Anti-Tax Avoidance Directive. The Cyprus Ministry of Finance has presented to the Parliament legislation in view of the implementation of the European Union Anti-Tax Avoidance Directive.
The main issues addressed by the Directive and included in the law are:
1. Interest limitation: to challenge artificial debt arrangements
2. Controlled foreign company rule (CFC) : for profit shifting to tax heaven or low tax jurisdictions
3. General Anti-avoidance rule, which addresses tax planning when there are no regulations or law that apply for a specific situation
It is expected that in the coming months further regulations will be introduced which are included in the directive and cover the Exit Tax payment, when relocating assets, and the Hybrid mismatches which take advantage national mismatches to avoid taxation.
Multilateral Instrument (MLI). Following the OECD Base Erosion and Profit Shifting (BEPS) initiative a Multilateral Instrument (MLI) was introduced which was adopted by 68 countries including Cyprus. The MLI covers Hybrid Mismatches, Treaty abuse, Arbitration and Dispute resolution between the countries, as well as avoidance or permanent establishment status. In the case of treaty abuse, there will be a limitation of the benefits of the taxpayer if there are only tax reasons for establishing and using a specific international structure.
Transfer Pricing. In 2017 the Cyprus Tax Department has introduced transfer pricing requirement for back to back intragroup loan transactions. A predefined profit margin of 2% after tax is expected, otherwise a full transfer pricing study is expected to be presented to justify the use of a lower rate. It is expected that new guidelines will be issued for other forms of income that will cover sales of goods, services and licensing.
Substance and tax residency requirements. Both the OECD through the BEPS Action Plan and the EU through the parent subsidiary directive have introduced increased substance and tax residency requirements. In effect statutory substance will not be enough and will need to be combined with Physical substance (office/telephone/qualified staff) and economic substance for execution of day to day activities.
How can we help? It is imperative that actions need to be taken to adopt structures to the new environment. Our firm can assist you to absorb the right and cost-effective changes by:
• Amending current structures and agreements to abide by the new regulations
• Providing transfer pricing studies and analysis
• Providing physical and economic substance by establishing fully fledged offices in Cyprus
• Using Alternative Investment Funds and sub-funds for tax residency and substance purposes
Please contact a member of our staff for further information and/or clarifications.