Overview of corporate tax work over the last year
Types of corporate tax work
The geographic location of Cyprus and its position as an international finance centre tends to mean that the corporate work undertaken by tax specialists on the island is both complex and varied. It also frequently intersects with personal tax issues since Cyprus is home to many high-net-worth individuals who are significant corporate investors. The COVID-19 pandemic did initially lead to the deferral of several significant corporate deals; however, several of these are now starting to come to fruition and other avenues for tax specialists have been opened earlier than anticipated as the government seeks to kickstart the economy. Specific areas of activity are the following.
Many corporates based in Cyprus are international or multinational businesses. Cyprus implemented transfer pricing rules in 2017, hence transfer pricing is a substantial compliance priority for many organisations on the island. They require assistance to introduce practical transfer pricing solutions into their overall global business operations and objectives, to prepare documentation to support their transfer pricing practices, and if necessary to represent them for the purposes of resolving disputes.
Cyprus is keen to establish itself as a headquartering location and is meeting this with some success. During the past decade, several household names including NCR, Kardex, Amdocs and Bernhard Schulte Shipmanagement have all opted to headquarter on the island and utilise the experience of local tax professionals. Two sectors that have been particularly targeted have been Shipping and High-tech. Considerable work is therefore directed towards assisting corporates to navigate the EU-approved shipping tonnage scheme and the EU-approved IP Box regime.
The work in this area has increased substantially for two principal reasons. The first is the desire of the Cyprus government to promote Cyprus as a regional energy hub – both for hydrocarbon fuels and renewables. The second is a stated aim by the government to accelerate a variety of large capital development projects such as the Larnaca Port development. By their very nature, both of these areas of activity lend themselves to the joint-venture structure. The discovery of natural gas and potential oil deposits in Cyprus' exclusive economic zone has attracted industry giants such as Total, Royal Dutch Shell and ExxonMobil to explore the area and most have established joint-venture vehicles for this purpose. The favoured bidder for the Larnaca development is also a joint-venture company. Professional input is required to structure the most tax-efficient vehicle and to advise on additional tax benefits that may be accessible.
The level of M&A work in Cyprus tends to be high and generally of an international rather than domestic nature. The intervention of the EU in the banking sector post-2013 significantly increased, albeit temporarily, the level of domestic M&A activity. However, the market for domestic transactions involving a Cyprus entity remains much larger in both value and volume. In most deals, the role of the Cypriot law firm is to advise on the Cyprus tax law aspects of the deal as part of a consortia of firms operating under the direction of a main advisor to the client. For example, the merger of FedEx Express International BV and TNT Express Worldwide BV required local professionals to advise on the impacts for two Cyprus subsidiaries. It is noteworthy that the level of activity in the hospitality and tourist sector has shown a definite upturn, which appears to be growth driven by rather than as a result of COVID-19-induced financial distress. A notable recent deal for tax advisors is Park Lane Acquisitions and Hyatt Hotels agreeing with Anolia Holdings Ltd to launch the first Hyatt hotel in Cyprus.
Significant deals and themes
Acquisition structure advice: Mediterranean Hospitality Venture Limited (MHV) on its 100% acquisition of Parklane Hotels Limited. This most recent purchase enabled MHV to add internationally branded luxury hotel complex "Parklane, a Luxury Collection Resort & Spa, Limassol", the only internationally branded luxury resort in Cyprus, to its portfolio of high-end hospitality venues.
Public bids: CPI Property Group SA and Aroundtown SA utilised a Cyprus entity to make a cash offer for all of the share capital of Globalworth Real Estate Investments Limited (a Guernsey incorporated real estate company listed on AIM). Corporate tax advice was required regarding the structuring and implementation of the offer and acquisition of the shares, which was made via the Cyprus entities.
Advanced business structuring: Mintra Holding AS's cross-border acquisition of German-based maritime digital learning and crew competence management specialists Safebridge GmbH and its Cyprus subsidiary Safebridge Limited. Advice was required on structuring the deal to be tax efficient on an ongoing basis.
Greenmont AIFLNP's EUR 15.6 million acquisition of Watium Energia SL. Tax experts were required to provide tax advice throughout the structuring of the deal and the financing of the arrangement through a mix of debt and equity.
Key developments affecting corporate tax law and practice
Purely domestic changes
The Draft Budgetary Plan (DBP), prepared according to Regulation (EU) 473/2013, was approved by the Council of Ministers of Cyprus on 22 October 2020 and will be laid before the House of Representatives.
The analysis and forecasts contained in the DBP are based on the latest available results of 2020 as well as the Budget Bill for 2021 that was submitted to the House of Representatives on 9 October 2020.
Revenue and expenditure projections
Revenue from taxes on production and imports is expected to decrease by 6% during the current year and marginally increase as a percentage of GDP to 15.3% compared to 15.2% the year before. The forecasted negative growth of this revenue category stems from expected losses from reduced VAT receipts due to the restrictive measures taken by the government related to the COVID-19 pandemic as well as from the estimated impact from the reduction of the special VAT rates, about 0.1% of GDP, as of 1 July 2020 until the end of the year. In 2021, revenue from taxes on production and imports are expected to grow by 5.4% and remain unchanged as a percentage of GDP.
Tax measures expected in 2021
Cyprus generally supports the European Commission's initiatives to fight Aggressive Tax Planning (ATP), including by adopting the Anti-Tax Avoidance Directive II (ATAD II) and the Directive on Administrative Cooperation Vol. 6 (DAC6). Cyprus reiterates its commitment and willingness to continue cooperation in all appropriate fora for taxation, in full respect of the respective competencies under the treaties and in light of the relevant voting procedures that are applicable for such matters. In addition to the European and international measures, Cyprus unilaterally announced two additional measures to address ATP, namely:
- Introduction of withholding tax on dividend, interest, and royalty payments to countries in Annex I of the EU list of non-cooperative jurisdictions on tax matters.
- Introduction of a corporate tax residency test based on incorporation, in addition to the existing "management and control" test.
For these two measures, draft bills have been sent to the Attorney General's office for legal vetting. It is also noted that the unilateral measures have been agreed with relevant stakeholders (Institute of Certified Public Accountants of Cyprus) and that they are expected to come into effect by year-end.
Exchange of information
In relation to the actions taken by the Cyprus government to deal with the concerns that the Citizenship by Investment (CBI) and Residence by Investment (RBI) schemes may circumvent the Common Reporting Standard initiative, the Cyprus Tax Authority, in collaboration with the Immigration Authority, is in the process of developing the appropriate infrastructure to enable, as soon as possible, the spontaneous exchange of information mechanism about individuals that have obtained residence rights through the CBI and RBI programmes with all original jurisdictions of tax residence.
The processes for the provision of a new information system for the Cyprus Tax Department are in progress. The aim of the project is the simplification of processes and procedures and the use of more modern Tax Department methods in order to increase personnel productivity and improve operational efficiency (Hyperlink).
Notional Interest Deduction
On 16 June 2020, an amending Income Tax Law (ITL) was published in the Official Gazette of the Republic with respect to the Notional Interest Deduction (NID). The revised NID provisions enhance the tax benefits for Cyprus companies financing their operations through new equity. The provisions are in line with the recommendations of the European Commission and offer additional clarity for taxpayers. The key changes introduced by the amendment are:
- A change in the definition of "new equity". Effective from 1 January 2021, this is defined as equity introduced into the business on or after 1 January 2015. Therefore, as from 1 January 2021, the NID can no longer be claimed on equity arising from the capitalisation of pre-existing reserves.
- A change in the prescribed rate. From 1 January 2020, the prescribed rate is the yield of the 10-year government bond (as of 31 December of the year preceding the tax year the NID is claimed) of the country where the new equity is employed/invested plus 5%. If the country does not issue such bonds, the Cyprus bond rate applies. There is no minimum reference rate.
The amendment also clarifies that for the purposes of calculating the NID cap, the relevant taxable profits are those arising from the employment of the new equity.
Refugee contribution on sales of immovable property
On 22 February 2021, a law was published in the Official Gazette of the Republic amending the provisions of the Central Agency for Equal Distribution of Burdens (Creation, Objects, Responsibilities, and Other Related Matters) Law. The amendment imposes a 0.4% "contribution" levy payable by the vendor on:
- the sale of immovable property located in the areas controlled by the Republic; and
- the sale of shares in a company that owns such immovable property, provided that the buyer takes control of the company. For the calculation of the contribution, the value of the shares equals the latest valuation of the immovable property by the Department of Lands and Surveys.
The levy is to support refugees and to compensate owners of immovable property in the occupied part of Cyprus. Full detail is awaited on a variety of issues including how and when payment is to be made, possible exemptions, transactions between related parties and penalties for late or non-payment. Clarification is expected when the associated Regulations are published.
European – CJEU cases and EU law developments
CJEU case law
T-516/18 Luxembourg v Commission and T-525/18 ENGIE, ENGIE Global LNG Holding Sàrl and ENGIE Invest International SA v Commission
In this case, the General Court approved the Commission's approach, which entailed looking at the economic and fiscal reality, rather than adopting a formalistic approach that takes into consideration each of the transactions completed under the intra-group financing structure in question on a separate basis. Additionally, the General Court concluded that it could not be disputed that the ENGIE group was conferred preferential tax treatment in light of the non-application of national provisions relating to abuse of law. It is therefore clear that the test of reality is of utmost importance and that preferential tax treatment can be predominantly ascribed to the non-application of a national measure relating to abuse of law.
EU-level developments and exit taxation
On 3 July 2020, Cyprus fully adopted the provisions of ATAD I and II. Consequently, companies and groups with international activities may find themselves liable to pay an "exit tax". That is, they may be subject to corporate tax on an amount equal to the market value of the transferred assets at the time of exit, less their value for tax purposes, in any of the following circumstances:
- Transfer of assets to the Head Office or to a permanent establishment (PE) in another EU Member State or in a third country insofar as Cyprus no longer has the right to tax the transferred assets.
- Transfer of tax residence to another EU Member State or to a third country, except for those assets that remain effectively connected with a PE in Cyprus and for which Cyprus has the right to tax.
- Transfer of the business carried on in Cyprus by a PE in another EU Member State or in a third country insofar as Cyprus no longer has the right to tax the transferred assets due to the transfer.
Hybrid mismatch rules
Companies and groups of companies with international activities should note that on 3 July 2020, Cyprus fully adopted ATAD I and II. Provisions relating to hybrid mismatches came into effect from 1 January 2020. Provisions relating to reverse hybrid mismatches take effect from 1 January 2022. The aim of the provisions is to ensure that tax deductions or credits are only taken in one country and that a deduction is not taken in one country without taxation of the corresponding income in the other country. Cyprus rules follow ATAD minimum standards. They apply to Cyprus registered companies and foreign registered companies with a PE in Cyprus.
ATAD I and II
On 5 April 2019, the House of Representatives approved legislation implementing ATAD in Cyprus with the aim of improving the internal market's ability to deal with cross-border tax avoidance practices.
ATAD contains five legally binding anti-abuse measures, which all Member States must apply. The measures are the following:
- introduction of controlled foreign company (CFC) rules (Action 3);
- the switch-over rule (Action 2);
- introduction of exit taxes;
- interest limitation (Action 4); and
- introduction of the general anti-abuse rule (GAAR) (Action 6).
The provisions relating to interest deductibility rules, CFCs and GAAR, as included in ATAD, entered into force on 1 January 2019. On 3 July 2020, the remaining two amendments for full implementation of ATAD were published in the Official Gazette of the Republic: the first concerns the introduction of an exit tax regime (ATAD I), which applies retroactively from 1 January 2020; and the second is related to hybrid mismatches (ATAD II), which focuses on Action 2 and also applies retroactively from 1 January 2021. The so-called reverse hybrid mismatch rules will apply from 1 January 2022.
Transactions that are not carried out for valid commercial reasons will give rise to tax liability calculated in accordance with the ITL. Cyprus already incorporates within its tax legislation numerous anti-abuse rules. It is expected that relevant Articles within the tax legislation will be introduced to provide greater and specific powers to the Inland Revenue Director to ignore non-genuine arrangements that do not have a valid commercial reason that reflects economic reality. GAAR only applies to corporate transactions.
Thin capitalisation/interest deductibility rules
A limitation on the possibility of deducting exceeding borrowing costs in the tax period in which they are incurred is set at 30% of taxable earnings before interest, taxes, depreciation and amortisation (EBITDA). Taxable EBITDA is defined as the total of net taxable income calculated in accordance with the ITL, increased by the exceeding borrowing costs.
The exceeding borrowing costs restriction does not apply to amounts below EUR 3 million per taxpayer. In addition, the restriction does not apply to companies not forming part of the group and that do not have a related business (participation of at least 25% in the share capital or participating at least 25% in the profits).
The law further excludes financial undertakings from the scope of the interest limitation rules (i.e., credit institutions, investment firms, alternative investment fund managers and management companies of undertakings for collective investment in transferable securities).
An entity, or a PE whose income is not taxable or is exempt in Cyprus, is treated as a CFC where the following two conditions are met:
- in the case of a non-Cypriot tax-resident entity, the Cypriot tax-resident company alone, or together with its associated enterprises, holds a direct or indirect participation of more than 50% in such an entity; and
- the non-resident entity or PE is low-taxed (i.e., the income tax it pays is lower than 50% of the Cypriot corporate income tax that it would have paid by applying the provisions of the ITL).
Cyprus has opted for the ATAD Model B CFC rules since they give EU Member States the ability to "carve out" CFCs via the thresholds provided by ATAD. "Carving out" applies to entities that have: (i) accounting profits of no more than EUR 750,000 and non-trading income of no more than EUR 75,000; or (ii) accounting profits of no more than 10% of operating costs.
Other specific measures transposed into Cyprus law include:
- the amendment of the IP Box regime to follow the nexus approach in response to Action 5;
- elimination of back-to-back reduced margins in response to Actions 8–10;
- amendment as to the taxability of dividends where such are products of a hybrid instrument in response to Action 2;
- ratification of the Multilateral Convention to Implement Tax Treaty Related Measures (MLI) in response to Action 6;
- country-by-country reporting in response to Action 13; and
- the introduction of transfer pricing files (master and local) in response to Action 13.
It is therefore vital, from a tax planning perspective, that the Cyprus position be examined in terms of its entire structure and its adherence to BEPS and ATAD.
On 22 January 2020, the instrument of ratification of the MLI, together with the positions of Cyprus and an explanatory statement, were published in the Official Gazette of the Republic.
The MLI is designed to allow countries to swiftly incorporate new tax treaty provisions into their existing bilateral tax treaties (in line with measures arising from the G20/OECD BEPS Project). The MLI does not operate in the same manner as an existing treaty protocol amendment – rather, it "complements" existing treaties and is to be read in conjunction with the treaty at hand. While the MLI provides flexibility on each state's sovereign right over the adoption of the MLI positions, some elements contained therein (inter alia, the provisions on the prevention of treaty abuse and dispute resolution) are considered G20/OECD "minimum standards" for those jurisdictions participating in the BEPS initiative.
Cyprus approved the minimum Actions as prescribed by the MLI – Action 6 (Purpose of Covered Tax Agreement), Action 7 (Treaty Abuse) and Action 14 (Making Dispute Resolution Mechanisms More Effective).
The publication of the above completes the domestic procedures by Cyprus for entry into force of the MLI, with deposit of the MLI having taken place on 23 January 2020. The entry into force will follow Article 34 of the MLI, i.e., "the first day of the month following the three months following the deposit", being 1 May 2020. For provisions relating to withholding taxes, the earliest entry into effect will be 1 January 2021 (provided that the other contracting jurisdiction has also submitted its instrument of ratification with the OECD prior to, or during, 2020). For provisions relating to other taxes, the earliest entry into effect will be 1 November 2021 (provided that the other contracting jurisdiction has also submitted its instrument of ratification with the OECD prior to, or during, January 2020).
COVID tax implications
The Cyprus Tax Department issued a circular on 27 October 2020 clarifying the provisions of the ITL (Article 2) on "tax residence" and "permanent establishment" amidst COVID-19 as well as an additional circular on 25 January 2021 extending the validity of the previous circular for as long as the restrictions continue to apply globally.
Creating an unintended PE
Cyprus is dealing with the unusual travel problems caused by COVID-19 by adopting the OECD's "stopping the clock" approach to the extent that the current circumstances should not create any changes in the definition of a PE. Cyprus appreciates the exceptional circumstances producing the result that activities are being conducted in a jurisdiction where, without the restrictions imposed by governments, they would not normally occur, such as, for example, working or concluding contracts remotely or on construction sites.
Creating a forced change of residency for legal entities
Cyprus embraces the OECD's approach that the inability of the decision makers to travel should not affect the application of the Article 4 tiebreaker rule for the purposes of determining a company's place of residence. Non-Cyprus tax-resident companies would not be deemed to acquire tax residence in Cyprus merely because their staff, directors, representatives, or employees under a service contract are stranded in Cyprus solely because of the current restrictions.
By the same token, the failure of a director to travel to Cyprus to attend a board meeting, when such a failure is due to the restrictions, will not affect the company's tax residence in Cyprus. It is worth noting that pursuant to certain amendments to the Cyprus companies laws, a director can be present at a meeting via teleconference. Meetings can be organised and considered duly held through the use of electronic fora to also include general meetings.
The standard rate of VAT is 19%. Reduced rates of 5% and 9% apply to certain supplies. COVID-19 vaccines and diagnostic tests are 0% rated.
Mandatory disclosure rules update
On 18 March 2021, the Cyprus Parliament approved the draft bill of the Law of Administrative Cooperation in the Field of Taxation (Law 205(I)/2012) implementing DAC6. This said bill was fully enacted into local Cyprus law on 31 March 2021.
DAC6 requires EU-based intermediaries or taxpayers to disclose certain cross-border arrangements that were implemented on or after 25 June 2018 to their local tax authority, who must then share the information with the tax authorities of all other EU Member States.
On 26 February 2021, the Cyprus Tax Authority, in response to difficulties arising from COVID-19, issued a directive wherein it was announced that there will be no imposition of administrative fines for overdue submission of DAC6 information that should be submitted until 30 June 2021. This date was further extended until 30 September 2021 via an announcement made on 3 June 2021 in the following cases:
- reportable cross-border arrangements that have been made between 25 June 2018 and 30 June 2020 and had to be submitted by 28 February 2021;
- reportable cross-border arrangements that had been made between 1 July 2020 and 31 December 2020 and had to be submitted by 31 January 2021;
- reportable cross-border arrangements made between 1 January 2021 and 31 August 2021 that had to be submitted within 30 days from the date they were made available for implementation or were ready for implementation or the first step in the implementation has been made, whichever occurred first; and
- reportable cross-border arrangements for which secondary intermediaries provided aid, assistance or advice between 1 January 2021 and 31 August 2021 and had to submit information within 30 days beginning on the day after they provided aid, assistance, or advice.
Tax climate in Cyprus
Cyprus resident companies must be set up in a manner that satisfies international tax compliance and acceptance. The international legal framework has taken a sharp stance in safeguarding substance of companies, specifically through the EU Parent/Subsidiary Directive, which allows for the refusal of benefits for arrangements that are considered "non-genuine" and which have been put into place solely for purposes of obtaining a tax advantage. In addition, ATAD, BEPS Action 5 on harmful tax practices, and the MLI as well as the new Article 29 contained within the OECD Model Double Tax Treaty (referring to the Principal Purpose Test and Limitation of Benefits) reinforce the need for proper substance. Cyprus follows all of the aforesaid EU and international standards by having them embedded into its national legislation.
IP Box regime
Special allowances and incentives are granted for intellectual property rights in Cyprus.
Taxable profits from intellectual property would consist of:
- Less expenses linked with revenue generation.
- Less capital allowances on the cost of the intellectual property.
- Less NID on the value of any intellectual property injected into the Cyprus company in exchange for equity in the Cyprus company.
- Less 80% deduction under the nexus approach.
The effective corporate tax rate of a successfully implemented Cyprus intellectual property owner may, under certain conditions (full enjoyment of deductions listed above), reduce the effective corporate rate up to 2.5%.
As a general note, Cyprus currently applies the "modified nexus" approach in line with Action 5 of the BEPS Action Plan. Such a regime is subject to stricter substance requirements (the "nexus" approach), notably, the hiring of new employees or relocation of employees in Cyprus and conducting research and development in Cyprus.
In particular under the new regime, which applies on qualifying assets developed after 1 July 2016, qualifying profits and qualifying expenditure are taken into account in arriving at the effective tax rate that will be subject to taxation in Cyprus, and this applies mainly in relation to software and patents.
In other words, the tax relief is not fixed or pre-determined as per the previous regime.
This matter is governed by the Merchant Shipping (Fees and Taxing Provisions) Law of 2010 as amended by Law 39(I)/2020 (together, the Tonnage Tax Law). As a result of this amendment, the tonnage tax system of Cyprus has been prolonged until 31 December 2029, giving effect to the Decision of the European Commission dated 16 December 2019 to prolong the Cyprus tonnage tax system and to approve it as being in line with the relevant EU policy and community guidelines on state aid to maritime transport. The Tonnage Tax Law gives qualifying Cyprus resident shipping and ship management companies the option to be taxed on the basis of the tonnage of the vessels they operate, simplifying and reducing the tax burden. It widens the range of exempt gains to include profits on the disposal of vessels, interest earned on funds and dividends paid directly or indirectly from shipping-related profits, in addition to profits from shipping operations.
Film and audio-visual production industry
In September 2017, the Cyprus government approved an initiative to encourage the development of the film and audio-visual production industry in Cyprus by means of grants, tax incentives and other assistance.
Law 139(I) of 2018, which took effect on 11 December 2018, amends the ITL to provide tax exemption of income from production of films and audio-visual media in accordance with the government's programme.
The amending law adds a new sub-paragraph to Article 8 of the ITL providing up to 50% exemption from tax of income derived from the production of films, series and other relevant audio-visual programmes as described in the government programme. The deduction is limited to 35% of the eligible costs approved by the competent authority implementing the programme. Any restriction on the exemption resulting from the limitation to 35% of costs can be recovered over the next five years. No exemption is available if the taxpayer has received a grant under the programme.
In addition, small enterprises as defined in Article 17 of Regulation (EU) 651/2014 may claim an annual deduction of 20% of the cost of cinematographic infrastructure and technological equipment providing it is used in Cyprus for at least five years. Medium-sized enterprises may claim an annual deduction of 10% of such costs.
Industry sector focus
Please see the "Tax climate in Cyprus" section above.
The year ahead
Tax residency-related considerations
COVID-19 has tested the strength of the global economy and health system as well as fully demonstrated the need of businesses in investing in modern working practices, IT infrastructure, and human resource management as staff had to work remotely through various electronic fora.
COVID-19 has produced some "novel" issues for tax authorities looking to apply standard tax treaties to non-standard situations. This has led the OECD Secretariat as well as competent authorities around the globe to issue initial guidance on an emergency basis on tax residency-related matters, among others.
The imposition of emergency measures by governments around the globe, such as travel restrictions, has created an array of complications that will need constant review and refinement.
There has also been the introduction of a corporate tax residency test based on incorporation, in addition to the existing "management and control" test as explained above.
Substance- and "beneficial ownership of income"-related considerations
Further to the discussion under the "Tax climate in Cyprus" section above, during the last few years, many foreign taxpayers have not been automatically granted treaty benefits unless there is evidence that the recipient is the actual beneficial owner of the income. Tax authorities around the world are becoming stricter and more sophisticated and proper tax planning is therefore required for safeguarding the taxpayer's interest.
Transfer pricing-related considerations
Significant changes to the taxation of back-to-back financing arrangements between related companies took effect on 1 July 2017 in response to Actions 8–10.
Cyprus does not currently contain a list of permissible pricing methods. Instead, the law incorporates a general requirement based on the use of the arm's length standard and requires that all documentation support said standard.
There are no penalties for improper transfer pricing but general penalties may potentially apply. Cyprus is expected to introduce a requirement of transfer pricing files (master and local) as per Action 13.
A three-tiered standardised approach to transfer pricing documentation has been developed:
- The "master file", which will provide tax administrations with high-level information regarding the global business operations of multinational enterprises (MNEs) and their transfer pricing policies.
- The "local file", which will provide detailed transactional transfer pricing documentation specific to each country, identifying material related party transactions, the amounts involved, and the company's analysis of the transfer pricing determinations.
- The country-by-country report – large MNEs are required to annually provide the following for each tax jurisdiction in which they conduct business:
- profit before tax;
- income tax paid;
- income tax accrued;
- number of employees;
- share capital;
- retained earnings;
- tangible assets; and
- a requirement for such MNEs to identify each entity within the group doing business in a particular tax jurisdiction and to provide an indication of the business activities each entity engages in.
Please see the "Mandatory disclosure rules update" section above.
Tech hub/headquartering-related incentives
Cyprus is positioning itself as a tech hub and the IP Box regime, along with the application of the NID as well as various tax and employment incentives at an employer and individual level, is expected to spur foreign investment and domiciliation services.
The setting up of regional headquarters in Cyprus is heavily sought by the government, which is currently in an advanced stage of discussions with the professional bodies, for establishing a "regime" that aims to provide business, employment and tax-related incentives in order to attract foreign investment in Cyprus. Moreover, an added aspect of such "regime" targets the relocation of specialists from abroad to form a strong board of directors and middle management in Cyprus and/or to use the local employment market to find suitable employees expanding their physical presence on the island.
The test of "reality" as well as the increasing importance of transparency and substance are expected to lead to business restructuring or enhancement of the level of the substance of all companies within a specific group and not only at a local level. Substance is also important in the context of exchange of information and transfer pricing, among others. All cross-border transactions will be screened pursuant to EU (i.e., ATAD I and II) and international regulations.
Lastly, digital taxation as well as other tax reforms that are in the EU and G20 agenda may play a very important role in the establishment and future operations of MNEs.
Special defence tax
Legislation for the extension of the 3% defence tax on corporate bonds to include both individuals and company recipients is currently before Parliament.
This article was first published in Global Legal Insights – Corporate Tax 2021.
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.