Cyprus Implements the Remaining Provisions of the Anti Tax Avoidance Directive
On 04/07/2020, the remaining provisions of the EU Anti-Tax Avoidance Directive (ATAD EU 2016/1164) of July 2016 have been transposed into Cyprus national law, namely:
• Exit Taxation
• Hybrid mismatches (including reverse hybrid mismatches and tax residency mismatches)
The amendments of the law law came into effect as of 01 January 2020 with reference to hybrid mismatches and tax residency mismatches and exit taxation. The measures with regards to reverse hybrid mismatches will come into effect as of the 1st of January 2022.
Scope of Exit Taxation
A Cyprus tax resident company or a Cyprus permanent establishment of a non-Cyprus tax resident company) shall be subject to tax as per the provisions of the Cyprus Income Tax Law at an amount equal to the market value of the transferred assets, at the time of exit of the assets, less their value for tax purposes, in any of the following circumstances:
(a) A Cyprus tax resident company transfers assets from its head office in Cyprus to its permanent establishment in another Member State or in a third country provided that the Cyprus tax authorities no longer has the right to tax the transferred assets due to the transfer.
(b) The Cypriot permanent establishment of a non- tax resident company transfers assets from the permanent establishment in Cyprus to its head office or another permanent establishment in another Member State or in a third country provided that the Cyprus tax authorities no longer has the right to tax the transferred assets due to the transfer.
(c) A Cyprus company transfers its tax residence to another Member State or to a third country, except for those assets which remain effectively connected with a permanent establishment in Cyprus.
(d) The permanent establishment in Cyprus of a non-tax resident company transfers the business carried on by the permanent establishment to another Member State or to a third country provided that the Cyprus tax authorities no longer has the right to tax the transferred assets due to the transfer.
Where a Company or a Permanent Establishment tax resident in another Member State transfers its assets, residency, or business to Cyprus, the starting value of the transferred items for tax purposes, shall be equal to the value accepted by the Member State, unless this does not reflect its market value.
‘Market value’ is defined as the amount for which an asset can be exchanged, or mutual obligations can be settled between willing unrelated buyers and sellers in a direct transaction.
By way of exemption, exit taxes shall not be imposed in outbound transfers related to the financing of securities, assets posted as collateral or where the asset transfer takes place in order to meet prudential capital requirements or for the purpose of liquidity management, in the event where such assets are set to revert to Cyprus within a period of 12 months.
Provisions for the Deferral of Exit Tax Payments
The Cyprus Assessment and Collection of Taxes law, introduces a provision pursuant to which where there is an intra-EU transfer (including transfers within the European Economic Area where a mutual understanding for tax recovery is in place), an option for deferral of the tax by paying it in installments over a period of five years. Such deferral is subject to interest and the provision of guarantees to leverage non-recovery risks where appropriate and may be discontinued immediately with the tax being deemed recoverable if the provisions of the income tax law are not met.
Hybrid mismatches result from the discrepancies in the tax treatment, of two or more jurisdictions and are considered abusive. Hybrid mismatches arise:
• between associated corporations;
• between a taxpayer and an associated corporation;
• between a head office and its parent entity; or
• where a structured arrangement has been put in place where the mismatch outcome is priced into the terms of the arrangement or an arrangement that has been designed to produce a hybrid mismatch outcome; unless the taxpayer or an associated corporation could not reasonably have been expected to be aware of the hybrid mismatch and did not share in the value of the tax benefit resulting from the hybrid mismatch).
Application of Hybrid Mismatch Rules
Double deduction due to hybridity is neutralized by Cyprus denying the deduction of any payment, expense or loss in Cyprus in the event the investor jurisdiction is Cyprus. If Cyprus is not the investor jurisdiction but instead it is the payer jurisdiction, the deduction is allowed but only in the case where the investor jurisdiction has denied the deduction.
Notwithstanding, any deduction shall be eligible for off-setting against current or future dual inclusion income whether arising in a current or subsequent tax period.
In the event of payments by a hybrid entity or permanent establishment, the payer jurisdiction is the jurisdiction where the hybrid entity or permanent establishment is established.
Deduction without Inclusion
Deduction without inclusion due to hybridity is neutralized by Cyprus denying the deduction of
a payment or deemed payment between a head office and a permanent establishment or between two or more permanent establishments of the same entity, if Cyprus is the payer jurisdiction.
If Cyprus is the recipient jurisdiction, Cyprus will include the income in its taxable base unless an exception applies.
Tax Residency Mismatches
The rules target tax residency mismatches whereby payments, expenses or losses are deductible in multiple jurisdictions due to the taxpayer being considered a tax resident of those jurisdictions.
In the event where such deduction is allowed from the taxable base of the taxpayer in Cyprus and is also allowed as a deduction in the other jurisdictions, the Cyprus tax authorities will deny the deduction to the extent that the other jurisdiction allows the duplicate deduction to be set off against income that is not dual inclusion income. Moreover, the deduction will not be granted in Cyprus in the event where all jurisdictions concerned are EU member states and a double tax treaty is in force between Cyprus and the Member state concerned according to which the taxpayer is not considered to be a Cyprus tax resident.
Reverse hybrid mismatches
A reverse hybrid entity is an entity that is treated as transparent in its jurisdiction of incorporation or establishment but is considered as a taxable entity under the laws of the investor’s jurisdiction.
Reverse hybrid entities may give rise to deductions with no inclusions as their income may be exempt in the jurisdiction where they are established as well as in the state of the investor (since the entity is not treated as transparent and there is no flow- through approach).
To the extent where the income of a reverse hybrid entity is not otherwise taxed in Cyprus or in any other jurisdiction, the reverse hybrid entity shall, under conditions, be regarded as a Cypriot taxpayer and a Cyprus taxpayer and shall be subject to tax accordingly.
It is to be noted that this rule shall not apply to collective investment vehicles that adhere to certain conditions.