality).

Savva & Associates aims to work with clients to ensure their Cyprus, international and personal structures are established and administered to the highest level of international standards. Our highly experienced and qualified team will ensure the correct structuring of your Companies and provide comprehensive advice in all VAT and Tax matters.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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