Cyprus Tax considerations for the year ahead

Transfer Pricing

Cyprus introduced transfer pricing rules and documentation requirements effective as of 1 January 2022 in line with the OECD TP Guidelines. The new rules require domestic and cross-border intra-group transactions to be documented for Cypriot TP purposes. 

During 2023, the Cyprus Tax Authorities ("CTA") released FAQs which address a number of aspects relating to the application of the new TP legislation. Also, during 2023, the CTA issued a tax circular introducing simplification measures for various types of intercompany transactions that do not fall within the ambit of TP documentation thus effectively introducing certain safe harbour rates. In addition, the CTA issued a tax circular taking the position that as of 2023 tax year, the Comparable Uncontrolled Price is the preferred method for documentation of back-to-back financing transactions, while the use of other methods can only be accepted in exceptional circumstances and provided certain conditions are met. 
 

Additional changes and guidance are expected in 2024. As businesses operate in an interconnected global economy, transfer pricing has become an increasingly important aspect both in terms of tax compliance and tax planning. It is expected that transfer pricing will be very high on the list of priorities for both tax authorities and taxpayers alike. 
 

Charalambos Palaontas

Partner, International Tax and Transaction Services  | EY Cyprus

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Introduction of 15% Global Minimum Tax - Pillar II

On 15 December 2022, the Council of the EU (i.e., the EU Member States) unanimously adopted the Directive ensuring a global minimum level of taxation (15%) for multinational enterprise (MNE) groups and large-scale domestic groups in the Union (the “Directive”). The Directive provides a common framework for Member States to implement into their national laws the Model Rules on the Pillar Two Global Minimum Tax (GloBE), as agreed by the G20/OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS) 2.0. and released on 20 December 2021.

The global minimum tax rules set out in the Directive were expected to be transposed into the domestic legislation of the EU Member States and be in effect as of 31 December 2023. Cyprus has not yet transposed the rules into the domestic legislation but is expected to do so in the next couple of weeks with a retroactive effect as of 31 December 2023.

The rules introduce a minimum effective tax rate (ETR) of 15% to MNE or large-scale domestic groups with consolidated annual revenues of €750 million in at least two of the four fiscal years immediately preceding the tested fiscal year. The Directive sets forth a system consisting of two interlocked rules - the Income Inclusion Rule (IIR) and the Undertaxed Profit Rule (UTPR) - through which an additional amount of tax called a “top-up tax” should be collected each time that the ETR due on the income of an MNE or domestic large-scale group in a given jurisdiction is below 15%. In such cases the jurisdiction is considered to be low tax.

Under a qualified IIR, the parent entity of an MNE or large scale domestic group located in a Member State (or in a third country that has introduce the rules) should be obliged to apply the IIR to its share of top-up tax relating to any entity of the group that is low-taxed, whether that entity is located within or outside the EU.

The UTPR should act as a backstop to the IIR – which means that in case the top-up taxes relating to low-taxed entities could not be collected by parent entities through the application of the IIR, there is a reallocation of any residual amount of top-up tax to the entities that are located in jurisdictions that have introduced the UTPR rules based on tangible assets and employees costs.

Cyprus is expected to introduce an IIR for financial years beginning on or after 31 December 2023 and the UTPR for financial years beginning on or after 31 December 2024.

The Directive also includes an option for the Member States to introduce their own domestic minimum top-up tax based on the Pillar Two mechanics in order to preserve their primary right of taxation over its own income. In such case, in case a qualified domestic minimum top-up tax is introduced, it will reduce the amount of top-up taxes collected through IIR or UTPR. Cyprus is expected to introduce a domestic minimum top-up tax for financial years beginning on or after 31 December 2024.

Various safe harbors have also been developed by the OECD which provide relief from the rules for a specified period of time provided certain conditions are met. Cyprus has consented to these safe harbors through a public statement made by the Minister of Finance.
 

Eleni Papachristodoulou 

Director, International Tax and Transaction Services | EY Cyprus

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Petros Krasaris

Partner | Head of International Tax and Transaction Services

Phone: +357 22 209 790

Petros.P.Krasaris@cy.ey.com

Guidance on the application of the interest limitation rules  

In 2023, the Cyprus Tax Authorities issued a tax circular providing guidance on the application of the interest limitation rules. The said rules were introduced in 2019 as part of the adoption of the EU Anti-Tax Avoidance Directive. Following the release of the tax circular, the tax authorities are expected to place more emphasis on this matter and thus taxpayers are encouraged to ensure compliance with the rules.

Michalis Karatzis

Senior Manager, International Tax and Transaction Services | EY Cyprus

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Cyprus | Update of EU List of non-cooperative jurisdictions may trigger withholding tax and other implications

On 17 October 2023, at the Economic and Financial Affairs Council, the European Union (EU) Finance Ministers approved the revised list of non-cooperative jurisdictions (EU List). The EU List is relevant for tax purposes since as of 31 December 2022, Cyprus imposes withholding tax on dividend, interest and royalty payments made to entities that are registered or resident in a jurisdiction that is included in Annex I of the EU List. In addition, the EU List is relevant for MDR and Public CbCR purposes since under certain conditions, payments to these jurisdictions may create a reporting obligation.

The Cyprus Tax Authorities are in the process of issuing a circular providing clarifications on the application of withholding tax on dividend, interest and royalty payments made to entities that are on the EU list. 

Read more.
 

Olga Chervinskaya

Senior Manager, International Tax and Transaction Services | EY Cyprus

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Additional Defensive Measures based on Cyprus' National Recovery and Resilience Plan

As per Cyprus' National Recovery and Resilience Plan, Cyprus committed to introduce defensive measures in relation to low tax jurisdictions. Such a legislative change will enter into effect by 31 December 2024. Based on discussions with the relevant authorities, it is expected that Cyprus will introduce withholding taxes on outbound payments of dividend made to low tax jurisdictions. Moreover, it is expected that Cyprus will introduce provisions as per which the deductibility of interest and royalty payments made to low tax jurisdictions will be denied under certain conditions. 
 

Elina Papaconstantinou 

Senior Manager, International Tax and Transaction Services | EY Cyprus

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EU Emissions Trading System
 

As of year 2024, maritime activities are included in the EU Emissions Trading System (“ETS”). This effectively means shipping companies will need to pay for at least a portion of greenhouse gas emissions generated during voyages to and from the EU.

In addition to underlying costs related to effective compliance with the ETS, new policies and procedures may need to be implemented, in addition to having a dedicated carbon management function.

If the shipping industry were a country, it would be the world’s sixth-largest greenhouse gas emitter. However, when it comes to existing national and subnational carbon pricing regimes, very few address emissions from maritime operations. Where emissions are addressed, it’s in connection with inland voyages. Domestic compliance carbon markets are unlikely to mirror the EU ETS and require maritime operations to bear the associated cost of emissions.

Instead, carbon pricing for the maritime industry is set to be regulated at a global level under the framework being developed by the International Maritime Organization.

Predicting Carbon Pricing Measures

In July, during the 80th session of the Marine Environment Protection Committee, the IMO confirmed its intention to implement global carbon pricing for the shipping industry. The policy is expected to be finalized in spring 2024, adopted in autumn 2025, and take effect in 2027.

Several countries, market participants, and international organizations have developed and submitted policy proposals to the IMO. Proposals range from a global shipping cap-and-trade system (advocated by Norway), to a carbon tax-like mechanism proposed by three different interest groups (Japan, Marshall Islands and Solomon Islands, and the International Chamber of Shipping).

All these proposals involve part of the funding going directly toward rewarding low or zero-emissions ships and voyages. There are significant differences in the level of detail between the proposals, the design and complexity of the schemes, and suggested (if any) amount of the levy.

The IMO can implement one or a combination of these measures. It also could formulate a different design that might not even involve emissions trading or a carbon tax, such as mandatory energy efficiency standards enforced by tradeable certificates, as proposed by the US.

Aviation’s Head Start

When considering what the maritime industry might do, it’s worth looking again at the aviation industry. A global carbon pricing regime has existed for the aviation sector since 2016, namely the Carbon Offsetting and Reduction Scheme for International Aviation, or CORSIA. Participation in the scheme will become mandatory for flights, with very few exceptions, starting in 2027.

This system doesn’t put a price on carbon per se, but instead requires airlines to offset their emissions through the purchase of credits. One credit represents one metric ton of reduced or removed carbon dioxide or other greenhouse gas equivalent, and the underlying activity can take place outside of the aviation value chain.

CORSIA maintains a list of the types of credits that it will recognize per compliance period in relation to their issuing body, which can be either a public or private entity: for example, a national government such as China’s GHG Voluntary Emission Reduction Program, or a private standard such as the gold standard and Verra.

As long as credits are considered eligible, the price at which they were acquired isn’t relevant. This provides regulated entities with a significant level of control over the ultimate compliance costs, but in parallel, compels them to enter and operate in a new marketplace dedicated to carbon offsets.

Unlike the EU ETS, this market has a global reach with little or no regulatory oversight. However, this is expected to change. More countries are starting to make policy interventions, and a global carbon market framework is emerging under the Paris Agreement. It remains to be seen whether the IMO will follow the lead of CORSIA and include offsetting in its carbon pricing design.

How Much Is at Stake

The three carbon pricing design options outlined above—cap-and-trade, tax, and offsetting—can lead to vastly different levels of financial exposure. If the IMO opts for a carbon tax or levy, levels can be set as desired, and some proposals are reaching new heights ($637 per metric ton by 2040 in Japan).

For emissions trading schemes, authorities have some influence over the price and can introduce corrective measures, such as with price floors and ceilings. But the marketplace essentially determines the price, and as of September 2023, the EU ETS price is approximately $90. In voluntary carbon markets, the cost of an offset is the result of its attributes, including geography where the project was developed, type of technology, and standard that issued the offset.

In a recent report, the World Bank indicated that carbon pricing in international shipping could raise between $1 trillion and $3.7 trillion by 2050, and that this revenue should support shipping decarbonization, enhancing maritime transport infrastructure and broader climate aims.

Regardless of the route chosen by the IMO, it’s essential for shipping companies to understand the role of carbon markets—especially the role they can play in reducing the emissions footprint of voyages as “companies want to buy decarbonized shipping now.”

Trading in carbon offsets requires careful consideration and understanding of their complex legal, tax, and accounting nature, how policy trends impact their monetary value, public perception of offsets, and the potential related mandatory and voluntary claims.

Simos Simou 

Senior Manager, Indirect Tax | EY Cyprus 

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EU | Compliance obligations for EU CBAM

On 1 October 2023, the transitional period of the Carbon Border Adjustment Mechanism (CBAM) entered into force. During the transitional phase, importers, their representatives and brokers and certain other parties in the supply chain are required to adhere to several compliance and reporting requirements that may vary depending on the Member State of importation.
 

Simos Simou

Senior Manager, Indirect Tax | EY Cyprus 

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Central Electronic System of Payment information (CESOP): Less than a month to go

The Council Directive (EU) 2020/284 alongside Council Regulation (EU) 2020/283 introduced new recording and reporting obligations for Payment Service Providers (PSPs) providing payment services within the EU, applicable as of 1 January 2024. In Cyprus, it is expected that an implementing legislation will be enacted in the coming weeks.

The new regulations are designed to tackle VAT fraud, enabling national authorities of each Member State to perform investigations. The information collected by different Member States will then be exchanged between them and centralized in a European database, Central Electronic System of Payment information (CESOP). This data exchange will enable tax authorities to detect potential VAT fraud, by identifying sellers behind websites or marketplaces.
 

Georgios Mavroyiakoumos

Assistant Manager, Indirect Tax | EY Cyprus 

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Change to Social Insurance

Social Insurance Contribution Rates
As of year 2024, the Social Insurance Contribution rates for both of the employer and the employee are increased by 0,5% and for self-employed individuals by 1%. The below table summarizes the contribution rates which are applicable for the year 2024:

Maximum limit of emoluments

As of year 2024 the below maximum amount of emoluments are applicable for Social Insurance Contribution purposes:

Social Cohesion Fund

An employer is liable to pay a social cohesion fund contribution of 2% on the amount of the emoluments of his employees (without any restriction as to the amount of the emoluments).

Herodotos Hadjipavlou

Manager, Global Compliance & Reporting | EY Cyprus

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