Public consultation – ATAD Cyprus

  Before relying on anything in this Blog please read the disclaimer 

On the 28th of January 2016, the Commission presented its proposal for the Anti-Tax Avoidance Directive (ATAD I) and the same was adopted on the 20th of June 2016. On the 19th of July 2019, the Cyprus Department of Taxation has issued a public consultation regarding the national transposition of ATAD I and ATAD II.

The department of taxation circulates for public consultation two proposed amendments to the Assesment and Collection of Taxes Law and the Income Tax Law of Cyprus. Any interested party is requested to provide comments in writing by the 26th of August 2019 to the email elpanayiotou@tax.mof.gov.cy.

ATAD I & ATAD II – Transposition to Cyprus Law

In the preamble of the ATAD, the purpose is chiefly summarised as laying down rules against the erosion of the tax base and the shifting of profits out of the internal market. The public consultation aims to transpose the ATAD I and ATAD II rules in Cyprus. The first set of ATAD I and ATAD II rules were adopted earlier in the year whereas the proposed amendments come to complete the Anti-Tax Avoidance Package with the introduction of hybrid mismatch rules and the exit tax.

Proposed Amendments to the Assesment and Collection of taxes Law in Cyprus to transpose ATAD I and ATAD II

The central amendment to the Assessment Law comes to introduce Section 40A. Section 40A relates to the payment of taxes in installments and extends this right to situations:

• That the assets of the person have been transferred to another member state
• That the tax seat of the person has been moved to another member state
• That the business legally conducted in Cyprus has been moved to another member state

The above is applicable in the instances that the contracting state is part of the EEA or the European Union agreed towards the mutual collection of taxes.

The amendment goes on to clarify that the payment of taxes with installments shall bear interest.

Lastly, the possibility to pay taxes due with installments is immediately terminated and the taxes are immediately due in the following instances:

• The assets are sold or transferred in any other way
• The transferred assets are then transferred further to a third country
• The tax residency of the person or the business exercised is transferred to a third country
• The person is in bankruptcy or placed in liquidation
• The person is not diligent with taxable obligations

The reasoning for proposed amendments

The department of taxation mentions in its notes to the proposed legislation that the amendment is justified in order to combat common issues and problems faced with the current legislation and to transpose to Cyprus Law the directives 2016/1164 as amended on the 21st of February 2017 by Directive E2017/952.

Proposed Amendments to the Income Tax Law

The proposed amendments to the income tax law appear to be at least 16 pages long. In the notes of the proposed law, it is mentioned that the amendments are required in order to:

1. Introduce an exit tax
2. Introduction of provisions for the avoidance of double none taxation from the utilization of hybrid structures.

Hybrid Mismatch rules in Cyprus

In the instance, that mismatch occurs in cross-border transactions then:

1. The deduction is not granted to the investor who is Cypriot tax resident
2. If the payee is a tax resident of Cyprus and the foreign investor receives a deduction then the Cypriot tax resident payee is not eligible for a similar deduction.

The above provisions are not applicable to mismatch occurring until 31st of December 2022 from payments to related parties, under certain circumstances, please contact me for further guidance on this.

If one or more connected entities, non-Cyprus tax residents, hold in total direct or indirect interest of up to 50% in the voting rights of a Cypriot entity then the Cypriot entity is treated as a Cyprus tax resident and its income is subject to taxation.

If a hybrid mismatch occurs due to the entity or person being a dual tax resident, the deduction is not allowed unless it is a double entry for both states.

Cyprus Exit Tax

The proposed amending law introduces an exit tax, it includes in the taxable base of any person amounts which occur from:

1. Transfer of assets to the main residence or another residency of the person, with the effect, that the government loses its right to tax of the transferred assets
2. Transfer of the tax residency of a person to another country. Assets associated with a Cypriot permanent establishment are unaffected by the transfer of tax residency of the person
3. Transfer of the business to another country with the Cyprus Government losing its taxing rights over the business

Effective Date

The effective date the proposed amendment to the income tax law is specified as the 1st of January 2020, this is however subject to passing parliament and being signed by the president of the Republic of Cyprus.