TaxLegi 30.12.2024

• Cyprus has transposed into local legislation the Council Directive on Global Minimum Tax.
• The law will be effective for financial years beginning on or after 31 December 2023 in relation to the IIR and for financial years beginning on or after 31 December 2024 in relation to the UTPR and domestic top-up tax.
• The Transitional Country-by-Country Reporting Safe Harbor and Transitional UTPR Safe Harbor are available.

Executive summary

On 12 December 2024, the Cyprus House of Representatives voted to transpose into law Council Directive (EU) 2022/2523 of 14 December 2022 to ensure a global minimum level of taxation of multinational enterprise (MNE) groups and large domestic groups in the Union (the Law), also known as the Pillar Two Directive. The Pillar Two Directive introduces a 15% minimum effective tax rate for ΜΝΕ groups and large-scale domestic groups with consolidated annual revenues exceeding €750m.

Details on the new Law

The Law incorporates all the provisions of the Pillar Two Directive and has been enriched with certain provisions issued to date through administrative guidance from the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), as well as provisions regulating administrative matters to enhance the interpretation of the Law.

A specific provision also requires the interpretation of the Law in line with all the administrative guidance issued to date by the OECD/G20 Inclusive Framework on BEPS to the extent these are consistent with the Law, as well as any further guidance to be issued by the same body.  

The Law introduces an Income Inclusion Rule (IIR) for financial years starting from 31 December 2023 in line with the Pillar Two Directive. The IIR requires a parent entity of an MNE group or a large-scale domestic group to pay a top-up tax on its low-taxed income and the low-taxed income of its subsidiaries to ensure that the group's overall income is taxed at a minimum rate of 15%.

A Domestic Minimum Top-up Tax (DMTT) and an Undertaxed Profits Rule (UTPR) are also introduced for financial years starting from 31 December 2024.

The DMTT provides for the imposition of top-up tax on the low-tax income of entities and joint ventures of an MNE group or large-scale domestic group located in Cyprus. The Cyprus DMTT rule deviates from the definition of a qualified DMTT as per the guidance issued and allows for the push down of foreign taxes, such as taxes resulting from a Controlled Foreign Company regime. The DMTT also respects all the pertinent safe harbors, including the Transitional Country-by-Country Reporting (CbCR) safe harbor.

The UTPR serves as a backstop to the IIR and applies to MNE groups that have low-tax income in jurisdictions where a top-up tax has not been collected through a Qualified IIR. It effectively allocates the top-up tax to other jurisdictions based on a formulaic approach, ensuring the group's overall tax burden meets the minimum effective tax rate of 15%.

Cyprus has also consented to all safe harbors, including the Transitional CbCR Safe Harbor as well as a Transitional UTPR Safe Harbor.

New compliance and filing requirements are introduced for reporting and collecting the Top-up Tax under the DMTT, IIR and UTPR. This includes a notification obligation to the Cypriot tax authorities that must be fulfilled no later than 15 months after the last of the relevant financial year (or 18 months for the first year of application) for all Cypriot entities and joint ventures of in-scope groups.

Implications

Given the introduction of the Law, it will be essential for all MNE groups and large-scale domestic groups to thoroughly evaluate the impact of this legislation on their operations. These entities must ensure their readiness to comply with the new requirements.

For help navigating these changes and ensuring compliance with the new rules, in-scope taxpayers should reach out to their tax advisors.

For additional information concerning this Alert, please contact:

• Petros Krasaris | petros.p.krasaris@cy.ey.com
• Eleni Papachristodoulou | eleni.papachristodoulou@cy.ey.com
• Elena Christodoulou | Elena.Christodoulou1@cy.ey.com

Aviation revolution

The year 2025 marks a significant turning point for the aviation sector in the European Union. It is the first year of the full application of the ReFuelEU Aviation Regulation, which promotes the gradual supply and uptake of sustainable aviation fuels (SAF). Additionally, 2025 is the last year of free allocation under the EU Emissions Trading System (EU ETS) - from 2026, operators must surrender allowances for all CO2 emissions. Furthermore, in 2025 a Monitoring, Reporting, and Verification (MRV) system for the first time will apply to non-CO2 aviation emissions. In summary, 2025 is the year of a real revolution in the aviation sector, paving the way for sustainable flights.

Obligations

The Regulation imposes obligations on aviation fuel suppliers, aircraft operators, and airports. Starting in 2025, fuel suppliers must ensure that at least 2% of the aviation fuel blend provided to EU airports is SAF, with this share rising to 70% by 2050. Suppliers can meet these targets by using renewable hydrogen, synthetic low-carbon aviation fuels, and low-carbon hydrogen. Additionally, the minimum share of synthetic aviation fuels starts at 0.7% in 2030 and increases to 35% by 2050. Aircraft operators must ensure that the yearly quantity of aviation fuel uplifted at a given Union airport shall be at least 90 % of the yearly aviation fuel required, to avoid overtankering practices leading to increased emissions cause by the higher weight of the plain. Airports are required to provide the necessary infrastructure to facilitate access to these sustainable fuels. All three parties have also reporting obligations. It is crucial to remember, that compliance with ReFuelEU Aviation requires that SAF meet the sustainability and emissions-saving criteria from the Renewable Energy Directive to count towards the targets.

Flexibility mechanism

To facilitate the transition towards the use of SAF, the Regulation introduced flexibility mechanisms. By allowing suppliers to average their SAF quotas across all fuel supplied at the EU airports for a reporting period, this mechanism aims to ease the initial challenges of SAF distribution and uptake. Moreover, the European Commission is currently finalizing a report evaluating SAF market developments and considering enhancements to the flexibility mechanism, including a potential tradable SAF system. This system would streamline SAF distribution and increase its use by enabling fuel supply in the Union without being physically connected to a supply site. It may incorporate elements of a "book and claim" scheme, allowing to purchase SAF through contractual arrangements and to claim the use of SAF at Union airports.​

Conclusions

The ReFuelEU Aviation Regulation creates a strong and stable legal framework to promote the gradual supply and uptake of sustainable aviation fuels in the EU. Increased production and uptake of SAF will eventually bring the prices down. Additionally, it is worth to keep in mind, that the EU ETS Directive, despite the phasing out of free allocations for aviation, introduced SAF allowances in the scheme. Namely, the EU will distribute for free 20 million allowances until the end of 2030 to increase the uptake of sustainable aviation fuels, covering the price difference with conventional jet fuel.

In conclusion, 2025 is where the future of sustainable aviation begins. All hands on the board!

By:

Martyna Szlufik

Environmental Law | EY Cyprus

Martyna.Szlufik1@cy.ey.com

What is ETS2

As part of the 2023 ETS Directive revision, the European Union has introduced a new, separate Emissions Trading System, known as ETS2. It targets CO2 emissions from fuel combustion in buildings, road transport, and small industries not covered by the already existing EU ETS. The ETS2 aims to reduce emissions by 42% by 2030 compared to 2005 levels. It will become fully operational in 2027, however, monitoring of emissions starts in 2025.

What to know at the beginning

Regulated entities under ETS2 are required to hold a greenhouse gas (GHG) emissions permit (together with approved Monitoring Plan) by 1 January 2025. Until 31 December 2030, entities which are subject to a national carbon tax for activities covered by ETS2 may be exempt from the obligation to surrender allowances. This exemption is contingent upon approval from the Commission and is intended to avoid double regulation. In addition, Member States have the possibility to unilaterally extend the covered activities to other sectors (subject to the Commission's approval).

Auctioning of allowances

Unlike the existing system, ETS2 will not offer free allocations - all emission allowances will be auctioned, promoting a market-driven approach to emissions reduction. The European Commission has already set the cap for 2027 at 1,036,288,784 allowances. This is based on average CO2 emissions from 2016 to 2018, reduced annually by 5.1% in the period from 2025 to 2027 (later by 5,38 %). The cap for 2028 will be determined later, based on average emissions data from 2024 to 2026 to ensure relevance and effectiveness. Member States are required to use the revenues generated from these auctions for decarbonization-related goals.

Monitoring, reporting and verification

From 2026, every year, by 30 April, regulated entities must submit emissions report for emissions from the previous year. This data must be verified by an accredited verifier. Starting in 2028, entities covered will be required to surrender the allowances by 31 May each year.

Market Stability Reserve

In 2027, 600 million allowances will be created as holdings in the market stability reserve. If, for more than three consecutive months, the average price of allowances in auctions is more than twice the average price during the six preceding months, 50 million allowances will be released from the reserve. For 2027 and 2028, this condition is met if the average price exceeds 1.5 times the average price during the reference period. What is more, if the average price of allowances exceeds EUR 45 (indexation based on the European index of consumer prices for 2020 shall apply) for two consecutive months, 20 million allowances will be released. This mechanism helps to maintain price stability and market confidence.

Social Climate Fund

The Social Climate Fund (SCF) aims to ensure support for the vulnerable groups, such as households facing energy or transport poverty. The funds can be used by Member States for investments in energy efficiency, building renovations, heating and cooling systems, renewable energy, and zero- and low-emission mobility. A part of the resources can be used also as a temporary direct income support. The SCF will be financed through revenues from the auctioning of allowances under ETS2, 50 million allowances from the existing EU ETS and a mandatory 25% contribution from Member States to their Social Climate Plans.  It will equal at least EUR 86.7 billion in the 2026-2032 period.

Nothing to be afraid of

The carbon price set by the ETS2 will provide a significant market incentive for investments in clean energy development, building renovations, and low-emissions mobility. Countries are expected to utilise ETS2 revenues for climate action and social measures, ensuring further decarbonization with affordable costs. In the event of exceptionally high energy prices, the start of ETS 2 application can be postponed until 2028. 

By:

Martyna Szlufik

Environmental Law | EY Cyprus

Martyna.Szlufik1@cy.ey.com