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Implementation of Anti-Tax Avoidance Directive in to Cyprus Legislation

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Implementation of Anti-Tax Avoidance Directive in to Cyprus Legislation

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As reported recently through the interview of our Managing Director in, enactment of legislation was in process for the implementation of the European Commission’s Anti-Tax Avoidance Directive (ATAD). On 5 April 2019, the relevant bill was voted into law by the Cyprus Parliament. The main provisions have been covered in the interview. Some other points worth mentioning, following the enactment of the Law,

Interest Limitation

For what concerns the interest limitation rule, in case of a reorganization, any accumulated Excess Borrowing Cost (interest expense exceeding 30% of EBITDA) and unused interest capacity, will be transferred to the transferee company in accordance with the relevant provisions of the legislation regarding the reorganization of companies.

Borrowing Cost is defined as interest expenses on all forms of debt, other costs economically equivalent to interest and expenses incurred in connection with the raising of finance.

CFC Rules

With regards to the provisions for Controlled Foreign Corporations (CFCs), the condition concerning the minimum tax suffered excludes the profits of a Permanent Establishment of the entity assessed as a CFC, which is not subject to tax or is exempt from tax.

Also, the non-distributed income of a CFC is considered to be its accounting profit after tax which has not been distributed to the Cyprus company during the tax year in which the profit has been derived, or within 7 months from the end of the tax period.

The CFC provisions are not applied where CFC has:

  • accounting profits of no more than €750.000, and non-trading income of no more than €75.000; or
  • accounting profits of no more than 10% of its operating costs for the tax period.

The income or loss of the CFC to be captured shall be limited to amounts generated through assets and risks, which are linked to significant people functions carried out by the controlling Cyprus company. The attribution of income shall be calculated in accordance with the arm's length principles and is limited to the amount of the non-distributed income of the CFC.

Where the CFC distributes profits to the controlling Cyprus tax resident company, the income previously included in the tax base of the controlling Cyprus company based on the CFC provisions, is exempt from tax in Cyprus. Any foreign tax paid on the income of the CFC is credited against the income tax payable in Cyprus

It is expected that by the end of 2019 the provisions that are applicable as from 1 January 2020 will also be transposed into law. Furthermore, the Cyprus Tax Authorities are expected to issue tax Circulars which will cover in detail the practical implementation of all provisions.

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