TaxLegi 26.02.2021

Executive summary

On 12 February 2021, the Cypriot Tax Department issued an announcement which lists the 10-year government bond yield rates as at 31 December 2020 for a number of countries (listed on the table below) with respect to the Notional Interest Deduction (NID) on equity. These yield rates are to be used to determine the reference interest rate for claiming NID for the 2021 tax year. The key NID provisions and the applicability of the 10-year government bond yield rates are summarized below.

Detailed discussion

Notional Interest Deduction

As of 1 January 2015, Cyprus tax resident companies (as well as foreign companies with permanent establishments in Cyprus), which carry on a business, are entitled to claim a NID on their equity capital introduced on or after 1 January 2015.

The NID is deducted from the taxable income of the company for the relevant tax year (subject to any restrictions) for the period of time during which the equity is used by the company for the carrying on of its activities. The NID is subject to a number of conditions, including a taxable income limitation.

The NID equals the multiple of the “reference interest rate” (as defined below) and ‘’new equity.’’

“Reference interest rate” means the 10-year government bond yield as at 31 December of the year preceding the tax year of the country in which the new equity is invested increased by 5%.

10-year government bond yield rates as at 31 December 2020 (applicable for 2021 tax year)

Philippos Raptopoulos - Partner, Head of Tax and Legal Services

Petros Krasaris – Partner, International Tax and Transaction Services

Petros Liassides - Partner, Tax Services

Myria Saparilla - Associate Partner, Tax Services

On 3 February 2021, the Cypriot Tax Department (CTD) issued an announcement which provides for an extension of the deadlines for the submission of 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 Directive is yet to be transposed into the Cypriot Law on Administrative Cooperation in the field of Taxation. As a consequence of the delay in the transposition, certain deadlines under the Directive have already expired. Accordingly, the CTD has announced the extension of the deadlines for the submission of reports under DAC6 until 31 March 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 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 had to be submitted by 31 January 2021.
• Reportable cross-border arrangements made between 1 January 2021 and 28 February 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 made available for implementation or were ready for implementation or when the first step in the implementation has been made, whichever occurred first.
• Reportable cross-border arrangements for which secondary intermediaries provided aid, assistance or advice, between 1 January 2021 and 28 February 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 aid, assistance or advice.

Practically, this means that for all reportable cross-border arrangements that will be made (i.e., that will be made available for implementation or will be ready for implementation or the first step in the implementation will be made or for which aid, assistance or advice will be provided by a secondary intermediary) as of 1 March 2021 onwards, information will need to be submitted to the CTD for DAC6 purposes within 30 days from the date of the specific triggering event that applies.

As per the same announcement, the CTD also clarified that the Directive is expected to be transposed into the national legislation in February 2021.

On 5 January 2021, the CTD issued two previous announcements on DAC6.

The first announcement referred to the opening of the registration process for intermediaries and relevant taxpayers to the “Ariadne” government portal for DAC6 purposes.

The second announcement referred to the definition of a reportable cross-border arrangement, the information that should be disclosed for DAC6 purposes, the reporting deadlines in Cyprus, as well as provided guidance on the submission of DAC6 XML reports through the “Ariadne” portal.

Petros Krasaris – Partner, International Tax and Transaction Services

Panayiotis Tziongouros - Director, International Tax and Transaction Tax Services

Stavros Karamitros - Assistant Manager, International Tax and Transaction Tax Services

On 28 January 2021, the Commissioner of Taxation notified the institute of Certified Public Accountants of Cyprus (“ICPAC”) that the deadline for the payment of Special Defence Contribution on deemed dividend distributions (Code 0623) for the tax year 2018 is extended by three months, from 31 January 2021 to 30 April 2021, without the imposition of penalties/ interest.

In his letter to ICPAC, the Commissioner of Taxation explained that the extension is given as a result of the Covid-19 pandemic and of certain ambiguities that exist. It is our understanding that these relate to the tax treatment of certain financial reporting matters which may impact the determination of profits that are subject to the deemed dividend distribution rules.

Furthermore, a relevant amendment in the Special Defence Contribution Law which provides for the extension, was published in the Official Gazette of the Republic on 9.2.2021. 

Lastly it is noted that the extension also applies in respect of contributions towards the General Healthcare System (‘’GHS’’) that are due as a result of deemed dividend distributions (Code 0723) for the tax year 2018.

Philippos Raptopoulos - Partner, Head of Tax and Legal Services

Petros Liassides - Partner, Tax Services

Myria Saparilla - Associate Partner, Tax Services

Executive summary

Cyprus’ Double Tax Treaty network has been further expanded with two new tax treaties concluded with Egypt and Kazakhstan. In addition, a Protocol for

amending the existing tax treaty with Russia is now effective.

This article summarizes the key provisions of the new tax treaties and the amending protocol which are in effect as of 1 January 2021.

Detailed discussion

Treaty with Egypt

The treaty with Egypt (the Treaty) provides for a 5% withholding tax on dividends if the beneficial owner of such dividend is a company (other than a partnership) which holds directly at least 20% of the capital of the company paying the dividends throughout a 365-day period that includes the day of the payment of the dividend. In all other cases, the withholding tax rate is 10% of the gross amount of the dividends paid, assuming the recipient is the beneficial owner of the dividends.

In the event that a foreign enterprise of one Contracting State has a permanent establishment (PE) in the other contracting/source state, the Treaty gives the right to the source state in which a PE exists to impose a 5% withholding tax on the profits remitted to the foreign head office of a PE.

Moreover, the Treaty provides for a 10% withholding tax on the gross amount of royalties and interest paid provided that the recipient is the beneficial owner of such income.

In general, capital gains are taxable only in the Contracting State in which the alienator is resident, except for gains relating to immovable property and gains from the alienation of movable property of a PE for which the source jurisdiction maintains taxation rights.

However, capital gains arising to a resident of a Contracting State from the sale of shares or any other comparable interests in real estate rich companies (i.e., deriving more than 50% of their value, directly or indirectly, from immovable property), at any time during the 365 days preceding the sale, may also be taxed in the source state. Moreover, gains derived by a resident of a Contracting State from the sale of shares, comparable interests, securities or other rights (other than those mentioned above for real estate rich companies) of a company which is a resident of the other Contracting State may be taxed in that other Contracting State if the alienator, at any time during the 365 days preceding such sale, held directly or indirectly at least 20% of that company.

The above provisions do not apply to the sale of shares listed on an approved stock exchange.

Article 28 of the Treaty includes a principal purpose test whereby a benefit under the Treaty shall not be granted in respect of an item of income or capital if it is reasonable to conclude, considering all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the objective and purpose of the relevant provisions of the Treaty.

The Treaty also includes an article on taxation of offshore activities in connection with the exploration or exploitation of the seabed and subsoil and their natural resources (including the installation and exploitation of pipelines and other installations under or above the surface of the sea) which overrides any other provisions of the Treaty. The inclusion of such article is very important for both countries given the recent discovery of significant oil and gas reserves in their respective exclusive economic zones.

The Treaty between Cyprus and Egypt is effective as from 1 January 2021 for both countries and replaces the Cyprus-Egypt Income Tax Treaty (1993).

Treaty with Kazakhstan

The treaty with Kazakhstan (the Treaty) provides for a 5% withholding tax on dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 10% of the capital of the dividend paying company. In all other cases, the withholding tax rate is 15% of the gross amount of the dividends paid.

In the event that a foreign enterprise of one Contracting State has a PE in the other contracting/source state, the Treaty gives the right to the source state in which a PE exists to impose a 5% withholding tax on the profits remitted to the  foreign head office of a PE.

Moreover, the Treaty provides for a 10% withholding tax on the gross amount of the interest if the recipient is the beneficial owner such interest. However, if the beneficial owner of such interest is the Government or a political subdivision, a central or local authority, the Central Bank or any other financial institution wholly owned by the Government, no withholding tax should apply. The Treaty also provides for a 10% withholding tax on the gross amount of royalties if the recipient is the beneficial owner of such royalties.

In general, capital gains are taxable only in the Contracting State in which the alienator is resident, except for gains relating to immovable property and gains from the alienation of movable property of a PE for which the source jurisdiction maintains taxation rights. However, capital gains arising to a resident of a Contracting State from the sale of shares (except

shares listed on an approved stock exchange) or comparable interests in the capital of real estate rich companies (i.e., deriving more than 50% of their value, directly or indirectly, from immovable property) may also be taxed in the source state.

Article 29 of the Treaty includes a principal purpose test whereby a benefit under the Treaty shall not be granted in respect of an item of income if it is reasonable to conclude, considering all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the objective and purpose of the relevant provisions of the Treaty.

The Treaty also includes an article on taxation of offshore activities in connection with the exploration or exploitation of the seabed and subsoil and their natural resources (including the installation and exploitation of pipelines and other installations under or above the surface of the sea) which overrides any other provisions of the Treaty.

The Treaty between Cyprus and Kazakhstan is effective from 1 January 2021 for both countries. However, the provisions of Article 27 (Assistance in collection) shall not have effect until Cyprus confirms through diplomatic channels that it is able to provide such assistance under its domestic law.

For more information on the Treaty with Kazakhstan, see EY Global Tax Alert, Cyprus-Kazakhstan double tax treaty enters into force, dated 23 January 2020.

Protocol to existing treaty with Russia

The Protocol revises the provisions of Article 10 of the treaty with Russia (the Treaty) and provides that the standard/ordinary withholding tax rate on dividends is 15% (previously 10%) provided the recipient of the dividend income is the beneficial owner of such dividend. The withholding tax rate is reduced to 5% if the recipient is a resident of the other Contracting State and the beneficial owner of such dividends and is one of the following:

a) An insurance undertaking or a pension fund;

b) A company whose shares are listed on a registered stock exchange provided that the recipient holds directly at least 15% of the capital of the dividend paying company for at least 365 days and at least 85% of the recipient’s voting shares are in free float (i.e. publicly traded);

c) The Government or a political subdivision or a local authority;

d) The Central Bank.

Moreover, the Protocol revises the provisions of Article 11 of the Treaty and provides that the standard/ordinary on interest is 15% if the recipient is the beneficial owner of such interest (previously there was no withholding tax). However, the Protocol provides for reduced withholding tax rates as explained below.

There is no withholding tax on interest paid to a resident of the other Contracting State, who is the beneficial owner of the interest, if:

A) The beneficial owner is one of the following:

• An insurance undertaking or a pension fund;
• The Government of a Contracting State or a political subdivision or a local authority thereof;
• The Central Bank of that Contacting state;
• A bank.

Or

B) The interest is paid in respect of government bonds, corporate bonds or Eurobonds, which are listed on a recognized stock exchange.

Moreover, the withholding tax rate is reduced to 5% if the recipient is the beneficial owner of the interest and is a company resident of the other Contracting State whose shares are listed on a recognized stock exchange provided that the recipient holds directly at least 15% of the capital of the company paying the interest for at least 365 days and at least 85% of the recipient’s voting shares are in free float (i.e. publicly traded).

The Protocol between Cyprus and Russia is effective as from 1 January 2021 for both countries.

Other developments

During 2020, Cyprus initialed an amending protocol to the treaty with Germany and signed an amending protocol to update the treaty with Switzerland. The amending protocol between Cyprus and Switzerland has not yet entered into force.

Petros Krasaris - Partner, International Tax and Transaction services 

Elina Papaconstantinou - Manager, International Tax and Transaction Tax Services

On 25 January 2021, the Tax Department issued Application Guidance No. 07/2021 which relates to tax residency and permanent establishment considerations in the context of the COVID-19 pandemic.

Application Guidance No. 07/2021 confirms that the provisions stipulated in the Application Guidance No. 04/2020 (issued on 27 October 2020) continue to proportionately apply in the year 2021 for as long the global special measures relating to COVID-19 pandemic are in force.

Please refer to the Tax Alert issued by EY, dated October 2020 for more information.

Philippos Raptopoulos - Partner, Head of Tax and Legal Services

​Petros Liassides - Partner, Tax Services

Myria Saparilla - Associate Partner, Tax Services

Michalis Karatzis - Manager, Tax Services

Executive summary

On 22 February 2021, the Council of the European Union (the Council) updated the European Union (EU) list of non-cooperative jurisdictions for tax purposes (the EU List). Annex I (the so-called “black” list) of the EU List now includes American Samoa, Anguilla, Dominica, Fiji, Guam, Palau, Panama, Samoa, Seychelles, Trinidad and Tobago, the US Virgin Islands and Vanuatu. This follows from the removal of Barbados and addition of Dominica. As regards Annex II of the EU list (the so-called “gray” list) and the state of play of pending commitments, the Council decided to extend several deadlines for these commitments. Also, the Council decided to remove three jurisdictions (Morocco, Namibia and Saint Lucia) and to add Jamaica to Annex II. Australia, Barbados, Botswana, Eswatini, Jamaica, Jordan, Maldives, Thailand and Turkey are the nine jurisdictions listed on Annex II.

The Council will continue to review and update the EU List biannually, with the next update due in October 2021.

Detailed discussion

Background

The EU started working on the list of non-cooperative jurisdictions for tax purposes in 2016. On 5 December 2017, the Council published the first EU list of non-cooperative jurisdictions for tax purposes, comprised of two annexes. Annex I (the so-called “black” list) includes jurisdictions that fail to meet the EU’s criteria by the required deadline, and Annex II (the so-called “gray” list) includes jurisdictions that have made sufficient commitments to reform their tax policies but remain subject to close monitoring while they are executing on their commitments. Once a jurisdiction has executed on all of its commitments, it is removed from Annex II. The initial list of Annex I included 17 jurisdictions that were deemed to have failed to meet relevant criteria established by the European Commission. Since the release of the EU List, there have been multiple changes to its composition based on recommendations made by the Code of Conduct Group for Business Taxation. Such changes may occur if for example new jurisdictions or regimes are identified and analyzed by the EU Code of Conduct Group, or if jurisdictions already on the EU List are re-assessed. A de-listing for both Annex I and Annex II is considered justified in light of an expert assessment if it is established that the jurisdiction now meets all the conditions posed by the EU Code of Conduct Group.

The European Commission has also adopted the first countermeasures on listed non-cooperative tax jurisdictions by the adoption of a Communication in March 2018 that sets new requirements against tax avoidance in EU legislation governing, in particular, financing and investment operations. The said Communication aims to ensure that EU external development and investment funds cannot be channeled or transited through entities in jurisdictions listed on Annex I. Moreover, the Council released in 2019 additional guidance on defensive measures towards non-cooperative jurisdictions, but also on notional interest deduction regimes and the treatment of partnerships under criterion 2.2 (existence of tax regimes that facilitate offshore structures which attract profits without real economic activity) for screening jurisdictions. In accordance with the guidance on defensive measures mentioned above, Member States are committed, as of 1 January 2021, to use Annex I in the application of at least one of four specific legislative measures:

• Non-deductibility of costs incurred in a listed jurisdiction
• Controlled foreign company rules
• Withholding tax measures
• Limitation of the participation exemption on shareholder dividends

Many Member States have already moved forward with the adoption or draft legislation of such defensive measures, with Luxembourg, the Netherlands and Germany being recent examples.

Revised EU List

On 22 February 2021, the Council held a foreign affairs meeting during which the Ministers adopted the conclusions on the revisions of the EU List (the conclusions).

The Council adopted a revised Annex I of the EU List by adding Dominica and by removing Barbados, after Barbados passed the necessary reforms to improve its tax policy framework. As noted above, the revised Annex I of the EU List now includes 12 jurisdictions: American Samoa, Anguilla, Dominica, Fiji, Guam, Palau, Panama, Samoa, Seychelles, Trinidad and Tobago, the US Virgin Islands and Vanuatu.

According to the Council press release on the revised EU List, Dominica has been included in Annex I as it received a ”partially compliant” rating from the Global Forum and has not yet resolved this issue. Barbados was added to Annex I in October 2020 after it received a ”partially compliant” rating from the Global Forum. It has now been granted a supplementary review by the Global Forum and has therefore been moved to Annex II pending the outcome of this review.

The Council also amended the list of jurisdictions included on Annex II of the EU List which covers jurisdictions that have made sufficient commitments to reform their tax policies, but which remain subject to close monitoring while they are executing on these commitments. Accordingly, the Council decided to remove Morocco, Namibia and Saint Lucia from Annex II as they have fulfilled all their commitments. Jamaica has been added as it has committed to amend or abolish its harmful tax regime (special economic zone regime) by the end of 2022. The Council also decided to extend several deadlines of pending commitments with regards to Annex II. Australia and Jordan have been granted an extension of the deadline for fulfilling their commitments while the assessment of their reforms by the Organisation for Economic Co-operation and Development (OECD) Forum on Harmful Tax Practices is pending. Maldives has been given four additional months to ratify the OECD Multilateral Convention on Mutual Administrative Assistance.

Turkey, which is currently listed on Annex II, was not moved to Annex I of the EU List despite failing to make material progress in the effective implementation of the automatic exchange of information with all EU Member States. In its conclusions, the Council requested Turkey to solve all open issues regarding the effective exchange of information with all Member States within the following deadlines:

• Turkey should fully commit on a high political level by 31 May 2021 to effectively activate its automatic information exchange relationship with the six remaining Member States by 30 June 2021.
• For all 27 Member States, the information for fiscal year 2019 has to be sent no later than by 1 September 2021 and the information for fiscal years 2020 and 2021 has to be sent according to the OECD calendar for the automatic exchange of information and in any case no later than by, respectively, 30 September 2021 and 30 September 2022.
• If Turkey fails to comply with any of the five above-stated deadlines, the conditions for Turkey to be listed on Annex I with one of the next updates would be met.

Next steps

The Council will continue to periodically review and update the EU List, taking into consideration the evolving deadlines for jurisdictions to deliver on their commitments and the evolution of the listing criteria that the EU uses to establish the EU List. Up until 2019, the EU List was regularly updated without a set schedule, to reflect the reforms undertaken by third countries. However, from 2020, Member States have agreed that the EU List will be updated no more than twice a year, to ensure a more stable listing process, business certainty and so that Member States can effectively apply defensive measures against listed jurisdictions. The next revision to the EU List is expected in October 2021.

In its 15 July 2020 Communication, the European Commission made concrete proposals for enhancing tax good governance in the EU as well as externally. The proposals included, among others, a reform of the Code of Conduct mandate as well as a review of the EU List to ensure that it is still effective and able to address today’s challenges. Also, in November 2020, the Council approved conclusions on fair and effective taxation with which the Council expressed its support on the discussion regarding the revision of the Code of Conduct mandate. For now, Member States have concluded they will pause their discussions and “continue to discuss the scope of the mandate as soon as there are relevant developments at international level.” In any case, the Member States will continue their negotiations no later than by the beginning of 2022. The aim for these negotiations is to result in changes in the criteria used for the EU Listing, which could result in the inclusion of minimum tax notions in the criteria.

Implications

Companies with activities in jurisdictions listed as non-cooperative are advised to understand the implications of a jurisdiction being included on Annex I, including:

Reporting obligations which arise from the mandatory disclosure rules (MDR) contained in Directive 2011/16/EU as amended by Council Directive (EU) 2018/822 (MDR Directive or DAC6), which inter alia require the disclosure of cross-border arrangements that involve deductible cross-border payments when the recipient of the payment is tax resident in a jurisdiction included on the EU List of non-cooperative jurisdictions for tax purposes.

Member States may consider applying one or more defensive measures, including both taxation measures and measures outside the field of taxation, aimed at preventing the erosion of their tax bases. These may include measures such as non-deductibility of costs, enhanced controlled foreign company rules or withholding tax measures, among others.

As the work on the EU List is a dynamic process, companies should continue to monitor developments closely, including the introduction of defensive measures towards non-cooperative jurisdictions by other Member States.

Petros Krasaris - Partner, International Tax and Transaction