Cyprus Tax Update Kyiv May 2018
Today s agenda 1. Snapshot of Cyprus tax system 2. Developments affecting the Cyprus tax regime 3. Selected developments : a) ATAD b) TP 4. Selected structures 5. Expected changes 6. Q&A
Snapshot of Cyprus tax regime Page 3
Cyprus tax regime snapshot Tax residency based on management and control Low headline CIT rate (12,50%) determination of taxable income generally based on IFRS subject to adjustments No CFC rules (expected to change under EU ATAD) Transactions with related/connected parties must adhere to the arm s length principle. Circular on back-to-back arrangements. Detailed legislation expected in 2018/2019 Attractive holding company regime conditional exemption on dividends and gains on sale of shares (no conditions) Attractive financing company regime utilising notional interest deduction on equity Tax neutrality on FOREX differences (as of 2015) Page 4
Cyprus tax regime snapshot No taxation of sale of securities such as equities and bonds and on certain equity and bond derivative transactions Exemption on profits of foreign permanent establishment (conditional) or alternatively be taxed and claim relief for foreign tax IP Box regime allowing 80% deemed deduction on royalty income and gains on sale of IP on certain intangibles (under certain conditions) Foreign tax relief on income subject to both Cypriot and overseas tax No withholding taxes on interest and dividends / no branch remittance tax. 10% withholding tax on royalty payments/technical assistance if IP rights are utilized in Cyprus (but WHT can be eliminated / reduced under a tax treaty) Application of EU Directives on direct taxation (e.g. EU Parent-Subsidiary) Page 5
Cyprus tax regime snapshot Company re-organization rules exist (based on the EU Mergers Directive) allowing for tax neutral group restructuring No exit taxation rules in general(expected to change under EU ATAD) Low transactional taxes low set-up and company maintenance costs relatively to other jurisdictions Established tax ruling practice 50% exemption on employment income exceeding EUR 100K per annum for non-residents taking up employment in Cyprus New individual tax residency test - 60 days rules Non-dom rules for individuals aiming to encourage relocation of high net worth individuals to Cyprus Page 6
Developments affecting the Cyprus tax regime Page 7
Developments affecting the Cyprus tax regime EU Harmful tax practices DAC Automatic exchange of information OECD MLI BEPS/ EU ATAD TP developments Page 8 Cyprus Tax Developments
Developments affecting the Cyprus tax regime EU Harmful Tax Practices: DG competition examination of practices such as: Back to back leading to withdrawal of minimum margin scheme Non-reciprocal capital contributions ICPAC communication not to be applied and new circular to be issued in the coming months DAC Automatic exchange of information DAC3 Automatic exchange of tax rulings 1/1/2018 DAC4 CbCR information 1/1/2017 DAC5 Tax authorities to access AML information held by entities pursuant to the 4th AML EU Directive 1/1/2019 BEPS/EU Anti-Tax Avoidance Directive (I&II) (Net) interest expense limitation (1/1/2019) Exit taxation (1/1/2020) A general anti-abuse rule (GAAR) (1/1/2019) Controlled foreign company (CFC) rules (1/1/2019) Hybrid mismatch rules (1/1/2020 and 1/1/2022 for reverse hybrid) November 2018 - public consultation with Cyprus tax authorities Page 9 Cyprus Tax Developments
Developments affecting the Cyprus tax regime Transfer Pricing developments New circular on documentation of back-to-back financing TP legislation including documentation rules to be introduced in the coming months OECD MLI Cyprus signed the MLI on 7/6/2017 pending ratification Has opted to apply only the minimum standards in its Double Tax Treaties Treaty Abuse Principal Purpose Test (and not LOB) Dispute resolution procedures Page 10 Cyprus Tax Developments
Selected matters EU ATAD Page 11
EU Anti-Tax Avoidance Directives (ATAD) I and II ATAD 1 January 2019 1 January 2020 and onwards Interest deductibility limitation General anti-abuse rule (GAAR) Controlled foreign company (CFC) rules Exit taxation rules Anti-hybrid rules Reverse anti-hybrid rules (as per 2022 ultimately) Financing Holding General anti-abuse rule IP & Supply chain Interest deduction limitation rules Anti-hybrid rules Controlled foreign company rules Exit taxation rules Anti-hybrid rules Page 12
Interest limitation rules Cyprus consultation Cyprus has launched a public consultation for the transposition of ATAD into national legislation in November 2017 The exceeding borrowing cost does not include Notional Interest Deduction A minimum threshold with a maximum of EUR 3 million may be introduced No equity escape clause route to be introduced Provisions to carry forward of unused interest deduction Exclude financial undertakings loans concluded before 17 June 2016 Loans which were concluded before June 17, 2016 may be excluded, but the exclusion shall not extend to any subsequent modifications of such loans EU Anti-Tax Avoidance Directive Page 13 Upcoming tax developments
CFC rules Cyprus consultation Cyprus has launched a public consultation for the transposition of ATAD into national legislation in November 2017 EU Anti-Tax Avoidance Directive Definition: A CFC is an entity or PE in which the parent directly or indirectly holds at least 50 percent of the voting rights, capital, or profit rights. Effective Tax Rate: Effective tax rate suffered lower than 6.25% Between the two options i.e. the Income approach and the Significant people approach there is a preference towards the latter. Page 14 Upcoming tax developments
Key ATAD takeaways 1. Identify and manage legislative change 2. Assess what ATAD may mean to you 4. Watch for policy responses 3. Assess structures for interest limitation and CFC risks Page 15
Selected matters Transfer Pricing Page 16
Back to Back Financing 9,65% Offshore Co Loan Margin 0,35% CypCo Letter Box Co (No substance) Latest 10% Russian Co Loan Page 17 Cyprus Tax Developments
Developments on Back-to-Back financing Withdrawal of the MMS as of 1 July 2017 The CTA officially announced the withdrawal of the MMS with effect from 1 July 2017. The withdrawal of MMS was the result of recent international tax developments (OECD/G20 initiative BEPS) as well as the meticulous review of the MMS in the context both of the Code of Conduct for business taxation as well as from an EU State Aid perspective. The CTA take the view that as from 1 July 2017, the spread on back-to-back loans should be supported by a TP study which needs to be based on the OECD TP guidelines. TP study should take into consideration: - characteristics of the transaction (mainly the terms) - risks assumed, functions performed and assets used by the Cypriot financing company and its counterparties - in order to identify its functional profile prior proceeding with the determination of the arm s length remuneration/ economic analysis The intention is to introduce detailed transfer pricing legislation (at least for intra-group financing activities) which will be based on the OECD TP guidelines. Cyprus is expected to introduce transfer pricing legislation in 2018; including the adoption of a local and master file requirement. Page 18
Selected matters New IP Box Structures Page 19
New IP Box Regime in Cyprus and the nexus approach Tax Rate Qualifying Assets Qualifying Income Tax depreciation Registration/ Ownership Can work be performed by related parties/ outside CY? Will depend on the application of the nexus ratio as low as 2.5% Patents or patent equivalents, compute software rights and other IP assets that are legally protected and that are (i) non-obvious, useful or novel (subject to de minimis criteria), (ii) orphan drug designations, utility models, plant breeders rights Royalty, licensing fees, compensation income, trading profits from the disposal of IP, embedded IP income from the sale of products/services Capital nature gains from the disposal NOT subject to any tax Over useful economic life with a maximum period of 20 years IP does not need to be registered in Cyprus. Economic ownership is sufficient. Yes but cost of acquiring the IP and R&D expenses paid to related parties is not a qualifying expense unless incurred by an R&D branch of the Cypriot company Page 20
Cyprus IP Box company with an R&D branch ParentCo Background / Objective: To apply the new Cyprus IP Box regime and claim 80% deemed deduction on qualifying profits. Cyprus IPCo Licensing services OpCos Tax considerations: The branch s R&D expenditure is likely to be considered as incurred by the Cyprus IPCo as the branch does not have a legal personality. This has not yet been tested in practice. R&D Branch R&D services from the branch OR from third parties If the branch s R&D spend is considered as qualifying expenditure, Cyprus IPCo will be able to claim the 80% deemed deduction and potentially reduce its effective tax rate as low as 2,50%. Same applies to R&D outsourced to third parties. Profit attribution between IPCo and R&D branch. Page 21
Taxation of IP activities not qualifying under the IP Box regime Royalty and other income taxed at 12,50% Capital nature gains from the disposal of IP not subject to tax but recapture of previously claimed tax depreciation (depending on the disposal proceeds) Tax deduction is available for interest expense (debt funded) and notional interest expense (equity funded) but NID cannot exceed 80% of the taxable profit (before NID is taken into account) Tax deduction for any R&D expensed in the P&L Tax deduction for any capital expenditure for acquiring and/or developing the IP based on its (IFRS) useful economic life (but tax depreciation life cannot exceed 20 years) Foreign tax relief for any overseas withholding tax (if any given the application of EU Interest & Royalty Directive and bilateral treaties) No withholding taxes on dividend or interest payments Effective tax rate can be low even if the IP box regime does not apply Page 22
Selected matters Investment into foreign (RE) funds Page 23
Investments into foreign funds Parent Co Rulings were successfully obtained confirming: Foreign funds established as collective investment schemes are not transparent for Cypriot tax purposes. Cyprus HoldCo The investment certificates issued by foreign funds meet the definition of a security for Cyprus tax purposes (hence gains upon their disposal are tax exempt). REIT or FUND Distributions made by funds should be treated as dividends (hence tax exempt). Page 24
Expected changes Page 25
Expected changes 1 Detailed transfer pricing legislation and documentation requirements 2 3 4 5 Taxation of Cypriot funds and Cyprus based fund managers OECD Multilateral instrument (BEPS Action 15) EU Anti-Tax Avoidance Directive Exchange of Information developments (DAC6) Page 26
Questions and Answers Page 27
Contacts Philippos Raptopoulos Partner, Head of Tax Cyprus Tel.: +357 25209740 Mob.: +357 96795016 Fax: +357 25209998 Email: philippos.raptopoulos@cy.ey.com Page 28
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