1. How often is tax law amended and what are the processes for such amendments?
Apart from implementation of EU directives, amendments to the Cyprus tax laws are generally "infrequent". It follows that taxpayers can undertake transactions with a high degree of assurance that the tax environment they anticipated at the time of a transaction will continue to apply. There is generally advance consultation with stakeholders over a period of several months before new legislation is enacted. However, the international tax landscape is changing rapidly and Cyprus can be expected to keep up to date with international as well as OECD standards.
2. What are the principal procedural obligations of a taxpayer, that is, the maintenance of records over what period and how regularly must it file a return or accounts?
For income tax purposes, books and records and supporting documentation must be retained for six years after the end of the tax year to which they relate. Taxpayers are required to submit returns of income for income tax purposes once a year. If the taxpayer is a company or a self-employed individual with gross income above a certain threshold (currently at EUR 70,000), then it should keep books and records in accordance with generally accepted accounting principles that will be audited in accordance with auditing standards. With regards to the payment of income tax there is a self-assessment system, under which taxpayers must declare an estimated income and profit with the estimated tax charge for the year partway through the tax year. The declaration must be accompanied by payment of half the estimated liability. The balance of the estimated liability is payable by the end of the tax year. This amount can always be revised should this be deemed necessary. The final tax return is submitted after the end of the tax year, together with a payment of any final balance which may be due.
See the answer to question 5 for details of due dates.
Employers are also required to submit returns of employees' pay and tax deducted under PAYE one month after the salary payment.
Special Defence Contribution, commonly known as SDC tax, should be paid only by companies that are Cyprus tax residents and individuals who are domiciled in the Republic. SDC tax is payable on rents, passive interest income, and dividends. Subject to certain exemptions, companies making such payments must deduct SDC tax at source and account for it to the Tax Department. In the case where a taxpayer receives rents, interest, or dividends from which SDC tax has not been deducted, they must submit semi-annual returns together with a payment of the amount due. All returns and payments in respect of income tax, SDC tax and PAYE must be made online.
See the answer to question 13 for details of SDC.
Taxpayers must submit and pay any capital gains as they arise. However, Capital Gains Tax ("CGT") only applies to gains from disposals of properties that are situated in the Republic, and after utilizing the available deductions, this is generally not an issue that affects most taxpayers.
There is a separate tax system for qualifying businesses engaged in international shipping, which is outlined in the answer to question 17.
3. Who are the key regulatory authorities? How easy is it to deal with them and how long does it take to resolve standard issues?
The Tax Department is the key regulatory authority. It resides within the Ministry of Finance and was formed in 2014 by combining the Inland Revenue Department, which administers direct taxation, and the VAT Service, which deals with indirect taxation.
Like many other governmental departments in Cyprus, routine procedures, such as the final agreement of tax returns and the issuing of assessments, can take some time, depending on the complexity of the matter in issue. Nevertheless, the department responds efficiently and constructively to inquiries. Following the rapid changes to the Tax System in 2014, substantial changes in the way the authorities deal with inquiries were introduced. For instance, advance tax rulings are available and taxpayers may, on payment of the prescribed fee (currently at EUR 2,000), request an expedited ruling, guaranteeing a response within 21 working days provided all the necessary information is supplied.
4. Are tax disputes capable of adjudication by a court, tribunal or body independent of the tax authority, and how long should a taxpayer expect such proceedings to take?
Decisions of the tax authorities can be challenged by submitting an appeal to the Tax Tribunal, which is an independent body, or to the Administrative Court. The Tax Tribunal is required to reach a conclusion within a year of receiving an application, however, there are no set time limits for the Courts to adhere to. A decision of the Administrative Court and the Tax Tribunal may be the subject of an appeal to the Supreme Court.
Cyprus approved the minimum actions as prescribed by the Multilateral Convention To Implement Tax Treaty Related Measures To Prevent Base Erosion And Profit Shifting ("BEPS") ("MLI") and specifically Action 14 (Making Dispute Resolution Mechanisms More Effective) among others. Cyprus has covered all of its existing double tax treaties (with the exception of existing treaties that have already bilaterally agreed to the minimum actions).
Action 14 relates to a commitment by countries to implement a minimum standard to ensure that they resolve treaty-related disputes in a timely, effective, and efficient manner. Approving the integration of Action 14 ensures that Cyprus complies with minimum standards for making dispute resolution mechanisms more effective.
In addition, the MLI introduces a mandatory binding arbitration (Articles 18 – 26) procedure. A party to the MLI who chooses to apply this procedure with respect to its Covered Tax Agreements ("CTA"s) must notify the "Depositary" accordingly. This procedure shall apply in relation to two contracting jurisdictions with respect to a CTA only where both contracting jurisdictions have made such a notification.
Where Articles 18-26 are not adopted, treaty parties are reliant on the mutual agreement procedure ("MAP") article in tax conventions
5. Are there set dates for payment of tax, provisionally or in arrears, and what happens with amounts of tax in dispute with the regulatory authority?
The tax year in Cyprus for individuals and companies is the calendar year.
Both individuals and companies must submit a provisional estimate of income, profits and tax payable for the year by 31 July of the tax year, together with a remittance of half the estimated tax payable. The estimates may be revised at any time before 31 December of the tax year and the balance of the estimated tax payable must be paid by then.
This differs for companies and individuals who are obliged to provide audited financial statements. They are required to pay the balance to tax due by 01 August following the end of the tax year. Currently a penalty of 10% is imposed if the tax paid under the provisional assessment is less than 75% of the finalized tax charge of the year. Their final tax return must be submitted by March 31 of the next year (i.e., within 15 months after the end of the year in question).
Self-employed individuals, who are exempt from the requirement to provide audited financial statements, are required to submit their final tax return for the year, with a remittance for any tax payable, by 31 July following the end of the tax year. Tax returns must be submitted electronically via the official TAXISNET system.
It is important that employers submit an employer's return each year; the deadline generally being the last calendar day of February in the year following the tax year, which is extended to May 31 if filing is done electronically.
The due date for submitting the final employee annual return is July 31 in the year following the tax year.
6. Is taxpayer data recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government? Is it a signatory (or does it propose to become a signatory) to the Common Reporting Standard? And/or does it maintain (or intend to maintain) a public Register of beneficial ownership?
While complying fully with all information exchange standards, Cyprus takes taxpayer confidentiality very seriously. The Assessment and Collection of Taxes Law contains strong safeguards against inappropriate disclosure of taxpayer information and requires requests for disclosure to conform with strict requirements, ruling out so-called fishing expeditions.
As an EU member, Cyprus is bound by the Directive 2014/107/EU on mandatory automatic exchange of information in the field of taxation. It is also a signatory to the Multilateral Competent Authority Agreement on the Automatic Exchange of Financial Account Information. As per Article 29 of the OECD Model Tax Treaty, information can be exchanged in three different ways: (i) via request, (ii) automatically, and/or (iii) spontaneously. Cyprus implemented the Common Reporting Standard ("CRS") from the beginning of 2016 and as of 2017 it has started exchanging information. It exchanges information both automatically, thus systematically and periodically transmitting tax information, and spontaneously, thus transmitting information presumed to be of interest.
It is broadly known that Directive 2018/822/EU amending Directive 2011/16/EU aims at increasing transparency to tackle aggressive tax planning by strengthening the rules on mandatory automatic exchange of information. The Cyprus Tax Department has published guidance regarding automatic exchange of financial account information and other information relating to the CRS. The "Guidance Notes on Automatic Exchange of Financial Account Information" published on the department's website provides detailed and comprehensive guidance on the application of international agreements as well as Cyprus' legislation on the automatic exchange of financial account information between the Republic and other tax jurisdictions.
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 Directive 2018/822/EU ("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 for certain cases.
In respect of combating money laundering, the financing of terrorist activity, and tax evasion, the 4th AML Directive obliged all EU member states to introduce a central register of the beneficial or true owners of companies, trusts, and other legal arrangements. Additionally, on 19 June 2018, the European Council issued the 5th AML Directive, revising the provisions of the 4th AML Directive to allow for public access to the said registers
The 5th AML Directive was transposed into Cyprus legislation through an amendment to the Prevention and Suppression of Money Laundering Activities Law of 2007 (N.188 (i)/2007) on 23 February 2021 through law N.13(I)/2021.
On 12 March 2021, the Registrar of Companies and the Official Receiver ("RoC") issued a directive (Κ.Δ.Π. 112/2021) providing guidance on the provisions of the abovementioned law in regard to the companies and other legal entities register (the "Guidance Manual"), and on 18 June 2021, the Cyprus Securities and Exchange Commission ("CySec") also issued a directive (Κ.Δ.Π. 257/2021) providing guidance on the trusts and similar legal arrangements register (the "CYTRUST Directive").
7. What are the tests for residence of the main business structures (including transparent entities)?
Individuals are automatically tax resident if they are physically present in Cyprus for more than 183 days in the tax year. Effective from 1 January 2017, if during the tax year concerned, an individual maintains a permanent establishment ("PE") in Cyprus, undertakes any business or employment in Cyprus, which continues until the end of the tax year, and is present in Cyprus for at least 60 days, then they may also become Cyprus tax residents. All three conditions must be satisfied, and additionally, the individual concerned must not be a tax resident of any other country as well as not be physically present in any other country for more than 183 days of the tax year in question.
For companies, residence is based on the locus of effective management and control. Mere registration in Cyprus is not sufficient to establish residence: the key decisions which are necessary for the conduct of the business of the company must be made in Cyprus. The Tax Department's application form for the issuance of a Tax Residency Certificate gives an indication of what are the criteria that the Tax Department considers, such as the location where the directors' and shareholders' meetings are held, where the directors are residents, and where minutes as well as statutory and other records are kept. However, in accordance with the Cyprus Government Budget for 2021, it is expected that in 2021, Cyprus will also be including the "incorporation" test as a further decisive factor.
8. Have you found the policing of cross border transactions within an international group to be a target of the tax authorities' attention and in what ways?
Most companies in Cyprus operate internationally and it has been our experience that the Cyprus tax authorities do not target such companies in terms of policing cross border transactions.
9. Is there a CFC or Thin Cap regime? Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?
As a result of the Anti-Tax Avoidance Directive (ATAD) Cyprus introduced CFC rules as from 01 January 2019, applying retrospectively.
- A CFC is defined as an entity or a PE whose income is not taxable or exempt in Cyprus if the following two conditions are met:
- in the case of a non-Cypriot tax resident entity, a 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
in the case of a non-Cypriot tax resident entity, a 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
Cyprus has opted for Model B since it gives states the ability to 'carve out' CFCs via the thresholds provided by ATAD. 'Carving out' would apply to entities that (i) have accounting profits of less than EUR 750,000 and nontrading income of less than EUR 75,000, or (ii) have accounting profits of more than 10% of operating costs.
Effective from 1 January 2019, Cyprus follows the provisions of the ATAD in respect of thin capitalization rules.
A limitation on the possibility of deducting interest has been set at 30% of taxable income before interest, taxes, depreciation, and amortization.
Taxable Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is defined as the total of net taxable income calculated in accordance with Cypriot income tax laws increased by any 'excess' borrowing costs.
The restriction does not apply to amounts falling below EUR 3 million per taxpayer. The restriction does not also apply to companies that do not form part of the group and do not have a related business (defined as participation of at least 25% in the share capital or participation of at least 25% in the profits).
Further, the law also excludes financial undertakings from the scope of the interest limitation rules (i.e. credit institutions, investment firms, alternative investment fund managers (AIFMs), and management companies of undertakings for collective investment in transferable securities (UCITS)).
In terms of transfer pricing, pursuant to Article 33 of the ITL, the tax authorities can adjust taxable profits if they consider that they have been affected by transactions between related parties undertaken other than on an arm's length basis. There is currently no detailed guidance on how this provision is to be applied in practice.
As from July 2017, transfer pricing rules do apply to intra-group financing arrangements. Cyprus does not currently contain a list of permissible pricing methods but has incorporated a general requirement based on the use of the arm's length standard and requires that all documentation support said stand.
The interpretive circular issued by the Tax Department on implementation of the rules closely follows the OECD Transfer Pricing Guidelines. It is widely expected that formal transfer pricing rules will shortly be introduced for all other transactions. In addition, Cyprus is expected to introduce a requirement of transfer pricing files (master and local files).
The Tax Rulings Division of the Tax Department will, on application by or on behalf of a taxpayer, issue advance tax rulings regarding actual transactions (for brevity this should be understood as including a series of transactions) relating to tax years for which the due date for filing a tax return has not yet passed as well as transactions proposed to be undertaken by existing or new entities. Rulings will only be binding with regard to the taxpayers specifically mentioned in the ruling request, and only to the extent that the facts and circumstances presented in the ruling request continue to be applicable as well as provided that there is no subsequent change in the tax law which renders the ruling inapplicable. The Tax Rulings Division will express an opinion on the applicable tax treatment of the hypothetical transaction or scenario presented to it and will not be responsible for verifying the facts presented by the applicant.
There is nothing in the wording of the circular regarding tax rulings that would prevent a ruling being applied for proposed transfer prices. It should nevertheless be noted that transfer pricing rules are very much a work in progress in Cyprus and the Tax Department is likely to adopt a very cautious approach to initial applications.
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Originally published by The Legal 500
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.