- Cyprus is in the process of adopting and publishing the laws, regulations and administrative provisions necessary to comply with the provisions of the EU Anti -Tax Avoidance Directive (“ATAD”), which was approved by the EU Commission in 2016.
- EU Anti -Tax Avoidance Directive (“ATAD”) creates a minimum level of protection against corporate tax avoidance throughout the EU, while ensuring a fairer and more stable environment for businesses.
- The Anti-Tax Avoidance Directive contains five legally-binding anti-abuse measures, which all Member States should apply against common forms of aggressive tax planning.
Controlled foreign company (CFC) rule:
Multinational companies sometimes shift profits from their parent company in a high tax country to controlled subsidiaries in low or no tax countries, in order to reduce the Group’s tax liability. The proposed Controlled Foreign Company (CFC) rule should discourage them from doing this.
The CFC rule will allow the Member State where the parent company is located to tax certain profits that the company parks in a no or low tax country. The CFC rule will be triggered if the tax paid in the third country is less than half of that which would have been paid in the Member State in question. The company will be given a tax credit for any taxes that it did pay abroad. This will ensure that profits are effectively taxed, at the tax rate of the Member State in which they were generated.
With the proposed CFC rule, the EU Member State can tax the subsidiaries profits as though they had not been shifted to the no-tax country, thereby ensuring effective taxation at the tax rate of the Member State concerned.
Interest Limitation Rules:
In order to discourage artificial debt arrangements designed to minimise taxes interest limitation rules are adapted which provide that 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 in a tax year.
General Anti-abuse rule:
General Anti-abuse rule comes to counteract aggressive tax planning when other rules don’t apply. It provides that for the purposes of calculating the corporate tax liability, the tax authorities can 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.
In order to prevent companies from avoiding tax when re-locating assets new exit rules ensure that Member states can impose tax on the value of the of the market value of the transferred assets, at the time of exit of the assets, less their value for tax purposes.
Hybrid mismatch rules provide that when a hybrid mismatch:
- results in a double deduction, the deduction shall be given only in the Member State where such payment has its source.
- results in a deduction without inclusion, the Member State of the payer shall deny the deduction of such payment.
Effective date of the changes:
The interest limitation rules, CFC rules, and GAAR, which should be transposed into Cyprus shall be effective from 1 January 2019.
Exit tax rules, as well as rules regarding hybrid mismatches will be effective from 1 January 2020, in line with the dates provided in the Directives.