On the 5^th of April 2019 Cyprus Parliament has amended the Income Tax Law (“the Law”) to implement the EU Anti-Tax Avoidance Directive (“ATAD”) which will impact Cyprus tax resident companies and permanent establishments (“PEs”) of non-Cyprus tax resident companies for tax years 2019 and onwards, on the following areas:

• General Anti-Abuse rule (“GAAR”)

GAAR requires that, any arrangement which has 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 and which is not genuine having regard to all relevant circumstances, shall be ignored for the purposes of calculating the Cyprus corporate tax liability. An arrangement is non-genuine when it is not put into place for valid commercial reasons which reflect economic reality.

• Controlled Foreign Company (“CFC”) rule

CFC rule provides that the non-distributed income of a CFC, which is derived from non-genuine arrangements, shall be included to the taxable income of the Cyprus tax resident company which controls the CFC (“Controlling Company”). 

CFC is a non-Cyprus tax resident entity or a foreign PE (“Foreign Entity”) of a Cyprus tax resident entity, the profits of which are not subject to or are exempt from tax in Cyprus which meets the following conditions:

1. i) A Cyprus resident entity, either itself or together with its associated enterprises, holds either directly or indirectly more than 50% of voting rights, or more than 50% of the capital or is entitled to receive more than 50% of the profits of the Foreign Entity, and
2. ii) The actual corporate tax paid on the profits of the Foreign Entity is lower than 50% of the tax that would have been imposed if such profits were subject to tax in Cyprus in accordance with the provisions of the Law.

Non-distributed income is the accounting profit after tax, which has not been distributed to the Controlling Company during the tax year in which the profit is derived or within the next 7 months from the end of the tax period. The amount of non-distributed income of the CFC that is included in the tax base of the Controlling Company shall be limited to the amounts generated through assets and risks which are linked to the significant people functions which are carried out by the Controlling Company.

Non-genuine arrangement is an arrangement in case that the CFC does not own the assets or would not have undertaken the risks which generate all or part of its income, if it were not controlled by the Cyprus entity that carries out the significant people function which are relevant to those assets and risks that are instrumental in generation the CFC’s income.

The CFC rule does not apply to Foreign Entities which have accounting profits not exceeding €750,000 and non-trading income not exceeding €75,000 or accounting profits amounting to no more than 10% of their operating costs for the tax period.

The Law contains provisions for avoidance of double taxation in case that the CFC distributes profits to the Controlling Company which are taxable at the level of the Controlling Company. If the profits have been included in the tax base of the Controlling Company in previous years, they will be deducted from its taxable income for the current year.

• Interest limitation rule

According to this rule, the excess borrowing costs (“EBC”) which exceeds the 30% of the taxpayer’s earnings before interest, tax, depreciation and amortization (“EBITDA”), will not be tax deductible in the tax year in subject to a de-minimis EBC threshold of €3,000,000.  

EBC is the amount by which the deductible borrowing costs of a company exceed the taxable interest revenues and other economically equivalent taxable revenues of the company.

Borrowing costs is interest expenses on all forms of debt, other costs economically equivalent to interest expenses as well as expenses incurred in connection with the raising of finance i.e. payments under the profit participating loans, financing related hedging costs and guarantee fees.

Where the company is a member of a Cypriot group, the rule is applied at the level of the Cyprus Group. EBC which is not deductible in tax year based on the interest limitation rule, can be carried forward and be deducted from the taxable income of the company for the next 5 years.

The interest limitation rule does not apply to financial undertakings, standalone entities, loans used to fund long-term public infrastructure projects where the project operator, borrowing costs, assets and income are all in the EU and  loans concluded before 17 June 2016.

In relation to the above anti-tax avoidance measures, it is expected that the Cyprus Tax Department will issue relevant circulars to provide guidance. The remaining measures provided by the ATAD, namely exit taxation provisions and hybrid mismatch rules are expected to be implemented in Cyprus on January 2020, with the exception of certain reverse hybrid mismatch provisions which are expected to be applicable on January 2022.