On December 12, 2024, the Cyprus Parliament approved the domestic bill entitled The Global Minimum Tax Assurance for Multinational Enterprise Groups and Large-Scale Domestic Groups in the Union Act of 2024. This law transposes the EU Council Directive 2022/2523 of December 14, 2022, establishing a framework for imposing a minimum effective tax rate of 15% on multinational enterprises (MNEs) and large-scale domestic groups with annual consolidated revenues exceeding €750 million. Known as the EU Pillar Two Directive or the GloBE (Global anti-Base Erosion) Directive, this legislative measure (the "Pillar 2 Directive") aims to curb profit-shifting practices and ensure fairer taxation.
The law will come into force for fiscal years starting on or after December 31, 2023, marking a crucial step in Cyprus's adherence to international tax reforms.
The Pillar 2 Directive is a fundamental component of the Organization for Economic Cooperation and Development's (OECD) Two-Pillar Approach, designed to address fiscal challenges in the digitalized global economy. Specifically, it introduces a global minimum tax to counteract profit-shifting by MNEs to jurisdictions with minimal or no taxation. This initiative fosters equitable taxation globally, safeguarding the tax bases of participating jurisdictions.
The approved legislation integrates rules established under the EU's Pillar 2 Directive, including the Income Inclusion Rule (IIR) and the Under-Taxed Profits Rule (UTPR). These mechanisms impose top-up taxes on profits that fall below minimum taxation thresholds, ensuring equitable revenue distribution. The framework also empowers member states to implement a domestic top-up tax, securing revenues from low-taxed entities within their territories.
Key Provisions of the Legislation
- Effective Date and Initial Tax Submissions
The legislation takes retroactive effect from December 31, 2023, aligning with the EU's Pillar 2 Directive. Affected companies must submit their first tax returns by June 2026, covering the fiscal year 2024.
- Application to Shipping and Ship Management
Multinational and large domestic shipping companies headquartered in Cyprus, even if they qualify for the tonnage tax regime, fall under the directive's scope. While international shipping income is excluded under specific conditions, ship management activities are taxable at the global minimum rate of 15%, reflecting a stricter stance in this area.
- Mandatory Application of IIR and UTPR
The Income Inclusion Rule (IIR) becomes mandatory for fiscal years starting on or after December 31, 2023. The Under-Taxed Profits Rule (UTPR), acting as a secondary mechanism, will be enforced from December 31, 2024.
- Introduction of a Domestic Top-Up Tax
From 2025, Cyprus will implement a domestic top-up tax, enabling it to directly collect additional revenues from entities that would otherwise attract top-up taxes in other jurisdictions. This phased approach gives businesses time to adjust while mitigating relocation risks.
- Strategic Delay in Implementation
Unlike most EU states implementing the domestic top-up tax in 2024, Cyprus will delay its adoption until 2025. This strategy allows companies to adapt and preserves Cyprus's status as an attractive business hub, minimizing potential disruptions from corporate relocations.
- Impact on Affected Entities and Broader Economy
Early implementation could adversely affect affected companies' behaviour, reducing corporate tax revenues and economic activity. By delaying implementation, Cyprus aims to balance short-term fiscal gains with long-term economic stability.
- Temporary Exemptions
While the EU Pillar 2 Directive permits a six-year temporary exemption from IIR and UTPR rules for jurisdictions hosting up to 12 parent entities, Cyprus does not qualify due to its higher number of affected entities, estimated at over 60.
The legislation emphasizes the global scope of these tax rules, aligning with OECD standards to ensure smooth integration across jurisdictions. Such alignment fosters seamless cross-border operations and positions Cyprus as a compliant and cooperative participant in global tax reform initiatives.
Although the exact fiscal impact is uncertain due to potential restructuring or relocation by affected companies, the reform is expected to enhance corporate tax revenues and strengthen Cyprus's fiscal framework.
This legislation underscores Cyprus's dedication to international tax cooperation, ensuring transparency, fairness, and stability. By adopting these reforms, Cyprus not only fulfils its EU obligations but also reinforces its reputation as a responsible and forward-thinking global tax participant.
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