TaxLegi 26.01.2021

Join EY Cyprus’ upcoming webcast: COVID-19: How new restructuring frameworks could help companies compete in the post-Covid era?  on Thursday, 11th February 2021 from  12 – 1 pm.

EY Cyprus’ experts of People Advisory and Legal Services will shed light on arising workforce implications and guide you through your business’ transformation journey during our novel webcast series. Please register here.

During the past two decades, organizations have never experienced so many challenges as they did during the past year when COVID-19 pandemic changed every aspect of human lives. Especially in the world of work, individuals are asked to adopt into a new norm of home office and businesses are obliged to shift their operations into a hybrid work environment.

Leaders encounter strategic dilemmas when it comes to be agile in volatile times and most importantly, how to get their workforce stick t­­hrough this extreme COVID-19 scenario plan. Consequently, people management must be considered as one of the most crucial strategic components of a business. People management programs should involve, among others, initiatives that elevate the well-being, increase motivation, preserve productivity, ensure fairness for all parties involved, and account for all legal issues that may emerge.

Before any business scenario is implemented, leaders should be certain that the journey they have selected will be feasible under legal, human and organizational aspects. Decision-makers should thoroughly design a framework which can survive not only the present but also the post-COVID era.

Panayiotis Thrasyvoulou, Associate Partner, People Advisory Services 

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The beginning of 2021 marks more than one year from the date when the first draft version of the Cypriot law implementing the European Union (EU) Directive 2018/822 on the mandatory disclosure and exchange of information on reportable cross-border arrangements (referred to as “DAC6/MDR” or “the DAC6 Directive”)  was published by the Cypriot Tax Department back in October 2019. A lot has changed since then.

The draft law has been placed under public consultation between 22 October and 12 November 2019 and then there has been a long period of stakeholders’ discussions and minor amendments to the wording of the draft law until the beginning of 2020, when the COVID-19 pandemic entered our lives.

Since then, on 27 July 2020, the Cypriot Tax Department issued an official announcement confirming that Cyprus has adopted a six-month deferral related to the DAC6 Directive. This announcement followed the adoption of the Directive[1] on 24 June 2020, by the Council of the EU, allowing EU Member States an option to defer, for up to six months, the time limits for the filing and exchange of information on cross-border arrangements under DAC6 due to the COVID-19 pandemic.

We have now entered, as of 1 January 2021, the live 30-day reporting period of DAC6/MDR, while reporting for the 6-month deferral period (i.e., from 1 July 2020 to 31 December 2020) has also commenced and is due by 31 January 2021.

In light of the above, please see below for an update on the current developments with respect to the Cypriot DAC6/MDR law, guidance notes and XML schema for reporting in Cyprus.

Cypriot DAC6/MDR law

The Cypriot DAC6/MDR law has been recently legally vetted after some final amendments and is now expected to be discussed within the following days in the session of the Parliamentary Committee of Economic Affairs and voted at the next plenary session of the Cypriot Parliament at the beginning of February 2021. The final Cypriot DAC6/MDR law will amend the existing Cypriot Law on Administrative Cooperation in the field of Taxation (Law 205(I)/2012).

Cypriot DAC6/MDR guidance notes

It is expected that the Cypriot DAC6/MDR guidance notes (in the form of an administrative decree) will be issued shortly after the enactment of the final Cypriot DAC6/MDR law (possibly within February 2021 if not later).

Cypriot XML reporting schema

The Cypriot Tax Department has recently (Tuesday, 5 January 2021) issued two announcements (“Registration of Intermediaries and Relevant Taxpayers to the DAC6 government portal” and “DAC6 – General information”) regarding:

i) the registration process which is now open for intermediaries and taxpayers to submit reports to the DAC6 government portal (i.e., to the “Ariadne” portal). The announcement specifies that since DAC6 Directive has not yet been transposed into Cypriot law, the reporting of potentially reportable cross-border arrangements can be done on a voluntary basis until it becomes mandatory upon the enactment of the relevant DAC6 legislation in Cyprus.

ii) general information with respect to the definition of reportable cross-border arrangement, the information to be reported under DAC6 and the reporting deadlines, where it is also specified that reporting will be done through the form of XML schema and a link is provided with further information on the reporting process including the files which are relevant for reporting purposes (including notably the EU DAC6 XSD User Guide of March 2020 and the Cypriot XML sample/output file, which is actually the Cypriot XML reporting schema form).

Please note, at this point, that the Cypriot XML schema is almost the same with the EU DAC6 Schema (it has been actually based on the EU DAC6 Schema) and this is why the Cypriot Tax Department has not issued a (separate) XSD User Guide for the Cypriot XML schema so far, but has instead published the one issued by the EU Commission services on March 2020.

There is also additional information included in the aforementioned announcement on a specific difference between the EU DAC6 Schema and the Cypriot XML schema, according to which, despite the fact that the fields ‘Arrangement ID’ and ‘Disclosure ID’ are compulsory fields in the EU DAC6 Schema, such fields should remain ‘blank’ in the initial report to be filed, i.e., the ‘Arrangement ID’ and the ‘Disclosure ID’ fields will be issued by the Cypriot Tax Department and will be communicated to the intermediary/relevant taxpayer via email, in order to be used in case of correction of a report or re-submission of a report for the same reportable cross-border arrangement to the Cypriot Tax Department.

What’s next

Given the absence of legislative basis for DAC6/MDR in Cyprus at the moment, it would not be advisable/recommended for intermediaries/relevant taxpayers to proceed with submitting reports to the Cypriot Tax Department (i.e., on a voluntary basis).

However, it is recommended that all Cyprus-based intermediaries with clients engaged in cross-border activities register from now as ‘Intermediaries’ in the “Ariadne” portal to be ready for the actual submission of reports to the Cypriot Tax Department.

For this purpose, the credentials obtained through the registration to the “Ariadne” portal for CRS/FATCA purposes (if a Cypriot financial institution intermediary/relevant taxpayer is already registered thereto in the past, for instance a bank or an investment fund) can be used. If this is not the case, Cyprus-based intermediaries or relevant taxpayers should obtain new credentials (i.e., “CY login”) from the system in order to be logged into the portal.

Moreover, relevant taxpayers with either a tax residency, permanent establishment, or other economic activity in Cyprus, may also need to consider proceeding with the registration of themselves (in case of natural persons) or their (group) companies (in case of legal persons) as relevant taxpayers in the “Ariadne” portal, in order to be prepared, given that reporting will eventually take place.

However, this will be mainly needed in cases where relevant taxpayers do not generally use the services of external intermediaries (e.g., tax advisors, lawyers, asset managers, corporate administrative service providers, etc.) for their tax structuring and planning, wealth management, investment planning, etc., but either operate through dedicated in-house (tax) departments or teams.     

In light of the above, it should be noted that the process and the links for DAC6/MDR reporting purposes in the “Ariadne” portal are different than the ones already used for CRS/FATCA (according to DAC2 Directive) and Country by Country Reporting (CbCR) (as per DAC4 Directive) purposes.

As a last note, further developments and announcements should be expected from the Cypriot Tax Department’s side with regard to the submission of reports and the application of penalties (i.e., a “grace period” for penalties is expected to granted), given the absence of final law and guidance with regard to DAC6/MDR for the time being and the upcoming reporting deadlines of 31 January and 28 February 2021, as well as the 30-day reporting deadline which is now live.  

How can EY Cyprus help

For further information on the above or any assistance needed in respect of DAC6/MDR, Ernst & Young Cyprus Limited can assist you in various ways.

In particular, we can offer tailored-made DAC6/MDR training sessions/workshops for your organisation and employees, assessment of DAC6/MDR impact on your business, provision of ad-hoc DAC6/MDR advisory support, licensing of DAC6/MDR technology solutions for documentation and reporting of potentially reportable cross-border arrangements to the Cypriot Tax Department and provision of ‘Reporting as a Service’ services, i.e., provision of support with regard to the registration and identification process to the “Ariadne” portal and submission of DAC6/MDR XML reports (including ad-hoc technical review of such reports, if requested) on behalf of your company or your clients to the Cypriot Tax Department. 

[1] Council Directive (EU) 2020/876 of 24 June 2020 amending Directive 2011/16/EU to address the urgent need to defer certain time limits for the filing and exchange of information in the field of taxation because of the COVID-19 pandemic.

Stavros Karamitros, Assistant Manager, International Tax and Transaction Services

Capital Gains Tax (“CGT”) is levied at a rate of 20% only with respect to capital nature profits realized upon the disposal of:

• immovable property situated in Cyprus;
• shares in companies the property whereof includes immovable property situated in Cyprus;
• shares in companies which either directly or indirectly participate in a company or companies which own immovable property situated in Cyprus and at least 50% of the market value of such shares is derived from the relevant property;
• a sale agreement of immovable property situated in Cyprus;

It is noted that the law provides that no CGT is due on any gain accruing from the disposal of shares listed in a recognised Stock Exchange.

As per Section 10 of the Capital Gains Tax Law, disposal of property includes a sale, sale by the Director of the Department of Land and Surveys or by the District Land Officer by public auction, sales agreement, assignment of rights deriving from a property sales contract, an exchange, a lease registered in accordance with the provisions of the Immovable Property (Tenure, Registration and Valuation) Law in force at the time being and a gift of property, as well as an abandonment of the use or enjoyment of any relevant right.

As per paragraph (b), Section 10 of the same law, disposal of property does not include a gift made from parent to child whether married or unmarried, between husband and wife or between relatives within the third degree of kindred, whether these persons are married or unmarried.

On 23 December 2020, an amendment in Section 10 of the CGT Law was published in the Official Gazette of the Republic, which provides that after the second reservation of paragraph (b), a new paragraph (b1) is added which in specifies that, a gift made from a foster parent to a foster child is also exempted from CGT. It is noted that foster parent and foster child have the same meaning as defined in the Children Law.

Marios Iacovou, Manager, Direct Tax

During mid-July 2020 and upon the near 10-year anniversary since the adoption of Directive 2011/16/EU on administrative cooperation in the field of taxation (“DAC”), the European Commission unveiled a directive proposal amending DAC (for the sixth time) with the upcoming ‘upgraded’ model, (hence the DAC7 moniker).

For anyone who is not familiar with the evolution of the DAC initiative, in the early 1980s there was an impetus for moving towards automatic exchange of information between tax authorities to compact fraud in the field of direct taxation—an area within the competence of Member States. As such, during 1977, Directive 77/799/EEC on Administrative Cooperation in Tax Matters came into force, providing for exchange of information on request/spontaneously, and for automatic exchange.

During 2000s, major progress in administrative cooperation took place within EU, with the Directive 2003/48/EC on taxation of savings income in the form of interest payments coming into force (the Savings Directive), aiming at reducing cross-border tax evasion, introducing an instrument at EU level for automatic exchange of information between tax authorities on non-resident individuals receiving income from savings in accounts outside their country of residence.

2011-2020: A decade of amendments

In 2011, Directive 2011/16/EU (aka the DAC1) was adopted (and was entered into force on January 2013) to better reflect the interconnected economy of the late 2000s, addressing the shortcomings of the old regime and replaced the previous directive. The objective for introducing the DAC was for ensuring ‘the efficient administrative cooperation between Member States to overcome the negative effects of the increasing globalization on the internal market’. The milestone reached with DAC in the history of administrative cooperation between tax authorities of EU Member States cannot be underestimated, as it extended and enhanced the cooperation of EU tax authorities aligning EU standards to the international ones set by the OECD and covering more (personal and corporate income) taxes whilst excluding VAT and custom/excise duties, which are already covered in a more harmonized EU instrument.

Since its implementation in 2013, DAC1 has been amended five times, all the more frequently in recent years and on an almost annual basis, mirroring the annual i-phone releases by Apple. The amendments are as follows:

• Directive (EU) 2014/107/EU - DAC2
• Directive (EU) 2015/2376 - DAC3
• Directive (EU) 2016/881 - DAC4
• Directive (EU) 2016/2258 as regards access to anti-money-laundering information by tax authorities – DAC5
• Directive (EU) 2018/822 as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements – DAC6*

*This was followed by Directive (EU) 2020/876 addressing the urgent need to defer certain time limits for the filing and exchange of information in the field of taxation because of the COVID-19 pandemic

DAC and its amendments provide a structured exchange of information both on request about any tax matter in the area of direct taxation as well as spontaneous requests considered as foreseeably relevant to another Member State. With a broader scope, new common electronic forms, a secured channel of communication, commonly agreed timelines and a support by Fiscalis budget, the competent tax authorities were provided with clarity and certainty.

During 2014, DAC2 widened the scope of automatic exchange of information to cover financial accounts, introducing the OECD Common Reporting Standard (CRS) to the EU framework. The adoption of DAC2 led also to a repeal of the 2003 Savings Directive.

 During 2015, DAC3 broadened the scope further, expanding automatic exchange to cover advance cross-border rulings and advance pricing arrangements (as a response to the 2014 financial scandal “LuxLeaks”. Ever since 2015, national tax authorities must, at least once a year and without prior request (i.e. automatically) provide their counterparts with the following mandatory information on five categories of predefined income and capital relating to residents in another EU country: income from employment, directors' fees, certain life insurance products, pensions, and ownership of and income from immovable property. This resulted in masses of information being collected regularly by tax authorities to have better background data to acknowledge the effects of double-tax treaties, hence ensuring correct tax assessment in two or more Member States. Yet, despite having been amended twice in a year’s time (i.e. in 2014 and 2015), DAC continued to evolve.

During 2016, DAC4 and DAC5 were introduced. DAC4 broadened the scope of automatic exchange of information, with the introduction of country-by-country reports. In late 2016, DAC5 was adopted and was composed of only one article (in effect as of January 2018), imposing a legal obligation for Member States to grant tax administrations access to beneficial ownership information as collected pursuant to Directive (EU) 2015/849, the EU’s anti-money laundering legislation.

Between 2017 and 2018, no further changes were introduced since it was time for the European Commission to evaluate DAC during the implementation stage of the amendments.

During mid-2018, DAC6 was adopted, which marks the fifth amendment to DAC1. DAC6 widened once more the scope of automatic exchange of information to cover cross-border arrangements and (paper) structures. The transposition of DAC6 into national law was due in mid-2020, however in light of the COVID-19 pandemic, Member States were allowed to opt for a deferral till early 2021 to have in place the national IT systems needed to enable DAC6 reporting, from taxpayers and/or tax intermediaries towards national tax administrations.

2021: DAC7 and multisided digital platforms

In late 2020, the EU Council reached a technical agreement on the exchange of information between EU tax authorities (the so-called DAC7), relating to income earned by EU and non-EU users/sellers on sharing and gig digital platforms, such as Amazon, e-Bay, Etsy, or even Facebook, which has its own marketplace and Airbnb. Specifically, DAC7 shall impact all platform operators facilitating either reportable domestic and cross-border commercial activities (i.e. rental of mode of transport, personal services, sale of goods, etc) of EU sellers, or the rental of immovable property located in the EU. Crowdfunding investment is outside the scope of DAC7. Information will be automatically exchanged on an annual basis via the EU common communication network. Such exchange of information between Member States can also be used for the administration, assessment and enforcement of VAT and other indirect taxes. Given the transactional nature of the information that is envisaged to be reported under DAC7, this clarification is helpful but not surprising.

Should the DAC7 proposal be adopted, Member States shall transpose DAC7 into national law by 2022, with the obligation to report for the first time the revenues generated by reportable sellers arising during the enforcement period, i.e. from 2023 onwards.

Conclusive remarks:

DAC and its amendments aligned the EU standards to the ones set by the OECD. However, the almost annual amendments for further transparency in the area of EU Direct and Indirect taxation serves as a reminder to the long-established truth: that the law is struggling to keep up with technology. Similar to the annual release of the I-phone by Apple, it is safe to suspect that the upcoming years shall bring further DAC amendments, as the law needs to address the tech advancements in the interconnected digital world we live and operate in nowadays

Frangeska Lampidoniti, Assistant Advisor - Business Tax Advisory Services

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