Signing of the Protocol is a response to COVID19 fiscal challenges and opens a new era in Russia-Cyprus business relationships. As has been highlighted by Russian representatives, the level playing field will be maintained and similar changes will be made to the treaties with other countries in order to be effective also as of 1 January 2021. In a snapshot, Cyprus remains an attractive jurisdiction for institutional and regulated businesses as well as for a large number of investors, such as asset managers, family offices, private equity and others. Businesses are therefore encouraged to review and critically examine, in detail and at an early stage, their structures and arrangements in light of the new treaty provisions in an attempt to assess the level of impact and whether there is a need to take any actions.
On September 8th, 2020, the Republic of Cyprus and the Russian Federation signed the Protocol to amend the double tax treaty between the countries. The amendments to the Treaty should be effective as of January 1st, 2021 (provided both parties ratify the Protocol by the end of 2020).
The Russian Federation assured the Republic of Cyprus that the changes are purely fiscal measures and, moving forward, they would discontinue any actions aimed at terminating the Treaty and that, to maintain a level playing field, they would seek the same agreement with other countries and to also be effective on January 1, 2021.
The primary changes have been made concerning withholding tax on dividends and interest. Ordinary withholding tax rate under the Treaty is increased to 15 percent (provided the recipient is a beneficial owner of the dividend income). Reduced 5 percent withholding tax is applied, amongst others, to the following categories:
- If the beneficial owner of the dividends is a company whose shares are listed on a registered stock exchange provided no less than 15% of voting shares of that company are in free float and which holds directly at least 15% of the capital of the company paying the dividends throughout a 365 day period that includes the day of payment of the dividends, or
- If the beneficial owner of the dividends is an insurance undertaking or a pension fund.
As for withholding tax on interest payments
- Ordinary withholding tax rate under the Treaty is increased to 15 percent (provided the recipient is a beneficial owner of the interest income)
- Reduced 5 percent withholding tax is applied if the beneficial owner of the interest is a company whose shares are listed on a registered stock exchange provided that no less than 15 percent of voting shares of that company are in free float which holds directly at least 15 percent of the capital of the company paying the interest throughout a 365 day period that includes the day of payment of the interest.
- Reduced 0 percent withholding tax is applied, amongst others, to the following categories:
- Insurance undertakings or pension funds
The interest on government bonds, corporate bonds, Eurobonds listed on a registered stock exchange.
Philippos Raptopoulos, Partner, Head of Tax & Legal Services
There is almost a universal agreement that legislative changes to tax collection and reporting constitutes a powerful measure to tackle tax fraud and non-compliance. Consistent with this approach, the Cyprus Parliament has enacted on 31 July 2020 some important amendments to the Value Added Tax Law (L.95(I)/2000) aiming to tackle VAT fraud and improve tax collection. Key amendments include:
- Extending the obligation of taxable persons to self-account for Cypriot VAT by applying the reverse charge mechanism on services received, even from non-VAT registered domestic suppliers, in relation to construction, modification, demolition, repair or maintenance of a property (expansion of Article 11B).
- Introduction of new obligation for taxable persons to self-account for Cypriot VAT by applying the reverse charge mechanism on transactions concerning mobile phones, other devices operating in networks, microprocessors, central processing units, gaming consoles, tablets and laptops supplied by domestic suppliers and acquired by the taxable persons in the context of furtherance of a business (new Article 11E). This is effective as of 1 October 2020.
- Suspension of the right of a taxable person for VAT refund (together with applicable interest) if the taxable person failed to comply with the obligation to submit income tax returns (i.e. Company Income Tax Return (IR4), Self-Employed Income Tax Return (IR1) and Employer’s Return (IR7)).
Similar provision is included in Income tax law for tax refund and interest suspension in cases of VAT obligations non-compliance.
- In addition, the right of taxable persons to request VAT refunds is now limited to six years from the end of the VAT period in which the VAT refund arose. This can be extended for cases where evidence exist at the discretion of the Tax Commissioner.
- With effect from 01 July 2021, failure of taxable persons to correctly apply the domestic reverse charge provisions as per Articles 11, 11A, 11B, 11C, 11D, 11E or 12A will result in the imposition of a €200 one-off penalty per VAT return but will not exceed the total penalty amount of €4.000. In addition, the penalty for late submission of a VAT return increases from €51 to €100 for each lately submitted VAT return.
The above-mentioned legislative amendments introduce a new era to the battle against VAT fraud. The effectiveness of these measures is an interesting development worth monitoring. What is certain though is that the Cyprus VAT Law enters into a new and long-awaited anti-abuse role.
Kika Christodoulou, Assistant Manager, Indirect Tax Services
In early September the Cypriot Tax Department issued an announcement informing the public that the bilateral Competent Authority Agreement, “Country-by-Country (CbC) reporting”, between Cyprus and the US is still under negotiation. Upon its conclusion, it is expected that this will be effective for Reporting Fiscal Years starting on or after 01 January 2020. Consequently, a secondary filing obligation is triggered for Reporting Fiscal Years starting on or after 01 January 2019 but before 01 January 2020. Consequently, a Cypriot constituent entity whose ultimate parent entity is a US tax resident entity, will be required to proceed with a local filing of the CbC report in Cyprus for its Reporting Fiscal Year ending on 31 December 2019, even if a CbC report has or will be submitted in the US. Moreover, the submitted notifications pertaining to the period 1 January to 31 December 2019, need to be revised before 31 December 2020 in order not to be subject to any penalties.
For more information on this, please refer to our newsletter: https://globaltaxnews.ey.com/news/2020-6198-cyprus-tax-authority-issues-clarification-note-regarding-bilateral-caa-with-us
Antonis Dimitriou, Manager, Business Tax Compliance
While relocating to Cyprus has been a complicated endeavour for some time, the recent global pandemic has made things more challenging. The previous modus operandi was as follows: in the case of European Union citizens, there was the legal obligation to register with the Civil Registry and Migration Department, and for the Third-Country nationals to provide a whole array of documentation in relation to the individual and the hiring entity. However, in an effort by the government to keep all its residents safe from the new Coronavirus (COVID-19), things have changed and become increasingly more intricate.
As of now, as per the Cyprus Flight Pass (CFP), individuals who want to relocate to Cyprus must oblige to different COVID-19 related protocols based on their country of departure. All countries are categorized into groups (A, B, and C) according to their epidemiological situation. The lists is updated every week and may be found here: https://cyprusflightpass.gov.cy/en/country-categories. In broad terms, countries in category A have the most favourable epidemiological status, while countries in Category B have less favourable status and Category C with the least favourable status.
If one arrives from a Category A country, it is smooth sailing as no measures need to be taken other than completing the CFP. If instead, the individual arrives from a Category B country, aside from the CFP, the individual will also need to present a negative PCR results for COVID-19, performed by a certified laboratory during the last 72-hours. Finally - and this is where things get more complicated – anyone who arrives from a Category C country will need to apply for a Special Permit, which requires the individual to present sound arguments regarding the need to relocate and provide all relevant documentation.
With the ongoing pandemic, things are not what they used to be. New obstacles to employees’ and entrepreneurs’ mobility have emerged and it is imperative that companies and individuals are attentive and take all the appropriate steps to ensure smooth traveling and relocation to Cyprus. As EY Cyprus, our Immigration Team is here to guide you through your relocation process during these difficult times and keep you updated as developments are fluid.
Riginos Polydefkis, Senior Manager, Head of Immigration Services- People Advisory Services
Mandatory disclosure rules are not something new for European Member States (“EU MS”). In fact, with the United Kingdom leading the race (from 2004), Ireland (in 2008) and then Portugal (in 2011) were the first -and only- EU MS to introduce mandatory disclosure rules in their local legislation. However, despite their success in combating aggressive tax planning schemes in advance, especially in the United Kingdom, such rules had differences between them, particularly in terms of design, thus resulting in diverging effects.
The aforementioned divergencies, along with the need to strengthen certain tax transparency aspects of the existing taxation framework set out by Council Directive 2011/16/EU (or “DAC1”), were the main reasons that led the EU Commission to the Directive Proposal for the sixth amendment of such framework regarding mandatory automatic exchange of information on reportable cross-border arrangements.
Considering the above, on 25 May 2018, the Council of the EU formally adopted Directive 2018/822/EU (the “EU MDR Directive” or “DAC6”) amending DAC1 with the introduction of an EU mandatory disclosure regime (“EU MDR”) providing for the filing of information related to reportable cross-border arrangements with the tax authorities of the EU MS and for the subsequent automatic exchange of such information among the EU MS. The EU MS should transpose the Directive into their domestic legislation by 31 December 2019, whereas the Directive will apply from 1 July 2020.
The EU MDR goes beyond the recommendations of Action 12 of the Base Erosion and Profit Shifting (BEPS) Project of the Organisation for Economic Co-operation and Development (OECD) / G20 of 2015 by prescribing a wider range of hallmarks and introducing the automatic exchange of information on reportable cross-border arrangements among the EU MS. The objective is to enable the tax authorities of the EU MS to take early action regarding potentially aggressive tax arrangements, in order to better target their audits or amend their legislation. This could also act as a deterrent for the promoters and users of aggressive tax planning schemes.
All taxes except of value added tax, customs duties, excise duties and compulsory social security contributions are included in the scope of EU MDR, while all arrangements must also present a ‘cross-border element’, i.e. to concern either more than one EU MS or an EU MS and a third country and satisfy an additional set of conditions.
Intermediaries which meet certain EU-nexus criteria are required to disclose to the national tax authorities certain cross-border arrangements which contain one or more of a prescribed list of hallmarks (referred to as “reportable cross-border arrangements”). For some of these hallmarks a gateway criterion needs to be met for them to apply, which is called the ‘main benefit test’ (“MBT”) and relates to the main tax advantage or one of the main tax advantages that a natural (i.e. an individual) or legal person (i.e. a company), having regard to all relevant facts and circumstances, may reasonably expect to derive from an arrangement.
The hallmarks are divided into five thematic headlines: (i) generic hallmarks linked to the MBT, (ii) specific hallmarks linked to the MBT or (iii) related to cross-border transactions, (iv) specific hallmarks concerning automatic exchange of information and beneficial ownership and (v) transfer pricing.
The Directive is the first among its predecessors (being DAC1 on administrative cooperation in the field of taxation, DAC2 on automatic exchange of financial account information, DAC3 on automatic exchange of tax rulings and advance pricing agreements, DAC4 on automatic exchange of country by country reports and DAC5 on access to anti-money-laundering information by tax authorities) to place the reporting obligation on all actors of aggressive tax planning, tax avoidance, evasion and abuse, i.e. to both intermediaries who design, market, organise or manage the implementation of a reportable cross-border arrangement (otherwise called ‘intermediaries-promoters’), as well as those who help or advise on such actions (‘intermediaries-service providers’) and to taxpayers as the recipients of such services.
Going even further, DAC6 defines and emphasizes, for the first time, on the role of ‘intermediaries’ giving them a reporting priority over taxpayers, as the latter are required to report only when no (qualifying) intermediaries are involved in a particular arrangement. In the opposite scenario, EU MDR reporting obligations lie with all intermediaries involved in the same arrangement.
Hence, where no intermediaries are involved in an arrangement (i.e. where all intermediaries involved have no EU-nexus or planning is developed “in-house” by the taxpayer) or an EU-based intermediary is exempt from disclosing due to legal professional privilege restrictions, the obligation to disclose shifts to the relevant taxpayer.
The disclosure includes details of intermediaries and relevant taxpayers, of any associated enterprises of relevant taxpayers and the reportable cross-border arrangement in question. The first disclosures will be filed by 31 August 2020 and communicated by 31 October 2020, but will cover reportable cross-border arrangements where the first step of implementation takes place between 25 June 2018 and 30 June 2020 (i.e. within the transitional period of the Directive).
Nevertheless, as from 1 July 2020, intermediaries and relevant taxpayers will only have 30 days beginning on the day after the arrangement is made available or is ready for implementation or when the first step in the implementation of the arrangement has been made, whichever occurs first, to file information that is in their knowledge, possession or control. Likewise, the automatic exchange of information will take place within one month of the end of the quarter in which the information was filed.
On 19 March 2019, the Cypriot Ministry of Finance circulated a draft bill to transpose the Directive into Cypriot legislation, thus amending the existing Cypriot law on administrative cooperation in the field of taxation. Official guidance is expected to be issued by the Cypriot tax authorities for interpretation purposes, even though the draft bill appears to be fully aligned to the text and minimum requirements of the Directive.
For Cyprus, this effectively means that now, as opposed to the past, not only Cypriot taxpayers, but also Cypriot ‘intermediaries’ (i.e. such as tax advisers, accountants, lawyers, banks, professional services firms, etc.) are targeted by an(other) EU directive on administrative cooperation in tax matters (DAC), which may pose a significant risk for their everyday activities, especially in terms of (additional) compliance obligations. Let’s hope that the fruits of EU MDR will outweigh the compliance costs to the benefit of a fairer taxation environment both at Cyprus-EU and global levels.
Stavros Karamitros, Assistant Manager, International Tax Services
When discussing about blockchain and its existing or potential uses across various industries, many are those who instantly wonder as to what blockchain really is and then declare it “far too complicated”, without any further analysis. Others may directly relate blockchain with cryptocurrencies, instantly dismissing any further discussion since cryptocurrencies have had their share of bad publicity by being considered to enable money laundering/terrorist financing. Nonetheless, the capabilities of the underlying technology of blockchain are far more numerous than just for rewarding miners with cryptocurrencies.
The technological innovation stemming from blockchain technology is challenging social and legal concepts which we have for years considered set in stone. The use of blockchain has demonstrated to fundamentally speed up transactions, reduce costs, remove middlemen and provide transaction transparency, for which businesses spend hefty fees to safeguard and ring-fence their rights.
In its simplest form, blockchain is a decentralised technology or distributed ledger on which data is anonymously recorded based on pre-agreed consensus algorithms in the network of users. It is a form of database where data is stored in a chain of fixed structures called 'blocks', hence the name "blockchain". The stored information is mirrored on all participating computers, called “nodes”, over the distributed network of users. Blockchain technology offers a decentralised solution that is not locally or centrally stored nor maintained by one single party. Depending on the blockchain type and whether it is a permission-less or permissioned blockchain, transactions are only recorded on the chain if all the users agree with the transaction’s accurateness. Once a transaction is codified and added on the blockchain it is permanently stored, cannot be modified or erased and can be traced all the way back to its origination. This makes the blockchain ledger exceptionally accurate and secure. The use of blockchain technology is spiralling in almost all industries, examples of which are included below.
In the efforts of establishing a more transparent and trustworthy experience in the insurance sector, blockchain technology is being utilised to boost efficiency and productivity against cumbersome and fragmented processes currently being used. InsurTech companies utilizing blockchain technology can substitute manual business processes of insurance claims for handling, payment, subrogation and assessment (using smart contracts) and ensure that data cannot be altered, manifested or manipulated by recording it on the blockchain.
Food and Beverage Provenance
To enhance supplier reliability to consumers and give answers to questions such as "where does my food really come from" blockchain can be used in the food and beverage provenance industry. The underlying technology of blockchain can assist producers and suppliers alike to achieve end-to-end near real-time transparent tracking of goods, ensure food authentication and information from all stages in the supply chain and have a trusted audit trail from production to the end-consumers. Utilisation of blockchain can further assist with the ongoing monitoring requirements of suppliers with regards to food safety by regulators and governmental bodies.
In the health sector, blockchain technology is used for the setting up of decentralised platforms which enable secure, fast and transparent exchange and use of medical data. Such platforms create a user-focused electronic health record and maintain a single true version of that patient’s data. Blockchain companies are also developing health data marketplaces through which users can negotiate commercial terms with third parties for alternative uses or applications of their health data (i.e. allowing their data to be used in medical research and being financially rewarded for it).
Legal registries that can be “codified” on the blockchain may include land registries, corporate, commercial, patent or trademark, listed entity registers and in general all types of registries that document status, identity or rights of a person/legal entity. Due to the immutability characteristic of blockchain technology, having the register entry being verified on the blockchain can allow for an impenetrable and fully transparent audit trail throughout the history of the said entry. This will optimize tracing efforts in identifying legal ownership of assets as well as provide security and comfort that the entries are the true and accurate positions, as well as speed-up transaction tracing time and procedures.
Other than its abovementioned uses, blockchain can be applied or developed to fulfil purposes with a social impact. In a move towards smarter and more efficient governance, blockchain can be used to record everything from birth and death certificates to marriage licenses, travel history tracing, citizenship status or even voting rights. For a more transparent charity and donation ecosystem, blockchain can help with tracing charitable donations tied to specific outcomes, ensuring that philanthropists’ contributions indeed reach their end purpose.
Overall, for some it might indeed feel daunting that blockchain is revolutionizing almost every industry we have known so far. The potential of this technology is enormous, and it depends on the innovator to put this technology to good use and create unique solutions. In fact, blockchain can have a tremendous impact on societies and it can be used to solve problems that have troubled countries and governments for years.
The legal effects of implementing such solutions in our everyday society are numerous and implementing changes to existing systems may in fact require lengthy legislative procedures. Furthermore, it will have to be ensured that all information stored on blockchains meet the requirements of secrecy, privacy and data protection, as well as modifiability and erasability, going in fact against one of the main characteristics of blockchain. Nonetheless, it cannot be ignored that blockchain is disrupting the way we are doing things going forward, from today to tomorrow.
In EY Cyprus we recognise the potentials of emerging technologies in the implementation of our client's day-to-day business operations. As a member firm of the EY global network, which was ranked first among the Big Four for blockchain services in the Top 10 Enterprise Blockchain Services Report, EY Cyprus has strong capabilities to assist clients in implementing their vision and strategy on the digitization of their offerings through blockchain.
Mikaela Kantor, Advocate, Senior Associate