On the 7th of June 2017 Cyprus signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”). The MLI will implement tax treaty measures in order to reduce opportunities for tax avoidance by multinational companies.
Article 6 and 7 as the main impact on Cyprus Companies
The main impact on Cyprus companies will be Article 6 and 7 which relate to treaty abuse. As a result, Cyprus will implement in its double tax treaties principle purpose test (PPT) and a limitation of benefit clause (LoB). Consequently, it is essential that Cyprus companies owners examine the impact of these changes and ensure that they have sufficient substance in Cyprus. Failure to do so could lead to significant tax implications.
On the 3rd of May 2017 Cyprus signed double tax treaty with Barbados.
Nil withholding tax on dividends, interest and royalty payments
The treaty is based on the OECD Model Convention and provides nil withholding tax on dividends, interest and royalty payments. The treaty will enter into force after formal ratification and with respect to taxes will have effect on or after 1st January following the date the treaty enters into force.
The Cyprus Tax Authority decided to change the current tax regime in relation to profit margins and loans between related parties.
Whom does the change apply to?
From the 1st of July 2017 all loans between Cyprus Tax Resident Companies and their related parties shall be supported by transfer pricing studies prepared by an independent expert and based on OECD principals. The new rule will affect financial transactions between related companies with regards to tax assessment and tax ruling.
The Ministry of Finance in Cyprus announced, in agreement with Russian Government, to abolish the introduction of source-based taxation of capital gains on disposal of shares in property-rich companies.
Disposals of shares in property-rich companies will continue to be taxable only in the country of residence of the person disposing of the shares. This means that gains on disposals of shares will continue to be tax free.
Currently all Polish investment funds – open-ended and closed-ended – as well as their equivalents from the EU and EEA have been fully exempt from Polish taxation on all types of profits derived in Poland.
The exemption covers income tax, capital gains tax and withholding tax. It is proposed that the exemption shall be cancelled. Instead it is proposed to exempt only certain types of profits derived by open-ended funds only or by their equivalents from the EU or the European Economic Area Member States. The exemption would cover only the following types of profits:
- interest
- dividends and dividend-like distributions
- capital gains from the sale of receivables, shares and stocks as well as other securities, including derivative financial instruments and foreign exchange gains
The new proposed legislation would fully exclude all closed-end investment funds from tax exemption. All profits of such funds derived from Poland would become subject to Polish taxation at the 19% rate.
It is proposed that the changes will come into force on 1 January 2017.
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Cyprus is well established as a favourable jurisdiction in Europe for business structuring and international tax planning. By ensuring proper long-term oriented tax planning and structuring are optimised of the Cyprus Company in the International Tax plan is in place that will provide tax optimisation and thus having a return on investment. Due to the fact, that Cyprus has a distinctive combination of advantages including a unique location, solid legislation and strong professional environment, these factors and more have resulted in Cyprus becoming one of the most attractive countries for the incorporation of International Business Companies (IBCs) in Europe over the last decade.
Management and Control
Principally, all Cyprus Tax Resident companies are taxed on the worldwide income accrued or derived from sources in Cyprus and abroad. A company is considered as a Resident Cyprus company if it is managed and controlled in Cyprus.
Corporate tax
The Corporation Tax in Cyprus is 12.5% which is uniform and it applies on trading profits, making it one of the lowest in Europe.
Taxable losses
If a company incurs a loss during a tax year, then this loss can be carried forward and used for tax relief of next year’s profit. Similarly, in case the company does not make profit then it can utilise the accumulated losses against the first available profits. The offset against the profit must arise during the next 5 years that the losses were created, otherwise this carry forward opportunity will be lost.
EU Directives
Cyprus having EU membership, and therefore use of EU Directives is also allows benefits to other Third countries. Application of some key EU directives are as follows:
1. Merger Directives –Resident and Non-Resident Companies have no taxation obstacles or consequences relating to reorganisation, mergers, divisions, transfer of assets and exchange of shares
2. Parent / Subsidiary Directive – Withholding tax is not paid on dividends and has immediate effect as long as there is 10% minimum shareholding and 2 years of holding. The tax is withheld abroad and the dividend is exempt in Cyprus (subject to conditions)
3. Interest / Royalty Directives – Withholding tax is not paid on the interest to Non–Residents and has immediate effect provided there is 25% minimum shareholding (only in case of royalties) Royalties are subject to corporation tax.
