Implementation of ATAD Measures in the Cypriot Law
On 25 April 2019, Cyprus has implemented the provisions of the EU Anti-Tax Avoidance Directive – ATAD EU 2016/1164 (hereinafter – ATAD or the Directive) and transposed three ATAD measures in the Cypriot Law (hereinafter – the Law). The transposed measures include a General Anti-Abuse Rule (GAAR): to counteract aggressive tax planning when other rules don’t apply; an Interest Limitation Rule: to discourage artificial debt arrangements designed to minimise taxes; as well as Controlled Foreign Company (CFC) Rule: to deter profit shifting to a low/no tax country.
The abovementioned provisions of the Law apply as of 1 January 2019, with the remaining ATAD provisions (Exit Taxation Rule and Switchover Rule) to be transposed gradually as per the timeframe set in the Directive.
The transposed rules apply to both Cypriot tax resident companies and non-Cypriot tax resident companies which have a permanent establishment (PE) in Cyprus.
General Anti-Abuse Rule
Under the provisions of the General Anti-Abuse Rule as these have been transposed in the Cyprus tax legislation, for the purposes of calculating the corporate tax liability, Cyprus shall ignore an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, are not genuine having regard to all relevant facts and circumstances.
Interest Limitation Rule
As required under the Directive, 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) as adjusted in accordance with the rules concerned. However, the new rules provide that any exceeding borrowing costs up to €3 million (per tax year) are not subject to the limitation (de minimis exception as allowed under the Directive).
The definition of ‘Exceeding borrowing costs’ follows the definition in the Directive and means the amount by which the deductible borrowing costs of a taxpayer exceed taxable interest revenues and other economically equivalent taxable revenues that the taxpayer receives according to national law;
In addition, the legal provisions transposed include a stand-alone entities and financial undertakings exemption, exclusion of loans that were concluded before 17 June 2016 and an exclusion from scope of long-term infrastructure projects which are considered to be in the general public interest. The income earned from such a long-term public infrastructure project is also excluded from the definition of tax-adjusted EBITDA.
Under Interest Limitation Rule as transposed in the Cyprus Income Tax Law, if a company is a member of a consolidated group for financial accounting purposes, it may deduct its exceeding borrowing costs in full, provided it can demonstrate that its equity to total assets ratio is equal to or higher than the equivalent ratio of its consolidated group for financial reporting purposes and subject to the following conditions:
(i) the ratio of the taxpayer's equity over its total assets is considered to be equal to the equivalent ratio of the group if the ratio of the taxpayer's equity over its total assets is lower by up to two percentage points (2%); and
(ii) all assets and liabilities are valued using the same method as in the consolidated financial statements prepared in accordance with acceptable accounting standards;
Taxpayers may carry forward any exceeding borrowing costs whose deductibility is restricted due to the application of the new limitation rules (i.e., the amount exceeding 30% of tax-adjusted EBITDA), as well as any unused interest capacity which cannot be deducted in the current tax period, for a maximum of five years. However, the non-utilized amount of the €3 million de minimis exception is not carried forward.
Controlled Foreign Company Rule
The definition of a CFC follows the wording of the Directive. According to the Law, a non-Cypriot tax resident company, or a foreign permanent establishment (PE) of a Cypriot tax resident company whose profits are not subject to or exempt from tax in Cyprus, shall be treated as a CFC where the following conditions are met:
(i) in the case of an entity, where the Cypriot company taxpayer itself or together with associated entities holds a direct or indirect participation of more than 50% of the voting rights, or of the capital or is entitled to receive more than 50% of the profits of such entity; and
(ii) the corporate income tax (CIT) paid by the non-resident entity / PE is less than 50% of CIT payable if it were resident in Cyprus.
De minimis exception
In line with the option given by the Directive, the Law provides that no CFC inclusion should be made of any non-distributed income of a CFC if a CFC has either:
i) Accounting profits that do not exceed €750,000 and non-trading income which is not more than €75,000; or
ii) Accounting profits that do not exceed 10% of its operating costs for the tax year.
Where an entity or permanent establishment is treated as a controlled foreign company, the non-distributed income of the CFC may be included in the tax base of the Cyprus parent or the Cypriot head office, if the non-distributed income of the entity or permanent establishment arises from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage under the Cypriot Income Tax Law.
It is clarified that non-distributed income is the income that has not been distributed within the year in question or within a period of seven (7) months after the year end.