Cyprus | Update of EU list of non-cooperative jurisdictions may trigger withholding tax and other implications

Executive summary

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.

Detailed discussion

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, Limassol                                                                                                                                                                 

• Petros Krasaris, Nicosia                                                                                                                                                                                

• Petros Liassides, Nicosia                                                                                                                                                                       

• Antonis Dimitriou, Limassol

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.