European Union adopts revised list of non-cooperative jurisdictions for tax purposes
Cyprus | Update of EU list of non-cooperative jurisdictions may trigger withholding tax and other implications
· The EU has updated its list of non-cooperative jurisdictions for tax purposes. Specifically, it added four new jurisdictions to Annex I, removed four from Annex II and added three new jurisdictions to Annex II.
· These changes may trigger withholding tax and other implications for the respective jurisdictions, as outlined in this Alert.
On 14 February 2023, at the Economic and Financial Affairs Council, the European Union (EU) Finance Ministers approved the revised list of non-cooperative jurisdictions (EU List). Specifically, in Annex I, four jurisdictions were added (British Virgin Islands, Costa Rica, Marshall Islands and Russia) whereas in Annex II, Barbados, Jamaica, North Macedonia, and Uruguay were removed and Albania, Aruba, and Curaçao have now been added.
As of 31 December 2022, Cyprus imposed 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.
Background on EU listing process
The EU started working on the list of non-cooperative jurisdictions for tax purposes in 2016 and published its list of non-cooperative jurisdictions for the first time on 5 December 2017, which was comprised of two annexes. Annex I includes jurisdictions that fail to meet the EU’s criteria on tax transparency, fair taxation and implementation of base erosion and profit shifting (BEPS) measures by the required deadline and Annex II includes jurisdictions that have made sufficient commitments to reform their tax policies but remain subject to close monitoring while executing their commitments. Once a jurisdiction has executed all of its commitments, it is removed from Annex II.
On 14 February 2023, the EU Finance Ministers updated the EU List and included four new jurisdictions in Annex I. As per the latest update, the British Virgin Islands, Costa Rica, the Marshal Islands, and Russia have been added and together with American Samoa, Anguilla, Bahamas, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, Turks and Caicos Islands, US Virgin Islands and Vanuatu, represent the 16 jurisdictions that are currently on the EU List.
The next update of the bi-annual review of the EU List is expected in October 2023.
Withholding tax on payments made to non-cooperative jurisdictions
In an effort to be in line with the proposals set by the EU regarding the application of defensive measures, as noted in our previous EY Global Tax Alert, Cyprus has opted to introduce the imposition of withholding taxes on outbound payments of dividends, interest and royalties made to companies which are tax resident or registered in jurisdictions included in Annex I of the EU List.
The relevant provisions have been transposed into the Cypriot Income Tax Law and Special Contribution to the Defense Law and are effective as of 31 December 2022.
As of today, the Cypriot Tax Department (Tax Department) has not issued any official guidance to taxpayers with regards to the practical application of withholding taxes in cases where an outbound payment of dividends, interest, or royalties is made to a company resident or registered in a non-cooperative jurisdiction.
We understand that as of the date of this Alert, the Tax Department is considering the details on the practical application of the new withholding tax rules and is expected to provide clarifications and guidance to taxpayers in the following weeks on matters including but not limited to:
· Application of withholding taxes and the determination as to which jurisdictions are included on the EU List at a specific point in time, covering additions to and removals from the EU List.
· Whether the determination of the tax point for withholding purposes will be made on a “cash basis” or “accrual basis.”
· Applicability of a deemed dividend distribution provision in cases where corporate shareholders have been tax residents in jurisdictions included on the EU List.
It should be highlighted that in cases where withholding taxes are applicable and an Agreement for the Avoidance of Double Taxation between Cyprus and the non-cooperative jurisdiction is in place (which currently is the case only for Russia), such Agreement is expected to supersede the provisions of the domestic tax laws. Consequently, the withholding tax rates included in the Double Tax Treaty should apply on the relevant type of income (dividends, interest, royalties).
For additional information with respect to this Alert, please contact the following:
Ernst & Young Cyprus Limited
· Philippos Raptopoulos, Partner - Business Tax Advisory, Limassol
· Petros Krasaris, Partner - International Tax and Transaction Services, Nicosia
· Petros Liassides, Partner - Global Compliance and Reporting, Nicosia
· Antonis Dimitriou, Manager - Global Compliance and Reporting, Limassol
VAT on financial services and fintech: The story of the CFO and the need for reform
For my intervention at the 6th IMH international tax conference held, strangely enough, on Valentine’s Day, I was supposed to cover the subject of VAT on financial services and fintech from a VAT technical perspective. I was the only speaker on VAT, in a house full of direct tax people, and this made me fear I would be in the receiving end of significant booing.
So, I decided to trick them by disguising a technical presentation inside a story. The story of the CFO. Here it is…
The year is 1977. The CFO of an EU bank, going through the news headlines, reads that EU lawmakers, after reaching an agreement have adopted the sixth VAT directive, aiming to introduce a harmonised VAT law throughout the troubled European Union.
The life of this CFO was hard overall, but he was happy that VAT was not going to be one of his big concerns. You see, when VAT was introduced, because of the difficulty in taxing margin based financial services, and for other socioeconomic reasons, it was decided by European policymakers that financial services should remain VAT exempt.
The EU VAT directive included therefore, seven simple, generic definitions, which covered, as VAT exempt, the financial world of that era. Income wise therefore, our CFO had minimal worries. He had of course the side problem of non-recoverable input VAT on expenses, but that was not a significant issue for him because, you see, back then, banks and other financial institutions, predominantly insourced all their needs.
As the years passed and the financial liberalisation arrived, from the mid-80s to the millennium, the life of this CFO became much more complex. His bank now provided many more financial services in the sphere of securities, derivatives, underwriting, participation in M&As, private banking and many many more, including the very difficult area of transactions concerning money, payments and transfers, requiring significant investment in technology.
Most importantly, his Bank was rethinking its operating model. She was going cross border rapidly, started focusing on core functions, outsourcing non-core and slowly but steadily started going digital, purchasing a variety of services from different sources. All these expenses had VAT charged on them which remained a cost.
The CFO now had too many items in his plate, and, sadly, VAT was becoming one of them.
The 1977 definitions were too generic to fit this new world of financial services. There was huge uncertainty in terms of defining what is VAT exempt and what is subject to VAT. Different European countries applied the definitions differently. Harmonisation on this matter was thrown out of the window. In addition to the uncertainty, the irrecoverable VAT cost of the Bank, skyrocketed. This CFO was living a nightmare. His CEO and his Board of Directors were furious. Music in the ears of VAT consultants who did help but did not have all solutions after all. He had to find a solution but there was none.
In 2007 there was light at the end of the tunnel. The European Commission took the initiative to solve the problem. They proposed an EC Regulation with refined definitions, aiming to capture the modern world of financial services, alleviating the uncertainty that existed from the generic definitions. The Commission also proposed tools aiming to limit the impact of irrecoverable VAT cost. Such tools were in the likes of an enhanced VAT grouping regime, a cost sharing arrangement exemption applicable for Financial Services, and a refined Option-to-Tax mechanism, whereby Banks and financial services businesses could select which of their supplies they could forfeit the exemption and render them subject to VAT, earning therefore the right of input VAT recovery.
Being a businessperson, our CFO thought to himself, we are now in 2007, logically by the end of 2010 this should be over. The Gods of Politics started laughing.
Fast forward 16 years to today, the CFO of our story is now retired, enjoying a good old single malt he saved from back in the day, yet, the VAT rules for financial services are exactly the same as they were the day they were introduced back in 1977. They don’t stand a chance against the modern financial world, new operating models and fintech. The problems of uncertainty and the irrecoverable vat cost are exponentially higher. The European Court of Justice takes the role of law maker, which is a problem in its own regard. Even worse, the VAT rules are affecting the way financial services organisations are structuring their business in order to optimise their VAT position. For example, they choose to work with fixed establishments instead of setting up different entities or even refrain from outsourcing so as to avoid the corresponding VAT cost. This is counter intuitive for a pro-entrepreneurship European Union and a pro-business…pro-tech-business Cyprus.
One of the main challengers of the reform was the UK. You see, irrecoverable VAT was one of the largest taxes paid by the sector in the UK. This continues to be the case also today. The European Commission – post Brexit – and as part of the 2020 Tax Action Plan – restarted the initiative with aggressive plans to help in tackling the problems. The pandemic, the war in Ukraine, the energy crisis and of course the inflation and the resulting interest rate increases, once again pushed back the reform to an unknown horizon. Our hero – the CFO – looking at the situation – appreciates retirement even more.
Now; I do appreciate that this is just a story and, in reality, the CFOs of Banks and FinTech’s have much bigger problems to deal with and, regardless of how badly I want this to be true, they don’t really lose sleep for Value Added Tax.
Irrespective of this, the FinTech world took us by storm. The services we see being offered are so complex, the uncertainty when it comes to application of VAT on these businesses is tremendous and this must be appreciated.
The high levels of technological advancement, the trends towards outsourcing and the fragmentation of supply chain in various activities and specialised operators increase dramatically both the uncertainty and the VAT cost.
If the CFO of our story was in Cyprus – and many of them are – he would have faced the same issues and potentially even more. This cannot be the case for a country like Cyprus.
Devotees of status quo will logically ask; Isn’t this a pan-European issue with little to nothing we can do as a small country? Indeed, this might be the case. There are plenty we can do however to make the system more attractive and fairer for such businesses and fulfil our vision of being a destination for technology companies including technology companies of the financial and insurance sectors.
First and foremost, we need a stable and consistent system. We cannot issue orders changing the whole landscape for a given area without consultation and without transitional measures. We cannot be seen as hindering Tax Justice.
We need to adopt pro-business practices. For example, we already have in our VAT system, in our current VAT law, the concept of a VAT group but practically we restrict application, denying its benefits to the VAT exempt financial sector. The reasons behind this practice are appreciated but, must be reconsidered in line with the overall tax strategy of the country.
On the other hand, the European VAT directive, and again, the current EU VAT directive, as it is now and not as we hope it will be after a reform, has various tools and options which can be considered for introduction in the Cypriot VAT legislation. One such tool is the Option-to-Tax for financial services, which if applied positively, it can be a differentiating factor for Cyprus in the attraction and retention of FinTech, in conjunction of course with other tax measures and incentives we already have in place.
Am I proposing adoption of an option-to-tax? No! but, I am proposing consideration, consultation and assessment, of this and other points of law. We have examples from other member states. Poland for instance introduced an option-to-tax for financial services during 2022. To the best of my understanding, it has introduced the option restrictively, resulting in limited adoption. France on the other hand, had for years applied a restrictive option-to-tax and within 2022 loosened the rules with an aim to boost the competitiveness of French businesses operating in the sector. We can learn from their experiences.
From 1 March we will have a new and promising Government. From the pre-election messages of the President-Elect and the presence of his accompanying political office reps at this very tax conference, it is obvious that taxes, including indirect taxes, are high on their agenda.
If I could convey a message on behalf of all of us, the VAT practitioners of the VAT committee of the Institute of Certified Public Accountants of Cyprus, a committee which I proudly chair, that would be a plea for inclusion of the area of VAT in the so much advertised upcoming Tax Reform. We need at last to see matters holistically.
And its not only for FinTech businesses. It is also for Funds, Shipping and many more. The UK for instance is as we speak undergoing consultation for a reform of the VAT rules on Funds which is another area of comparable competitive advantage for Cyprus. Rumour has it that next in the UK is a reform of the VAT rules for financial services overall in line with developments in the sector.
This is a call for action; and we are here to help.
The actual intervention at the Tax Conference ended with a small but valuable technical discussion on how we approach VAT for complex financial services and FinTech according to the current rules. That part is not covered in this article but as I always say; we are a phone call away.
- George Liasis, Partner - Indirect Tax
Cypriot DAC6/MDR implications of the updated EU list of non-cooperative jurisdictions for tax purposes
On 14 February 2023, the Council of the European Union (EU) updated the EU list of non-cooperative jurisdictions for tax purposes (the EU List). Specifically, British Virgin Islands, Costa Rica, Marshall Islands and Russia were added in Annex I (the so-called “black” list) of the EU List. With these four additions, the black list now consists of 16 jurisdictions. The Annex II (the so-called “grey” list) of the EU List was also updated.
The updated EU List is effective as of 21 February 2023, date of its publication in the Official Journal of the EU. The next update of the bi-annual review of the EU List is expected in October 2023.
The revision of the EU List may have the potential reportability implications for Cypriot DAC6/MDR purposes, especially with regard to hallmarks C.1.b.(ii) and D.1 of the Cypriot DAC6/MDR Law (Law 41(I)/2021). It should be noted that such hallmarks are not subject to the Main Benefit Test additional criterion, meaning that whether or not the objective of the arrangements under consideration is to obtain a tax advantage is not relevant.
Cypriot DAC6/MDR implications
Hallmark C.1.b.(ii): Cross-border arrangements that involve intragroup deductible cross-border payments to any blacklisted jurisdictions may give rise to DAC6/MDR disclosure under this hallmark. Cypriot companies which participate in such arrangements should assess the potential reporting obligations under the Cypriot DAC6/MDR legislation.
Hallmark D.1: Cross-border arrangements involving the use of a jurisdiction included in the EU list may fall within the scope of the said hallmark. It should therefore be examined whether the use of such jurisdictions has the effect of undermining reporting under the OECD CRS or other equivalent exchange of information agreements.
The DAC6/MDR team of EY Cyprus remains at your disposal for any questions and/or clarifications regarding the above matters. Please feel free to contact us as follows:
EY Cyprus Advisory Services Limited, Nicosia
· Petros Krasaris | Petros.P.Krasaris@cy.ey.com
· Panayiotis Tziongouros | Panayiotis.Tziongouros@cy.ey.com
· Stavros Karamitros | Stavros.Karamitros@cy.ey.com
· Jennifer J Donneaux | Jennifer.Donneaux@cy.ey.com
 EU Council – Press release 14 February 2023
 Official Journal of the EU – Publication 21 February 2023 (2023/C 64/06)
Cyprus Tax Authority issues FAQs on new transfer pricing legislation
Transfer Pricing Alert – February 2023
On 10 February 2023, the Cyprus Tax Authority released a set of FAQs which addresses a number of aspects relating to the application of the new TP legislation that is effective as of 1 January 2022.
One of the main points addressed relates to the abolishment of the Interpretive Circular 3 (dated 30 June 2017) on back-to-back financing arrangements. The abolishment is effective as from 1 January 2022, as announced in the Circular issued on 5 January 2023.
The following eight FAQs are addressed and published on Tax Department’s website.
Frequently Asked Questions (FAQs)
If the controlled transactions in category "A" cumulatively exceed €750,000 or shall exceed €750,000 on the basis of the arm's-length principle as described in article 33(9)(a) of the Income Tax Law (ITL), and at the same time the controlled transactions in category "B" cumulatively do not exceed the €750,000 threshold in a tax year, is there an obligation to include the controlled transactions of category "B" in the Cyprus Local File?
No, there is no obligation to include category "B" controlled transactions in the Cyprus Local File.
Only, the controlled transactions of a category which cumulatively exceed or shall exceed €750,000 on the basis of the arm's-length principle during a tax year must be documented and analyzed in the Cyprus Local File.
In this specific example, it would be category "A" controlled transactions only.
How is the €750,000 threshold determined in the context of rental income activities during each tax year?
The threshold is determined by reference to the total rental income on the basis of the arm's-length principle in a tax year.
Do purchases and sales need to be aggregated for the purposes of assessing whether the threshold has been exceeded?
Yes, the threshold refers to the absolute values of the controlled transactions for each category occurring in a tax year. For example, if total purchases and total sales amount to €400,000 and €500,000, respectively, the cumulative amount in this category is €900,000. Therefore, the threshold in this category has been exceeded.
Are the Cyprus Local File and Summary Information Table prepared using the tax year or the accounting year of the company?
The Cyprus Local File and Summary Information Table are prepared with respect to the tax year.
Under which category of the Summary Information Table should financial guarantees be reported?
Financial guarantees should be reported under the category "Financial Transactions."
Should a benchmarking study be prepared every tax year, or only if something changes with regards to the intra group loans?
A benchmarking study should be prepared when an intra group loan is initiated, and updated when:
•New loans are provided or received by the company; or
•Significant terms of the existing loans change or are amended; or
•The functional profile of the company changes; or
•The market and economic conditions change significantly (if applicable).
The above list is indicative and not exhaustive. Further guidance is provided in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
Please note that in accordance with article 33(10) of the ITL, the master file (where applicable) and the local file must be updated every tax year.
Who is responsible for the completion and submission of the summary information table?
It is the responsibility of the taxpayer to complete the Summary Information Table.
The Summary Information Table is to be submitted by the statutory auditor or tax consultant.
Is the circular dated 30 June 2017 with title "Tax treatment of intra group back-to-back financing transactions" still applicable following the enactment of the new TP legislation and regulations?
The back-to-back circular was abolished as from 1 January 2022.