TaxLegi 30.06.2021

Following our alert issued on 20 May 2021, we note that the Minister of Labour, Welfare and Social Insurance, exercising the powers conferred to her by the relevant law, issued two Administrative Decrees (No. 212/2021 and No. 213/2021), which were published on 21 May 2020 in the Official Gazette of the Republic.

Administrative Decree No. 212/2021

As per the decree 212/2021, the Minister of Labour, Welfare and Social Insurance announces that the Settlement of Overdue Social Contribution Laws 2016 – 2021 (“the Law”) will apply to liabilities relating to the following:

I.  in relation to employers, it includes overdue contributions up until March 2021 (inclusive), which are payable by the end of April 2021;

ii. in relation to self-employed, it includes overdue contributions up to the fourth quarter of 2020 (inclusive), which are payable by 1st March 2021.

Administrative Decree No. 213/2021

As per the decree 213/2021, the Minister of Labour, Welfare and Social Insurance announces that individuals and companies, who wish to regulate their overdue contributions, may submit an online application (form SIS O.C.1) during the period 21 May 2021 – 20 September 2021.

We note that the overdue contributions can be settled in 54 monthly instalments. However, in the event that the applicant elects to pay the overdue contributions in a lump sum, they are released from the obligation to pay the full penalty imposed in respect of these contributions.

Additionally, in case the overdue contributions are paid in less than 54 monthly instalments, 1/54 of the amount of the penalty is waived for each month which is paid earlier than the 54 instalments (e.g. if the overdue social contributions are paid in 24 monthly instalments then 30/54 of the total amount of the penalty is waived).

The minimum amount of each monthly instalment is:

a)      for overdue contributions up to €500, the monthly instalment is €25

b)      for overdue contributions from €501 to €1.000, the monthly instalment is €50

c)      for overdue contributions in excess of €1.001, the monthly instalment is €75

In order for the regulation to be valid, in addition to the monthly instalments, all current due contributions must be timely paid. Current contributions are considered to be:

• for employers, the contributions as of the month of April 2021 (inclusive) onwards and,
• for self-employed, the contributions as of the first quarter of 2021 (inclusive) onwards.

It is noted that for the purposes of applying the Law:

• “overdue contribution” is the social contribution for which the deadline for settlement has expired.
• “social contribution” is the contribution which is payable in accordance with the Social Insurance Law, the Annual Leave with Remuneration Law, the Termination of Employment Law, the Social Cohesion Fund Law, the General Healthcare System Law and the contribution which is payable in accordance with Article 20 of the Human Resources Development Law.

Lastly, we note that the above-mentioned decrees are effective as of 21 May 2021.

EY Cyprus is at your disposal for any information or clarifications you may require as well as to assist you with the submission of an application for the regulation of overdue contributions.

Herodotos Hadjipavlou - Assistant Manager, Direct Tax

On 1 June 2021, the Kingdom of the Netherlands and the Republic of Cyprus signed the Convention for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance (treaty) in Nicosia. Cyprus was the last member of the European Economic Area with which the Netherlands did not yet conclude a double tax treaty.

The objective of the treaty between Cyprus and the Netherlands is to further strengthen cross-border cooperation and to promote cross-border investments. The wording of the treaty generally follows the model treaty of the Organisation for Economic Co-operation and Development (OECD) and contains the standard provisions to avoid double taxation of income and capital.

In order to implement the Base Erosion and Profit Shifting (BEPS) measures on dispute resolution and anti-tax avoidance, the treaty contains a Mutual Agreement Procedure (MAP) to resolve disputes (including dual tax residency of entities) and introduces a principal purpose test (PPT), which allows tax authorities to disallow the application of treaty benefits if the application of those benefits was one of the principal purposes of an arrangement or transaction.

It is noteworthy that the newly signed tax treaty will provide for full relief of withholding taxes on dividend payments to corporate investors, provided they hold directly at least 5% of the capital of the company paying the dividends throughout a 365-day period. This exemption also applies for certain recognized pension funds which are generally exempt under the corporate tax laws of the contracting jurisdictions. Combined with the 0% withholding tax rate for interest and royalties, the Cyprus-Netherlands tax treaty presents a beneficial legal framework for cross-border investments.

Currently, no official date has been published as to when the treaty will enter into force, since the legal framework first needs to be formally adopted by the Dutch Parliament. In the case of Cyprus, the ratification process has been completed. At the earliest, the treaty may come into force in 2022, but only if the ratification and notification procedures in both countries are completed prior to 1 December 2021.

Our team remains at your disposal for any additional information and support you may need.

Elina Papaconstantinou - Manager, International Tax and Transaction Tax Services

The Tax Department issued on the 17th of May 2021 Application Guidance 15/2021 (“Guidance”), which provides direction to tax payers in relation to the tax treatment of the impact on the Financial Statements upon adoption of the new accounting standards IFRS 9, IFRS 15 and IFRS 16.

The Guidance addresses relevant considerations both from an Income Tax (‘IT’) and Special Defense Contribution (‘SDC’) perspective, as analyzed below.

I.                 IFRS 9 – Financial Instruments

Income Tax treatment for Companies, other than credit institutions

The tax treatment which arises as a result of the adoption of IFRS 9 as of tax year 2018 (inclusive), should be as follows:

A.     Any write-offs of trade receivables incurred during the year should be treated as tax deductible on the basis that the taxpayer is in a position to prove that despite the actions taken to collect the said amounts, the specific receivables have become uncollectible and as such these were written-off;

B.     Specific provisions for doubtful trade receivables booked during the year should be treated as tax deductible, to the extent that the tax payer is in a position to prove that although all relevant courses of action have been taken to collect, there is still a significant difficulty in collecting the due amounts which renders the receivable doubtful;

C.      Any general provisions for doubtful trade receivables incurred during the year, should be treated as non-tax deductible;

D.     For the purposes of determining the taxable income as of tax year 2018 (inclusive):

                           i.          The provisions/ impairments of trade receivables recognised as a result of adopting IFRS 9 should be eliminated, up to the amount which does not relate to write offs/ specific provisions as mentioned in points (A) and (B) above;

                          ii.          Any amount recognized directly in the reserves upon initial adoption of IFRS 9, may be treated as tax deductible in any tax year during which the taxpayer can prove that although all relevant courses of actions were taken in order to collect the due amounts, there is still significant difficulty in collecting these.

As a result, taxpayers should maintain such records which support their claim that a provision against trade receivables is specific in nature.

Income Tax treatment for credit institutions

The adoption of IFRS 9 for Credit Institutions (‘FI’) should follow a different approach whereby:

A.     Any provisions of loans or advances, which have been categorised as Stage 1 or 2, should be treated as non-tax deductible;

B.     Any provisions of loans or advances, which have been categorised as Stage 3 or POCI (Purchase or originated financial assets that are credit impaired on initial recognition), should be treated as tax deductible;

C.     In case, there are transfers of loans or advances from stage 1 or 2 to stage 3 within a year, the cumulative provisions recognised on such loans or advances in prior years, should be treated as tax deductible in the said year;

D.     In case, there are transfers of loans or advances from stage 3 to stage 1 or 2 within a year, the cumulative provisions recognised on such loans or advances in prior years, should be treated as non-tax deductible in the said year;

E.     Any amount recognized as an initial provision of loans or advances, which have been categorised as Stage 3 or POCI, as at 1/1/2018 directly in the reserves upon initial adoption of IFRS 9, should be treated as tax deductible during the tax year 2018.

Tax treatment of the provisions/ impairment of receivables for the purposes of SDC on Deemed Dividend Distribution

The recognition of provisions/ impairments of receivables should not be considered as a revaluation for the purposes of Deemed Dividend Distribution (‘DDD’). In this respect, a provision/ impairment of receivables recognized in the accounting profit for the year in accordance with IFRS 9 will be accepted for the purposes of DDD and as such no adjustment should be made in the accounting profit in relation to the said provision/impairment.

Any amount recognised as a provision as at 1/1/2018 directly in the reserves upon initial adoption of IFRS 9 should be deducted from the accounting profits for the year 2018 for the purpose of DDD.

     II.          IFRS 15 – Revenues from Contracts with Customers

The tax treatment for the revenue that is accounted for under the provisions of the new IFRS 15 should follow the accounting treatment, both for income tax as well as for DDD purposes. Any adjustment made to the reserves as at 1/1/2018 shall need to be recognized in the profit for the year 2018, both for income tax and DDD purposes.

It should be relevant to note that in cases tax circulars, guidelines or administrative degrees have been issued by the Tax Department based on which the tax treatment of revenue recognition has been clarified therein, such guidance shall continue to apply, irrespective of the accounting treatment mentioned in IFRS 15 (e.g. Construction Contracts for developers).

    III.          IFRS 16 – Leases

Income tax treatment

For the purposes of determining the taxable income, the tax treatment applicable for leases up to tax year 2018 shall continue to apply despite the adoption of IFRS 16. As a result, any accounting entries made due to the adoption of IFRS16, should be adjusted for tax purposes.

The tax treatment for the Lessee should be as follows:

Operating Leases (as these are interpreted for the lessor): The amount of annual rent payable, which represents the annual rent expense incurred by the lessee for the use of the leased asset, should be considered as tax deductible.

Finance Leases (as these are interpreted for the lessor): The lessee should be entitled to claim capital allowances on the leased asset. Furthermore, the lessee should be entitled to claim the interest expense included within the lease payment as tax deductible.

Although the Guidance does not cover the Lessor, the tax treatment for the Lessor should be as follows:

Operating Leases: The amount of annual rent receivable, which represents the annual rental income for the lessor should be considered as taxable. Furthermore, the lessor should be entitled to claim capital allowances on the leased asset.

Finance Leases: The lessor should be taxable on the interest income included within the lease payment received.

Tax treatment for the purposes of SDC – DDD

The accounting profit of the year for the lessee as a result of the adoption of IFRS 16 shall be accepted for DDD purposes. In this respect, in relation to the accounting treatment of leases under IFRS 16, there will be no adjustment to the accounting profit for DDD purposes.

The adjustment made to the reserves of the lessee as at 1/1/2019 upon initial adoption of IFRS 16 shall need to be recognized in the accounting profit of the year 2019 for DDD purposes.

Although the Guidance is silent on the SDC – DDD implications for the lessor, in our view the above position should be applicable for the lessor as well.

Lastly, it is noted that for IFRS 9 and IFRS 15, the Guidance applies of tax years 2018 inclusive, whereas IFRS 16 applies as of tax year 2019 (inclusive).

EY Cyprus is at your disposal for any information and/or clarifications required.

Michalis Karatzis - Manager, Direct Tax   

 On 4 June 2021, the Cypriot Tax Department (CTD) issued an announcement regarding a further extension to 30 September 2021 of the non-application of administrative fines for submissions with respect to information on reportable cross-border tax arrangements under the European Union (EU) Directive on the mandatory disclosure and exchange of information (referred to as DAC6 or the Directive).

The CTD had issued an earlier announcement extending the non-imposition of administrative fines for DAC6 submissions until 30 June 2021. In its latest announcement, the CTD has now announced its intention to not impose administrative fines for submissions of information under DAC6 until 30 September 2021, for the following cases:

• Reportable cross-border arrangements that have been made (i.e., of which the first step of implementation has taken place) between 25 June 2018 and 30 June 2020 (i.e., within the transitional period of the Directive) and that had to be submitted by 28 February 2021.
• Reportable cross-border arrangements that have been made (i.e., that were made available for implementation or were ready for implementation or the first step in the implementation has been made or for which aid, assistance or advice has been provided by a secondary intermediary) between 1 July 2020 and 31 December 2020 (i.e., within the six-month deferral period of the Directive) and that had to be submitted by 31 January 2021.
• Reportable cross-border arrangements made or to be made between 1 January 2021 and 31 August 2021 (i.e., within the normal application period of the Directive) that had to be submitted within 30 days beginning on the day after they were/will be made available for implementation or were/will be ready for implementation or when the first step in the implementation has been/will be made, whichever occurred/will occur first.
• Reportable cross-border arrangements for which secondary intermediaries provided/will provide aid, assistance or advice, between 1 January 2021 and 31 August 2021 (i.e., within the normal application period of the Directive), and had to submit information within 30 days beginning on the day after they provided/will provide aid, assistance or advice.

Update of sample XML file regarding the “associated enterprises” field

The CTD’s announcement also includes information on an update of the Cypriot sample XML file with added fields for the associated enterprises of the relevant taxpayer [1] and related instructions on how these fields of the XML file should be completed.

In particular, the sample XML file posted on the CTD’s website has been updated with the addition of fields for the associated enterprises of the relevant taxpayer in cases where such associated person (i.e., direct shareholder of the relevant taxpayer) is either a physical person/individual, or a legal person/company, as well as where there is no such associated person to the relevant taxpayer.

Endnotes

[1] Article 7D(13)(a) of the Administrative Cooperation in the Field of Taxation Law L. 205(I)/2012, as amended.

Stavros Karamitros - Assistant Manager, International Tax and Transaction