Optimizing International Operations: Cyprus Tax and Corporate Developments for International Companies

Stay informed about Cyprus’ advantageous tax environment, understand how it impacts your company’s international operations, and explore the corporate landscape to optimize your business structure. Whether you’re an established company in Cyprus or considering it for your international operations, these updates are vital for minimizing tax liabilities, ensuring compliance, and harnessing the advantages of Cyprus as your company’s international base.

Doing business internationally also presents a range of tax considerations that can significantly impact a company’s financial health and compliance with tax laws. It’s essential to understand and plan for these tax considerations when engaging in international business operations. Here are the most key tax considerations for businesses operating using Cyprus companies internationally:

 

DETERMINING TAX RESIDENCY

In general, tax residency

Understanding the concept of tax residency

Understanding where your business is considered tax-resident is crucial. Tax residency can vary depending on the country and its tax laws. A company’s tax residency is an important concept with significant implications for its tax liability. A company’s tax residency determines whether it is subject to corporate income tax in a particular jurisdiction. In the case of Cyprus companies’ corporate income tax is subject to a rate of 12.5%.  Also, it is used to determine a taxpayer’s worldwide tax obligations and ensure compliance with the tax laws of its resident country.

Understanding a company’s tax residency is also crucial to prevent double taxation of income. Many countries have double taxation agreements (DTAs) or treaties in place to allocate taxing rights on income earned by companies in multiple jurisdictions. Tax residency helps determine which country has the primary taxing authority. 

Tax residency is also important for countries imposing Controlled Foreign Corporation (CFC) rules primarily to prevent tax avoidance and the erosion of their tax base. Controlled Foreign Corporation (CFC) rules are a set of tax regulations implemented by many countries, primarily to prevent multinational corporations from shifting their profits to low-tax or tax-haven jurisdictions. Controlled Foreign Corporation (CFC) rules are discussed further below.

Meeting the relevant criteria for business substance purposes

In determining a company’s tax residency, several criteria come into play. To be considered a tax resident, a company typically needs to satisfy one or more of the following conditions:

• Incorporation or Registration: A company is tax resident if it is incorporated or registered in a country. This is a common criterion, but it may not be the only one.
• Place of Management and Control: In most jurisdictions, tax residency is determined by the location of the company’s central management and control. This means that the place where key decisions are made, such as board meetings or executive decisions, can establish tax residency.
• Physical Presence: Most countries may require a company to have a physical presence, such as an office, within their borders to be considered a tax resident.
• Effective Management: In addition to an office, most developed countries look at where the effective management and control of the company occur. This may involve assessing where most board meetings are held or where some of the company’s top executives are based.
• Annual Filing and Reporting: Most countries require companies to file annual tax returns and financial statements. Complying with these filing and reporting requirements can also establish tax residency.
• Ownership or Shareholding: Ownership by residents of a particular country can also trigger tax residency in some cases, especially in the context of controlled foreign corporation rules. This is explained further below.
• Treaty Provisions: Double taxation treaties can override domestic rules. Companies may rely on the tie-breaker provisions included in treaties to determine their tax residency.
• Intention of Permanent Establishment: Tax authorities may also examine whether the company’s activities indicate an intention to establish a permanent presence in the country.
• Establish a Physical Office: Maintain a physical office or place of business in the jurisdiction where the company claims tax residency. This office should be staffed, equipped, and used for the company’s core business activities.
• Hire Local Employees: Employ local staff in the jurisdiction where the company is claiming tax residency. These employees should be engaged in meaningful work related to the company’s operations.
• Board of Directors: Ensure that most of the company’s board of directors or key decision-makers are residents or citizens of the relevant jurisdiction.
• Maintain Bank Accounts: Maintain bank accounts, including the receipt of income and payment of expenses related to the company’s operations performed by the Company’s employees or Directors.
• Contracts and Agreements: Contracts, agreements, and transactions that are substantially related to the company’s core business activities in the jurisdiction.
• Keep Records and Minutes: Maintain proper records, minutes of meetings, and financial statements in compliance with local regulations.
• Obtain Necessary Licences: Where applicable obtain any necessary business licenses, permits, or regulatory approvals required to operate in the jurisdiction.
• Operational Control: Ensure that the company exercises real operational control and management within the jurisdiction, rather than merely having a passive presence.
• Local Marketing and Sales: Where applicable conduct local marketing and sales efforts to demonstrate that the company is actively engaged in business activities within the jurisdiction.
• Compliance with Tax Laws: Comply with all local tax laws and reporting requirements in the jurisdiction where the company claims tax residency.
• Annual Reporting: File annual tax returns and financial statements in the jurisdiction as required by local authorities. Failure to do so may have adverse effects on tax residency.

Meeting substance requirements for tax residency (Also applicable for Cyprus tax residency)

Compliance with business substance requirements both in Cyprus and abroad is vital to maintain your company’s tax residency and reap the benefits of an optimal international business strategy. Below, we outline critical actions that showcase business substance: 

• Maintain a fully-fledged office. Establish and maintain a physical office space in Cyprus that is appropriately equipped for your core business activities.
• Appoint Active Local Directors: Select local directors who possess a deep understanding of your business and can actively participate in decision-making processes.
• Record Board Minutes: Keep detailed board meeting minutes at your company’s registered office to demonstrate active corporate governance.
• Incorporate Directors into Payroll: Ensure that directors are included in your company’s payroll system, reinforcing their direct involvement in the business.
• Formalize Contracts: Conclude various contracts and maintain records within your company’s office. This includes agreements such as employee contracts, rental contracts, and contracts that underscore the rationale and economic value of your business.
• Hire Local Employees: Employ local staff in Cyprus, register your company as an employer with Cyprus government authorities, and maintain comprehensive employee records.
• Localize Financial Records: Store your company’s financial records locally or on a server accessible by employees to facilitate seamless bookkeeping.
• Manage Bank Accounts: Maintain bank accounts within Cyprus company and execute business transactions under the guidance of your directors.
• Directors take part in business transactions for example bank transactions either by a way of giving instructions or by a way of execution. 
• Directors as Bank Signatories: Appoint your directors as authorized bank signatories, further showcasing their active involvement in financial transactions.
• Secure Local Domains: Obtain and manage local domains, enhancing your company’s online presence and reinforcing its connection to Cyprus.
• Operational Control via Email Correspondence: Demonstrate operational control through email correspondence, showcasing the day-to-day decision-making process.
• Localized Website: Develop and maintain a company website with local domains ending in “.cy” to reinforce your company’s presence in Cyprus.
• Register with Local Professional and Government Bodies: Register your company with local professional and government bodies to solidify its legal standing and credibility.
• Apply proportionality. As a rule of thumb, the entity owning the most valuable intangibles and performing the most important functions within a corporate structure will typically be entitled to the largest share of the profits or losses.
• Beneficial Ownership of Income: Cyprus Company should beneficially own the income it receives, aligning with the terms of double tax treaties. The Cyprus Company should beneficially own the income it receives. The Cyprus Company receiving for example foreign dividend income under the terms of a double tax treaty should not receive that income on behalf of another person. The income should accrue to the company itself and be reported in its bank account and financial statements.
• Transparent Tax Planning: Implement transparent tax planning decisions, such as capitalizing your business with equity and utilizing appropriate foreign or domestic corporations for foreign investments.
• Avoid Multiple Directorships: Prevent the same directors from serving both your Cyprus International Company and a foreign entity to maintain clear economic substance and independence.
• Allocate Group Assets: To the extent possible, allocate group assets to your Cyprus company to enhance its economic substance.
• Utilize a Holding Company: Use a Cyprus Holding Company with multiple investment vehicles in foreign jurisdictions to strengthen economic substance. A Cyprus Holding Company with multiple investment vehicles in foreign jurisdictions is considered to have greater economic substance than a holding company with only one investment vehicle.
• Proper Management of Interest Income and Dividends: Handle interest income and dividends diligently, ensuring compliance with Cyprus tax regulations and transfer pricing guidelines.
• Rational Loan Agreements: Structure loan income and agreements rationally to avoid tax implications, including transfer pricing concerns. Transactions are considered to be rational if not made by the same counter-parties, the time of execution of transactions is not the same, Interest rates are at arm’s length and related to commercial rates, adequate returns (profits) are allocated to each company, and in relation to the risk undertaken, dissimilar duration of loans, dissimilar amount of loans received and loans granted.
• Manage Intellectual Property Rights (IP): License intellectual property rights to foreign companies, ensuring that payments to your Cyprus Company align with commercial justifiability and EU directives. 
• Utilize Investment Funds: If applicable, set up investment funds subject to local regulations to underscore your company’s business substance.
• Consider Stock Exchange Listing: Listing your company on a stock exchange or an emerging capital market can further strengthen your business substance, provided it aligns with relevant requirements.

Mastering these business substance requirements in Cyprus is pivotal for maintaining your tax residency and optimizing your international business endeavors.

In Cyprus, tax residency: Understanding Tax Residency for Cyprus Companies

A Cyprus company attains tax residency in Cyprus when its management and control operations are based within the island nation. Furthermore, starting from the year 2023, a Cyprus-incorporated company is automatically regarded as a tax resident of Cyprus by default, provided that it does not hold tax residency in any other jurisdiction. This holds particular significance, especially when a Cypriot company receives income from other companies under its ownership and control.

For Cyprus companies, the vital link between management, control, and tax residency highlights the importance of a well-structured business strategy. The 2023 regulation reinforces the principle that when a Cyprus company’s core functions and decision-making processes are centered in Cyprus, it is deemed a tax resident, reinforcing the country’s position as an appealing destination for international businesses. This is of utmost relevance for Cypriot companies managing income generated from their affiliated entities.

 

CONTROLLED FOREIGN CORPORATION (CFC) RULES

In general, controlled foreign corporation (CFC) rules

Controlled Foreign Corporation (CFC) rules are a set of tax regulations implemented by usually developed countries, primarily to prevent multinational corporations from shifting their profits to low-tax or tax-haven jurisdictions. These rules aim to ensure that income earned by foreign subsidiaries of a domestic company is properly taxed by the country where the parent company or the beneficial owner is based. The specific details and application of Controlled Foreign Corporation (CFC) rules can vary from one country to another, but the core principles are similar. Similar rules are also included in most countries’ double tax treaties. These rules are designed usually to tax the passive income generated by foreign subsidiaries of domestic entities. Below are key aspects of Controlled Foreign Corporation rules set by most countries:

• Ownership Threshold: Controlled Foreign Corporation (CFC) rules typically apply when a domestic entity, such as a corporation or individual, owns a certain percentage (often more than 50%) of the voting shares or value of a foreign corporation. This level of ownership gives the domestic entity control over the foreign corporation’s operations.
• Types of Income: CFC rules target specific categories of passive income, such as dividends, interest, royalties, rents, and capital gains, earned by the foreign subsidiary. These types of income are often subject to special taxation when earned by a Controlled Foreign Corporation (CFC). Usually, income derived from active business operations in the Controlled Foreign Corporation’s (CFC’s) home country may be exempt from Controlled Foreign Corporation (CFC) rules
• Taxation of Shareholders: Under Controlled Foreign Corporation (CFC) rules, the shareholders of the domestic entity that owns the Controlled Foreign Corporation (CFC) are typically subject to tax on their pro-rata share of the Controlled Foreign Corporation’s (CFC’s) income, even if the income is not distributed. This can result in the taxation of income that remains within the foreign subsidiary.

In Cyprus, controlled foreign corporation (CFC) rules

In Cyprus, controlled foreign corporation (CFC) rules stand as a cornerstone of the country’s tax framework. These regulations play a pivotal role in ensuring that income earned by foreign subsidiaries of domestic entities is managed efficiently and subject to relevant tax provisions. In this section, we delve into the intricacies of Cyprus’ CFC rules.

Dividends distributed from the foreign company to the Cyprus company

• Irrespective of the existence of a double tax treaty, Cyprus tax legislation does not impose income tax on dividends received by a Cyprus company
• Dividends received by a Cyprus company are subject to defence tax contribution at the rate of 17% if the companies paying the dividend 
  • have activities the nature of which amount to more than 50% of investment income and
  • their country of residence imposes corporation tax which is less than 6.25% per annum. Both criteria must apply for the tax to apply. 

For operating companies’ the first criterion applies and there will be no tax on dividends received by a Cyprus company

• Anti-Avoidance Tax Directive (ATAD) provisions have been transposed into domestic tax legislation regarding Controlled Foreign Corporation (CFC) rules. As of 1 January 2019, an entity or a permanent establishment of which the profits are not subject to tax or are exempt from tax in Cyprus is treated as a Controlled Foreign Corporation (CFC) where the following conditions are met: 

1. 1. In the case of an entity, the taxpayer by itself, or together with its associated enterprises holds direct or indirect participation of more than 50% of the voting rights, or owns directly or indirectly more than 50% of the capital or is entitled to receive more than 50% of the profits of that entity; and
   2. The actual corporate tax paid on its profits by the entity or permanent establishment is lower than 50% of the corporate tax that would have been charged to the entity or permanent establishment under the applicable corporate tax system of Cyprus. 

Where an entity or permanent establishment is treated as a Controlled Foreign Corporation (CFC), Cyprus shall include in the tax base the non-distributed income of the entity or the income of the permanent establishment which is derived from mostly passive income which includes the following categories: i) Interest or any other income generated by financial assets; ii) Royalties or any other income generated from intellectual property; iii) Dividends and income from the disposal of shares; iv) Income from financial leasing; v) Income from insurance, banking and other financial activities; vi) Income from invoicing companies earning sales and services income from goods and services purchased from and sold to associated enterprises, adding no or little economic value. 

Ultimate beneficial owner tax implications if the beneficial owner is a tax resident in another country.

Irrespective of the existence of a double tax treaty, Cyprus tax legislation does not impose withholding tax except for certain royalty payments if the IP is utilised in Cyprus. Non-resident companies have no obligation to withhold taxes on any payments they make. Dividends paid (directly or indirectly) to non-resident shareholders and interest paid to non-residents are not subject to withholding tax.

As of 31 December 2022, Cyprus applies a withholding tax of 17% on dividends paid by unlisted companies, 30% on passive interest payments (excluding payments from natural persons), and 10% on royalty and similar payments (excluding payments from natural persons) if the recipient of the payment is a company in a jurisdiction on the EU’s list of non-cooperative tax jurisdictions (commonly referred to as the EU “blacklist”).

 

In general, transfer pricing regulations

When a business engages in transactions with related entities across borders, transfer pricing policies must be established that ensure transactions are conducted at arm’s length prices. This helps prevent profit shifting and transfer pricing disputes with tax authorities.

In Cyprus, transfer pricing regulations

As of January 1, 2022, Cyprus has implemented comprehensive regulations governing transfer pricing, specifically for “transactions between related companies.” In Cyprus, the obligation rests on Cyprus companies to compile a meticulous transfer pricing study and maintain a robust transfer pricing Cyprus documentation file. This file serves as evidence that intercompany transactions with related parties have adhered to the arm’s length principle.

Cyprus companies are mandated to maintain a transfer pricing Cyprus Documentation File encompasses Cyprus companies or Cyprus permanent establishments. Their intercompany transactions with related companies, where the term “related” includes companies that share a common direct or indirect ownership exceeding 25% (under specific conditions), are scrutinized. These transactions, collectively categorized under goods, services, rights, other intangible assets, and financial dealings, should either exceed or have the potential to surpass the 750 thousand euros threshold per tax year if executed at arm’s length.

• https://rightax.com.cy/mandatory-application-of-regulations-for-transfer-pricing-transactions-between-related-companies-intra-group-transactions-in-cyprus%ef%bf%bc/
• https://rightax.com.cy/cyprus-transfer-pricing-and-cyprus-taxation-on-intra-group-transactions/
• https://rightax.com.cy/2023/03/02/cyprus-transfer-pricing-documentation-frequently-asked-questions-issued-by-the-cyprus-tax-department/

 

In general, the EU Parent-Subsidiary Directive and Interest and Royalties Directive

The Parent-Subsidiary Directive and Interest and Royalties Directive are a European Union (EU) directive that aims to eliminate or reduce double taxation of profits for example when a parent company receives dividends from its subsidiaries within the EU. It is part of a broader set of directives known as the EU’s Anti-Tax Avoidance Package, which seeks to combat tax avoidance and promote fair taxation within the EU.

Key features and objectives include:

Elimination of withholding tax: Under the directive, EU member states are required to eliminate withholding taxes for example on dividends paid from a subsidiary to its parent company, provided certain conditions are met. This facilitates the free flow of profits within the EU.

Conditions for application: To benefit from the directive, the parent company must hold a minimum ownership stake (usually at least 10% of the subsidiary’s capital) for a certain period. Additionally, both the parent and subsidiary must be tax-resident in EU member states.

The Parent-Subsidiary Directive and Interest and Royalty Directive are part of the broader framework of EU directives aimed at creating a single market for goods, services, capital, and people within the European Union. It helps promote cross-border investment and business activities by reducing tax barriers within the EU.

EU Directives apply if the recipient company of income (dividends, interest, royalties, etc) is the beneficial owner of such income and not a conduit company. The beneficial owner company of the income is where the recipient company’s powers are exercised by its directors without the interference of its shareholders, sufficient economic substance is present, income is reported in the recipient’s bank account and financial statements, free deal with the inflow of funds by the recipient, the recipient has the ability to make decisions on its own and having fully-fledged offices and employ full time or part-time employees, Income received in a form of interest should be in the form of unrelated payment received and be at arm’s length with adequate margin returns.

In Cyprus, EU Parent-Subsidiary Directive and Interest and Royalties Directive

Cyprus, as an EU member state is subject to the provisions of the Parent-Subsidiary Directive and Interest and Royalty Directive

Dividends

Cyprus, like other EU member states, typically requires a minimum ownership stake of at least 10% in the subsidiary’s capital for the directive’s benefits to apply. No minimum holding period is required.

Interest and Royalty

Implementing the provisions of the Interest and Royalties Directive outbound royalties are exempt from withholding tax, provided that the beneficial owner of the royalties is an associated company of the paying company and is resident in another Member State or such a company’s permanent establishment situated in another Member State. Two companies are “associated companies” if (i) one of them has a direct minimum holding of 25% in the capital of the other, or (ii) a third EU company has a direct minimum holding of 25% in the capital of the two companies. The relevant companies must have a legal form listed in the Annex of the Directive and be subject to a corporate income tax. No minimum holding period is required.

 

In general, double taxation agreements (DTAs)

Almost all countries have double taxation agreements and DTAs in place to prevent double taxation of income. These agreements outline the rules for determining which country has primary taxing rights on specific types of income. Understanding and leveraging double taxation agreements  DTAs can help minimise tax liabilities.

When distributing income from one country to another like dividends for example It is important to demonstrate that the country distributing dividends is the beneficial owner of the dividends. This is particularly important when there are many company layers in a structure especially if some of them are considered conduit companies rather than companies having real business and, in some cases, having economic value. 

Referring to OECD provisions, countries’ double tax treaty provisions in most cases apply only if the recipient company of income (dividends, interest, royalties, etc) is the beneficial owner of such income and not a conduit company. The beneficial owner company of the income is where recipient company’s powers are exercised by its directors without the interference of its shareholders, sufficient economic substance is present, income is reported in the recipient’s bank account and financial statements, free deal with the inflow of funds by the recipient, the recipient has the ability to make decisions on its own and having fully-fledged offices and employ full time or part-time employees, Income received in a form of interest should be in the form of unrelated payment received and be at arm’s length with adequate margin returns.

In Cyprus double taxation agreements (DTAs)

Foreign tax paid on income of a Cyprus resident company is credited against the corporation tax, subject to Double Tax treaty conditions. In the absence of a tax treaty, the tax paid in a non-treaty country is normally allowed as a deductible expense. Tax paid is credited only if a similar concession is given to Cyprus companies in that country. The foreign tax relief cannot exceed the Cyprus corporation tax on these profits.

The actual withholding tax rate charged may be lower/eliminated based on each paying country’s domestic law provisions or in the case of an EU country by the EU parent-subsidiary, Interest, and Royalty Directive

Cyprus does not impose withholding tax on dividends, interest, and royalties paid to non-residents of Cyprus, except in the case of royalties acquired from rights used in Cyprus, which are subject to a withholding tax of 10% (5% in the case of motion pictures). This can be reduced or eliminated by double taxation agreements entered by Cyprus or by the EU Interest and Royalty Directive.

As of 31 December 2022, Cyprus applies a withholding tax of 17% on dividends paid by unlisted companies, 30% on passive interest payments (excluding payments from natural persons), and 10% on royalty and similar payments (excluding payments from natural persons) if the recipient of the payment is a company in a jurisdiction on the EU’s list of non-cooperative tax jurisdictions (commonly referred to as the EU “blacklist”)

For more information on Cyprus’ double taxation agreements (DTAs) refer to our publication following the links below

https://rightax.com.cy/cyprus-double-tax-treaties/

Withholding Taxes

In general, withholding taxes

Beneficial owners must be aware of withholding tax obligations in foreign countries. Withholding tax, also known as retention tax, is a tax that is deducted at the source of income. It is typically imposed by a country’s tax authorities on payments made by residents or entities of that country to non-residents. The payer of the income, often referred to as the withholding agent, is responsible for withholding a portion of the payment and remitting it directly to the government as a prepayment of the recipient’s income tax liability.

The primary purpose of withholding tax is to ensure that non-resident individuals or entities who receive income from a country are subject to taxation in that country, even if they do not have a physical presence or tax residency there.

Withholding tax can be applied to various types of income, including interest, dividends, royalties, rents, salaries, and other payments. The applicable rate may vary depending on the type of income and the tax treaties in place between countries.

In Cyprus, withholding taxes

Generally, foreign tax paid on the income of a Cyprus resident company is credited against the corporation tax, subject to Double Tax treaty conditions. In the absence of a tax treaty, the tax paid in a non-treaty country is normally allowed as a deductible expense. Tax paid is credited only if a similar concession is given to Cyprus companies in that country. The foreign tax relief cannot exceed the Cyprus corporation tax on these profits.

The actual withholding tax rate charged may be lower/eliminated based on each paying country’s domestic law provisions or in the case of an EU country by the EU parent-subsidiary, Interest, and Royalty Directive

Cyprus does not impose withholding tax on dividends, interest, and royalties paid to non-residents of Cyprus, except in the case of royalties acquired from rights used in Cyprus, which are subject to a withholding tax of 10% (5% in the case of motion pictures). This can be reduced or eliminated by double taxation agreements entered by Cyprus or by the EU Interest and Royalty Directive.

As of 31 December 2022, Cyprus applies a withholding tax of 17% on dividends paid by unlisted companies, 30% on passive interest payments (excluding payments from natural persons), and 10% on royalty and similar payments (excluding payments from natural persons) if the recipient of the payment is a company in a jurisdiction on the EU’s list of non-cooperative tax jurisdictions (commonly referred to as the EU “blacklist”)

 

VALUE-ADDED TAX (VAT)

In general, Value-Added Tax (VAT)

Different countries have various VAT or GST systems, each with its own rules and rates. Ensure compliance with local VAT/GST regulations when selling goods or services internationally. VAT regulations apply to persons performing a business activity importing goods and receiving services from other Member States of the European Union as well as from non-member States.

In most countries VAT is obligatory on persons performing a business activity and is applicable on the supply of goods and provision of services and on imports into/from non-member States of the European Union.

A taxable person can be an individual or a company, a partnership, or a self-employed person including clubs, associations, institutions, and others.

Taxpayers charge VAT on their taxable supplies (output tax) and are charged VAT on goods or services they receive (input tax). If the output tax in a VAT period exceeds the total input tax, such excess is paid to the government. If the input tax exceeds the output tax, the additional input tax is carried forward as a credit and is offset against future output VAT.

Identifying VAT transactions and implications

Usually in identifying VAT implications on transactions, certain criteria have to be taken into account the persons involved (Business to Business – B2B), the type of transaction whether the transaction is a supply of goods or services, whether the transaction is an intra-community acquisition of goods, whether there is an import of goods, Identify the place of supply and the place of transaction is taxed and possible exemptions.

The Value Added Tax (VAT) reverse charge mechanism

Generally, Cross-border services generally are subject to VAT reverse-charge. The customer will be regarded as a taxable person in respect of all services received unless the person does not carry out an economic activity for example a holding company.

The Value Added Tax (VAT) reverse charge mechanism is a tax collection method used in certain transactions to shift the responsibility for paying VAT from the supplier to the recipient of goods or services. This mechanism is employed in the EU and many third countries to address specific issues and achieve several objectives. The rationale behind implementing the VAT reverse charge mechanism primarily includes:

Addressing Cross-Border Transactions: In international trade, the reverse charge mechanism can simplify VAT compliance in cross-border transactions. It allows businesses to account for VAT in their own country rather than dealing with the complexities of VAT in multiple jurisdictions.

Combating Tax Evasion and Fraud: One of the primary reasons for using the reverse charge mechanism is to prevent tax evasion and fraud. In some sectors or industries, unscrupulous suppliers may underreport their sales or manipulate invoices to avoid paying VAT. By shifting the tax liability to the recipient, tax authorities can reduce the opportunity for such fraudulent activities.

Leveling the Playing Field: In cases where tax evasion or underreporting is prevalent among suppliers, compliant businesses may face a competitive disadvantage. Implementing the reverse charge can help level the playing field, ensuring that all businesses pay their fair share of VAT.

In Cyprus, Value-Added Tax (VAT) and the burden of obligation to discharge the VAT

The burden of obligation to discharge the VAT, the supplier, or the recipient under the reverse charge mechanism – VAT EU Directive and Cyprus VAT

VAT reverse charge transactions apply when:

• VAT is paid by the Cyprus recipient for (B2B) transactions where the services are supplied by a taxable person not established within the Member State of the recipient (subject to conditions)

• VAT is paid by the Cyprus recipient for (B2B) intra-community transactions where the customer is established (subject to conditions).

The above applies if a recipient is a taxable person the place of supply of the services is Cyprus and the services are of any description of Parts I and II of the Thirteenth Annex of the Cyprus VAT Law

The above does not apply to services described in the Sixth and Seventh Annex of the Cyprus VAT Law

Where the supplier is not established in Cyprus where the VAT is due, Cyprus opted to extend the reverse charge to apply to those described in Parts I and II of the Thirteen Annex of the Cyprus VAT Law for example in installation supplies, services relating to immovable property, transportation of passengers, transportation of goods, services relating to the hiring of goods subject to conditions, telecommunications services, and short-term hiring of means of transport

In Cyprus, other VAT Important aspects

The standard rate of Cyprus VAT

The standard rate of Cyprus VAT rate is 19%

Input VAT recovery following input tax apportionment

When the input tax does not entirely concern the purchase of goods and services for the purposes of the business or does not entirely concern supplies with the right to deduct VAT, then an apportionment is made to calculate the amount of input tax that can be recovered. The apportionment is done as follows:

• Apportionment between economic and non-economic activity e.g., a company that carries out activities and owns investments in subsidiary companies

• Apportionment between income with the right to deduct VAT and income without the right to deduct VAT e.g., a company that carries out exempted activities inside and outside the European Union.

Cyprus VAT returns and payments

All persons liable to Cyprus VAT must file a quarterly return within 40 days following the end of each quarter and pay the balance between output VAT (collected) and input VAT (paid).

Refund of VAT in Cyprus

Claim for a VAT refund is made electronically by completing the relevant forms. Every taxable person who makes a claim for a VAT refund will be entitled to repayment of the VAT amount with interest, if the repayment is delayed for a period exceeding four months from the date of the submission of the claim. In case a VAT audit regarding the claim is conducted by the Commissioner, the time of four months is extended to eight months. VAT refunds are made via bank transfer. To obtain the refund, Form T.D.1900 must be completed and submitted to the relevant district VAT office along with an IBAN certificate or equivalent documentation issued by the bank showing the bank details.

As of 20 August 2020, the following also apply regarding VAT refunds:

• VAT refunds will be suspended where income tax returns have not been submitted by the submission date of the VAT refund claim. In addition, no interest will be payable on a VAT refund for the period during which the refund is suspended; and
• VAT refund applications cannot be submitted after six years after the end of the relevant tax period. Any requests submitted after the six-year period has elapsed will be examined at the discretion of the Tax Commissioner.

More information on Cyprus VAT

For more information on Cyprus VAT refer to our publications following the links below

• https://rightax.com.cy/cyprus-vat-regime-and-cyprus-vat-rates/

• https://rightax.com.cy/vat-reverse-charge-in-cyprus/

• https://rightax.com.cy/vat-on-cross-border-transactions-related-to-cyprus/

In general, fixed place of establishment (FPE) for VAT purposes

A fixed place of establishment (FPE) is a concept used in Value Added Tax (VAT) and other indirect tax systems to determine where a business is liable to pay VAT or GST (Goods and Services Tax). It is essential for establishing the tax jurisdiction and obligations of a business, especially to determine where a business is liable to register for VAT and account for VAT on its supplies. The specific criteria for what constitutes an FPE can vary from one country’s tax laws to another, but common characteristics include:

Physical Presence: An FPE typically involves a physical location, such as an office, shop, warehouse, factory, or other identifiable place of business. It is a place where business activities are conducted.

Permanent or Fixed Nature: The establishment is considered permanent or fixed in the sense that it is not a temporary or transient location. It is a place where the business regularly carries out its operations.

Control and Use: The business has control over the FPE, and it is used during its economic activities. It is not merely a passive asset but actively contributes to the business’s operations.

Independence: An FPE is often distinct from the personal or residential properties of the business owner or employees. It is a separate, identifiable location dedicated to business activities.

Duration: The FPE is not necessarily open every day or at all hours, but it is a location where business activities occur at intervals during the tax period.

The concept of an FPE is particularly important in the context of international transactions and cross-border VAT or GST. When a business has an FPE in one country, it may be required to register for VAT or GST in that country and collect and remit the tax on sales made from that location. Conversely, when a business acquires goods or services from a supplier in another country, the tax treatment may depend on whether the supplier has an FPE in the buyer’s country.

The determination of whether an establishment qualifies as an FPE can be complex and may vary between countries. Tax authorities often provide guidelines and criteria to help businesses assess whether they have an FPE for VAT or GST purposes.  

In Cyprus, fixed place of establishment (FPE)

In Cyprus, the concept of a “fixed place of establishment” for Value Added Tax (VAT) purposes is used to determine where a business is liable to register for VAT and account for VAT on its supplies. A fixed establishment is a specific, identifiable place of business where the business carries out its economic activities. The definition and application of a fixed establishment in Cyprus for VAT purposes are in line with European Union (EU) VAT rules.

 

PERMANENT ESTABLISHMENT (PE)

In general, Permanent Establishment (PE): 

A permanent establishment (PE) is a concept in international taxation that determines when a foreign entity or business has a taxable presence or a sufficient connection within a country’s jurisdiction to be subject to that country’s taxation. It is a critical concept used to allocate taxing rights between countries in the context of cross-border business activities. This concept is particularly important in cases where management and control for tax residency purposes may be hard to define.

Permanent establishment typically includes the following key elements.

Physical Presence: A permanent establishment generally involves a physical location, such as an office, branch, factory, workshop, mine, or construction site, where the foreign entity conducts business activities within a country’s jurisdiction.

Sufficient Duration: The presence must be of a certain duration, indicating a level of permanence. It typically goes beyond temporary or short-term activities. The specific duration required can vary by country but often involves a presence lasting several months.

The concept of a permanent establishment is essential in international tax law because it helps prevent double taxation (where the same income is taxed in both the home country and the host country) and allocates taxing rights between countries. Tax treaties between countries often include provisions related to permanent establishments to establish clear rules for taxation in cross-border situations. Businesses engaged in cross-border activities should be aware of the rules and criteria for permanent establishments in the countries where they operate to ensure compliance with tax obligations.

In Cyprus, Permanent Establishment (PE)

In Cyprus, the concept of “permanent establishment” (PE) for tax purposes is used to determine when a foreign entity or business has a taxable presence within the jurisdiction of Cyprus, allowing Cyprus to tax the business on income generated there. Cyprus follows international tax principles in defining permanent establishments, and its tax laws are largely in line with the Organization for Economic Co-operation and Development (OECD) and European Union (EU) guidelines.

 

LOCAL COMPLIANCE AND TAX COMPLIANCE

Local Tax Compliance

In general, local tax compliance

Local tax compliance means to comply with all local tax laws and reporting requirements in each country where a company operates. This includes income tax filings, VAT returns, and other tax-related filings. 

In Cyprus, local tax compliance

Some of the most important obligations of a Cyprus company are:

Filing of an Annual Return

Any company registered in Cyprus is obliged to hold an annual General Meeting and file a yearly return with the Registrar of Companies. It describes any changes that might have happened during the previous year with the shareholders, with the director, or with the company’s secretary. Annual return when filed is accompanied by the previous year’s Company’s financial statements.

Filing of VAT Reports

Where applicable a company may have to be registered with the Cyprus VAT Department and submit VAT quarterly returns. 

Audited Accounts

A Cyprus company is obliged to complete financial statements in compliance with International Financial Reporting Standards. Depending on the values involved an audit engagement or a review engagement might also be necessary to be performed. 

Filing of Tax Returns

A company is obliged to file with the Cyprus Tax department an annual tax return which is based on its annual financial statements 

Temporary tax returns and payments

Each year profitable companies must file temporary tax returns and pay provisionally the company’s corporation tax by 31 July and 31 December respectively.  

Pay the Special Government Annual Levy

A Cyprus company is required to pay a special government annual levy, amounting to 350.00 Euros by the end of June every year.

Further information

For further information on local tax compliance, relevant deadlines, and registration procedures refer to our publications following the links below:

• https://rightax.com.cy/cyprus-tax-diary-by-the-cyprus-tax-department/

• https://rightax.com.cy/register-a-cyprus-company-cyprus-company-formation-maintain-a-company-in-cyprus-and-do-business-in-cyprus/

 

TAXATION ADVANTAGES AND TAX INCENTIVES

Taxation advantages and tax Incentives

In general, taxation advantages and tax Incentives

Exploration of whether a business is eligible for tax credits, incentives, or deductions offered by governments to encourage certain activities, such as research and development or investment in specific industries is also encouraged.

In Cyprus, taxation advantages and tax incentives

In general, Cyprus taxation advantages and tax incentives may include the following:

1. Cyprus company low corporation tax of rate 12.50%; 
2. Non-resident entities are only taxed on their Cyprus-sourced income; 
3. No withholding tax on payments of dividends and interest to non-residents and Cyprus domiciled individuals; 
4. Profits and dividends from abroad are tax-free subject to Controlled Foreign Corporation (CFC) rules stated above;
5. Restructuring legislation in line with the EU Merger Directive extending to companies in non-EU countries; 
6. Up to 80% deduction from income from qualifying intellectual properties (royalties etc.) For further information refer to our publications by following the link https://rightax.com.cy/cyprus-ip-box-regime-cyprus-intellectual-property-regime/ ;
7. Tax incentives on investors on the issue of new share capital to innovative companies; 
8. Notional interest tax deductions on new share capital issued. For further information refer to our publications by following the link https://rightax.com.cy/cyprus-companies-and-cyprus-notional-interest-deduction-nid/ ; 
9. A Cyprus holding company can pay no tax on its profits; and 
10. Tax incentives for employees coming to Cyprus from overseas. For further information refer to our publications by following the link https://rightax.com.cy/corporate-tax-in-cyprus-and-income-tax-for-tax-resident-individuals/ ;
11. Extensive network of double tax treaties. For further information refer to our publications by following the link https://rightax.com.cy/cyprus-double-tax-treaties/;

 

In general, compliance with Anti-Avoidance Rules

Anti-avoidance rules, also known as anti-avoidance provisions or anti-avoidance measures, are legal provisions or regulations implemented by tax authorities or governments to prevent individuals and businesses from using aggressive tax planning strategies to reduce their tax liabilities. These rules are designed to ensure that taxpayers pay their fair share of taxes and to combat tax avoidance, which is the practice of legally minimising taxes through methods that go against the intended spirit of tax laws. Anti-avoidance rules may take various forms and can include:

General Anti-Avoidance Rules (GAAR)

These are broad and comprehensive provisions that grant tax authorities the power to disregard transactions or arrangements that are primarily entered into for tax avoidance purposes. GAAR provisions often require tax authorities to consider the substance of transactions over their legal form.

Specific Anti-Avoidance Rules (SAAR)

SAARs target specific tax planning strategies or transactions that are commonly used for tax avoidance. They provide detailed guidance on the treatment of such transactions and may override other provisions of tax law.

Transfer Pricing Rules

These rules require multinational enterprises to price their intercompany transactions (e.g., the sale of goods, services, or intellectual property) at arm’s length, ensuring that profits are allocated fairly among different jurisdictions.

Thin Capitalization Rules

Thin capitalization rules limit the amount of debt that a company can use to finance its operations in relation to its equity. These rules prevent companies from artificially shifting profits to jurisdictions with lower tax rates by overleveraging their operations.

CFC (Controlled Foreign Corporation) Rules

CFC rules are designed to prevent taxpayers from shifting income to low-tax or tax haven jurisdictions by controlling foreign subsidiaries. These rules may attribute the income of foreign subsidiaries to the parent company for tax purposes.

Limitations on Interest Deductions

Some jurisdictions impose restrictions on the deductibility of interest expenses, particularly when the interest is paid to related parties or more than a certain threshold.

Hybrid Mismatch Rules

These rules address situations where discrepancies in the tax treatment of financial instruments or entities between countries lead to double non-taxation or unintended tax benefits. They seek to align the tax treatment of such instruments or entities.

Exit Taxation Rules

Exit taxation rules apply when a taxpayer relocates or transfers assets or activities to another jurisdiction. These rules ensure that any accrued but unrealized gains on assets are subject to taxation before the exit.

Anti-Treaty Shopping Rules

These rules aim to prevent taxpayers from inappropriately benefiting from tax treaties by routing transactions through a third country to exploit favourable treaty provisions.

General Reporting and Disclosure Requirements

Tax authorities may require taxpayers to disclose certain transactions or structures that have the potential for aggressive tax planning. Failure to report such transactions can result in penalties.

In Cyprus, compliance with Anti-Avoidance Rules

Cyprus, like many countries, has implemented various anti-avoidance rules in the field of taxation.

Below are some key anti-avoidance rules in Cyprus:

General Anti-Avoidance Rule (GAAR)

Likewise, with the rest of the EU countries, Cyprus has General Anti-Avoidance Rules – GAAR provisions that empower the tax authorities to disregard transactions or arrangements that are primarily designed for the avoidance of tax. The General Anti-Avoidance Rules – GAAR allows tax authorities to look beyond the legal form of transactions and consider their substance. These rules align with the European Union’s Anti-Tax Avoidance Directive (ATAD) 

Thin Capitalization Rules

Cyprus has thin capitalization rules that restrict the deductibility of interest expenses on loans from related parties if the debt-to-equity ratio exceeds a specified threshold. This rule prevents companies from excessively leveraging their operations to reduce taxable profits. Exceeding borrowing costs shall be deductible in the tax period in which they are incurred only up to 30% of the taxpayer’s earnings before interest, tax, depreciation, and amortisation (EBITDA). Exceeding borrowing costs means the amount by which the deductible borrowing costs of a taxpayer exceed the taxable interest and related revenues that the taxpayer receives according to national law. In cases where the companies are part of the same group, exceeding borrowing costs and the EBITDA are calculated at the level of the group and comprise the results of all its members. 

The above provisions do not apply in the following circumstances:

1. When exceeding borrowing costs are up to EUR 3 million;
2. When the taxpayer is a standalone entity. 

Excess borrowing costs which cannot be set off against the taxable income in the current tax period can be carried forward to be set off against the income of the taxpayer for the next five subsequent years. These rules align with the European Union’s

Transfer Pricing Rules

Cyprus has transfer pricing rules that require multinational enterprises to price their intercompany transactions (e.g., goods, services, intellectual property) at arm’s length. These rules aim to ensure that profits are allocated fairly between related entities. Transfer pricing is analysed in a separate section of the information report. The rules align with the European Union’s.

CFC (Controlled Foreign Corporation) Rules

Cyprus has CFC (Controlled Foreign Corporation) rules that attribute the income of certain foreign subsidiaries or entities to Cypriot residents for tax purposes. These rules are designed to prevent the shifting of income to low-tax jurisdictions through controlled foreign entities. CFC (Controlled Foreign Corporation) Rules are analysed in a separate section of the information report. The rules align with the European Union’s

Interest Deduction Limitation Rules

Cyprus introduced rules to limit the deductibility of net interest expenses. These rules align with the European Union’s Anti-Tax Avoidance Directive (ATAD) and implement interest deduction limitations as required by EU directives.

General Reporting and Disclosure Requirements

Cyprus has implemented various reporting and disclosure requirements, including the submission of transfer pricing documentation and country-by-country reporting for multinational enterprises. The rules align with the European Union’s

Tax Treaties and Anti-Abuse Provisions

Cyprus’s tax treaties often include anti-abuse provisions aimed at preventing treaty abuse, such as treaty shopping. Income recipients are not considered to be the beneficial owners in a transaction if they do not have the legal right to use and enjoy the income or assets. The concept of “beneficial owner” is particularly important in the context of withholding taxes, which are taxes deducted at the source of payment. Many double tax treaties include provisions that reduce or eliminate withholding taxes on certain types of income, such as dividends, interest, royalties, and capital gains, provided that the recipient qualifies as the beneficial owner of that income. These provisions may deny treaty benefits to certain structures that are deemed to be abusive. These rules align with the European Union’s

 

In general, the Directive on Administrative Cooperation – DAC 6

The Directive on Administrative Cooperation – DAC 6, is a European Union (EU) directive aimed at enhancing transparency and information exchange among EU member states in the field of taxation. It introduces reporting requirements for certain cross-border tax arrangements and is part of a broader effort to combat aggressive tax planning and tax avoidance.

Key features

Key features of Directive on Administrative Cooperation – DAC 6 for tax purposes include:

Mandatory Reporting: Under Directive on Administrative Cooperation – DAC 6, certain intermediaries like tax advisors, consultants, lawyers, and financial institutions that design, promote, or assist with the implementation of reportable cross-border arrangements and, in some cases, taxpayers themselves, are required to report cross-border arrangements that meet specific hallmarks. These hallmarks are indicators of potentially aggressive or tax-avoidance-related transactions.

Directive on Administrative Cooperation – DAC 6 defines specific hallmarks that trigger reporting requirements. These hallmarks include certain characteristics or features of transactions that may indicate potential tax avoidance. They are categorised into categories A, B, C, D, and E, with Category A being the most serious.

The directive covers cross-border arrangements, which involve at least one EU member state and may also include non-EU countries. The reporting obligation is triggered when a cross-border arrangement contains one or more hallmarks.

Reports of reportable cross-border arrangements must be made within prescribed timelines. The reporting obligations began to apply retroactively from June 25, 2018.

The information reported under Directive on Administrative Cooperation – DAC 6 is exchanged among EU member states to enhance cooperation and enable tax authorities to assess the potential risks associated with specific arrangements.

Failure to comply with the Directive on Administrative Cooperation – DAC 6 reporting requirements can result in severe penalties and sanctions imposed by national tax authorities.

It’s important to note that while the Directive on Administrative Cooperation – DAC 6 is an EU directive, it has implications for businesses and intermediaries located both within and outside the EU. Non-EU intermediaries that have a presence or involvement in cross-border arrangements that impact EU member states may have reporting obligations.

Further information

For further information on Directive on Administrative Cooperation – DAC 6 refer to our publications following the links below:

• https://rightax.com.cy/cyprus-mandatory-disclosure-on-cross-border-arrangements-dac6/

• https://rightax.com.cy/2022/04/02/mandatory-automatic-exchange-of-information-on-declarable-cross-border-arrangements-dac-6-technical-analysis-the-cyprus-case/

In Cyprus, Directive on Administrative Cooperation – DAC 6:

In Cyprus, the Directive on Administrative Cooperation (DAC 6) is transposed into domestic law and is implemented as part of the country’s efforts to enhance transparency and combat aggressive tax planning and tax avoidance. Cyprus Administrative Cooperation – DAC 6 requires the reporting of certain cross-border arrangements that exhibit specific hallmarks indicating potential tax avoidance.

 

ANTI-MONEY LAUNDERING LAWS

Anti-Money Laundering Laws and Anti-Money Laundering European Union Directive

In general, Anti-Money Laundering Laws

Anti-Money Laundering European Union Directive refers to a series of directives issued by the European Union (EU) to combat money laundering and terrorist financing within its member states. The purpose of these directives is to establish a common framework and minimum standards for anti-money laundering (AML) and counter-terrorist financing (CTF) measures across the EU.

The responsibility for abiding by Anti-Money Laundering (AML) laws and regulations falls on various entities and individuals involved in financial and business activities. Anti-Money Laundering (AML) laws are designed to prevent and detect money laundering, as well as combat the financing of terrorism. The specific obligations and responsibilities can vary by jurisdiction, but generally, entities like financial institutions, Designated Non-Financial Businesses, and Professions – lawyers, accountants, auditors, tax advisors, real estate businesses, casinos, Virtual Asset Service Providers (VASPs) are subject to AML laws.

Also, service providers must be aware of sanctions, and proliferation financing. 

Key provisions and objectives of the Anti-Money Laundering – AML EU Directive framework include:

1. Establishing customer due diligence procedures for identifying and verifying the identity of customers.
2. Identifying and mitigating risks associated with money laundering and terrorist financing.
3. Promoting cooperation and information sharing among national authorities and financial institutions.
4. Creating beneficial ownership registers to enhance transparency.
5. Ensuring that virtual currency exchanges and wallet providers are subject to Anti-Money Laundering – AML regulations.
6. Implementing measures to prevent the misuse of shell companies.

In Cyprus, Anti-Money Laundering Laws and Regulations

Cyprus, like many countries, has implemented Anti-Money Laundering (AML) laws and regulations to combat money laundering and the financing of terrorism. The Anti-Money Laundering – AML framework in Cyprus is designed to align with European Union (EU) directives and international standards on Anti-Money Laundering – AML and counter-terrorist financing (CTF). Below are key aspects of Cyprus Anti-Money Laundering law:

Legal Framework: Cyprus Anti-Money Laundering – AML legal framework is primarily governed by the Prevention and Suppression of Money Laundering Activities Law of 2007 (Law 188(I)/2007). This law has been amended multiple times to align with EU AML directives.

Supervision of Regulated Entities: Cyprus Anti-Money Laundering – AML regulations applies to various regulated entities, including banks, credit institutions, insurance companies, investment firms, lawyers, accountants, auditors, tax consultants, investment advisors, real estate businesses, casinos, Virtual Asset Service Providers (VASPs). These entities are subject to strict Anti-Money Laundering – AML requirements, including customer due diligence (CDD) and reporting of suspicious transactions.

Regulated entities in Cyprus must conduct Customer Due Diligence – CDD on their customers to identify and verify their identity and assess the risk of money laundering or terrorist financing. Enhanced due diligence measures are required for higher-risk customers.

Cyprus has established beneficial ownership registers for companies and legal entities to increase transparency. Entities are required to maintain accurate records of their beneficial owners and share this information with competent authorities.

Regulated entities have a legal obligation to report suspicious transactions to a special unit – MOKAS. They are also required to report certain cash transactions exceeding specified thresholds.

Cyprus has adopted a risk-based approach to Anti-Money Laundering – AML, which means that entities should assess and manage the risk of money laundering and terrorist financing in a manner proportionate to the risk. Higher-risk activities and customers require more rigorous Anti-Money Laundering – AML measures.

The Anti-Money Laundering – AML law in Cyprus includes provisions for administrative fines, penalties, and criminal sanctions for non-compliance with Anti-Money Laundering – AML regulations. These penalties can be imposed on individuals and entities.