Cyprus: Main changes in Income Tax Law during 2019
As a result and in support of BEPS actions, the European Commission issued the EU Directive 2016/1164, which provides a minimum level of protection of domestic tax base, which was partly transposed into our Income Tax legislation on 25/4/2019 with Law L.63(I)/2019 and effect as from 1/1/2019.
The directive which is called the anti-avoidance directive covers 5 areas:
CFC rules
Prevent double no taxation of certain income
Exit Tax
Interest limitation
Anti-abuse rule
Interest Limitation:
Per IT law, the exceeding borrowing costs, in excess of the 30% of taxable income (earnings) before interest, tax, deductions and additions in relation to fixed assets, including intellectual property (EBITDA) used in the business, is not allowed for tax purposes. B/f losses are not taken into account.
‘Exceeding borrowing costs’ means the amount by which the deductible borrowing costs of a taxpayer exceed taxable interest revenues and other economically equivalent taxable revenues per Income Tax Law, that the taxpayer receives.
‘Borrowing costs’ means interest expenses on all forms of debt, other costs economically equivalent to interest and expenses incurred in connection with the raising of finance, including payments under profit participating loans, imputed interest on instruments such as convertible bonds and zero coupon bonds, amounts under alternative financing arrangements, such as Islamic finance, the finance cost element of finance lease payments, capitalised interest included in the balance sheet value of a related asset, or the amortisation of capitalised interest, amounts measured by reference to a funding return under transfer pricing rules where applicable, notional interest amounts under derivative instruments or hedging arrangements related to an entity’s borrowings, foreign exchange gains and losses on borrowings and instruments connected with the raising of finance, guarantee fees for financing arrangements, arrangement fees and similar costs related to the borrowing of funds.
In case a company is part of a Cyprus group the provisions of this Law applies to the level of the group. Cyprus group is defined in the Law as the group with member companies resident in Cyprus or with PE in Cyprus. The word group needs to be in line with the definition of a group for tax purposes as specified in the law.
The Law allows the deduction of exceeding borrowing costs, up to 3000000 Euro if the 30% of taxable income is less.
In case a company is part of a group for accounting purposes then it can choose to have all its exceeding borrowing costs deducted from taxable income provided it can prove that the ratio of its equity to assets its equal or greater than that of the group. A 2% lower difference is considered as equal. Furthermore, all its assets and liabilities must be valued as per consolidated accounts that have been prepared in accordance with the Commissioner accounting principles.
In all cases any exceeding borrowing cost not allowable in the current year can be carried forward 5 years.
The Law does not apply to financial organisations as specified in Income Tax Law and to companies that are not part of a group for accounting purposes and do not have associated companies or permanent establishments.
The Law also provides that interest on loans made prior 17/6/2016, and interest paid for the financing of long-term public infrastructure projects within the EU with all parties involved from EU are not taken into account when estimating the exceeding borrowing costs. Any income from the long term public infrastructure project is not taken into account when estimating the EBITDA.
In case of reorganisation of companies as specified in IT Law, any exceeding borrowing costs and any b/f exceeding borrowing costs are transferred to the acquiring company.
Anti-abuse Rule:
Per amending law any actions with main purpose or with one of its main purpose is to obtain a tax advantage not in line with the purpose of the law are considered non-genuine. Actions are considered non-genuine if are taken for non-valid commercial reasons that are in line with the economic environment.
These non-genuine actions are ignored for tax purposes.
CFC Rules:
A non-resident company or a PE abroad of a resident company, the profit of which are not taxable or exempt, is considered a foreign controlled company if the following applies:
In case of a non-resident company, the resident company with or without its associates has direct or indirect participation over 50% and tax paid abroad on profits is less than 50% of the Cyprus tax rate (Cyprus tax rate 12.5%). A PE is foreign controlled if rate is less than 50% of CY rate.
Any non-distributed income, of the foreign controlled company, from non-genuine actions is added to the taxable income of the resident in Cyprus company, subject to conditions (see below). In case of a loss this is taken into account on the basis of same conditions.
The PE of a foreign controlled company not taxed or exempt from tax in the tax jurisdiction of the foreign controlled company is not considered foreign controlled. Furthermore, a non-resident company or a PE of a resident company is not considered foreign controlled of a resident company, if it has accounting profits up to 750,000 Euro and non-commercial income up to 75,000 Euro or accounting profits not exceeding 10% of its operational expenses.
The profit or loss of foreign controlled entities added to the profit/loss of a resident company, is subject to the following conditions:
a) Includes the accounting profit after tax of the tax year and that of the 7 following months
b) Profit /loss restricted to amounts derived from assets and risks connected to the duties of significant people in the CY resident company and on the basis of Arm’s Length Price
c) The profit/loss is restricted to the percentage the resident company is entitled
In case a foreign control company distributes profits to a resident company that are not exempt per IT Law, any profit added in the past is deducted for the purpose of estimating the CY tax on the distributed profits, irrespective of the fact that it was then exempt, to ensure there is no double taxation. Same applies in case of a disposal of a CFC. These profits are not considered dividends per Special Defense Contribution Law.
Any tax paid abroad is deducted from the CY tax.