Category: Knowledge

THE IMPACT OF EU LAW ON THE CYPRUS CORPORATE TAX SYSTEM

Posted on | by Paschalis Paschali

Distinguishing the Concepts from the Misconceptions

For an effective tax planning strategy, businesses in Cyprus need to be fully aware of the concepts of taxation on a European level and how they affect Cyprus at present and how they may affect it going forward. This article aims to give an informed overview as a first step to gaining such an understanding.

There is often a misconception that the EU dictates all Cyprus tax laws. Whilst this is true as regards indirect taxes such as VAT, customs and excise which are largely harmonized, technically, the power to levy direct taxes, including corporate taxes, remains within the exclusive powers of Member States.

However, these powers must be exercised consistently with general EU law, that is, the EU’s fundamental freedoms, the Charter of Fundamental Rights, and the state aid prohibition. This obligation is derived from the supremacy of EU law over domestic law. In terms of tax law this general EU law and the various Directives are considered as “hard law”.

Cyprus’ corporate tax laws are primarily set out in the Income Tax Law (Law 118(I)/2002, as amended) and the Special Contribution for Defence Law (Law 117 (I)/2002, as amended). There are also important provisions in some of Cyprus’ pre-accession general tax instruments: the Capital Gains Tax Legislation of 1980 (Law 52/1980, as amended) and the Assessment and Collection of Taxes Legislation of 1978 (Law 4/1978)

Since Cyprus acceded to the EU, there have been few changes to its corporate tax system which were necessary as a result of EU legislation (usually, Directives).  This was because in anticipation to join the EU in 2004, Cyprus had already overhauled its tax system, including its corporate tax system, to ensure compatibility with the acquis Communautaire.

Accordingly, at the time of accession to the EU, Cyprus had already incorporated in its domestic law the then existing EU corporate tax law concepts: namely, the Parent-Subsidiary Directive, the Interest and Royalties Directive, the Merger Directive, and the Mutual Assistance Directives dealing with recovery of taxes and exchange of information.

Furthermore, pre-accession, Cyprus legislation was assessed under the Code of Conduct on Business Taxation, which is considered as “soft law”. Within the context of taxation although soft law is not, technically speaking, legally binding, nevertheless, it carries important political weight and must be followed. Numerous potential harmful tax measures were therefore identified and repealed at the beginning of 2003.

However, as we all know, law in general, and specifically EU law is not static. Since Cyprus’ accession to the EU, several incorporated Directives have been amended. Obviously, the amendments had to be again incorporated in Cyprus laws, as under EU law, directives (and their subsequent amendments) must be adopted by Member States within the time frame provided, otherwise, they become directly effective.

For example, when the Parent-Subsidiary Directive was amended in order to withdraw the exemption of dividends received when these were deductible in the country of the paying company, this amendment was incorporated into Cyprus tax laws (Art 8(20) of Income Tax legislation). Similarly, when the 1977 Directive on Mutual Assistance (Directive 77/799/EEC) was replaced with the 2011 Directive on Administrative Cooperation (Directive 2011/16/EU), the changes had to be incorporated in Cyprus tax law. In fact, this Directive has been amended several times since 2011 and each time, Cyprus has had to amend its tax laws to ensure compliance with the Directive.

Furthermore, since Cyprus’ accession, new Directives have been adopted – for example, the infamous Anti-Tax Avoidance Directive (ATAD I & II) and the Tax Dispute Resolution Mechanisms Directive. The provisions of ATAD I & II were subsequently incorporated in Cyprus Income Tax Law (Arts 11A, 11B, 11C, Art 11(16)(a), Art 33B and Art 36A as amended by Law 3 of 80(I)/2020). The Tax Dispute Resolution Mechanisms Directive was incorporated in Art 36B, 36C and 36D of the Income Tax Law (as amended by Law 151(I)/2019).

Cyprus is now gearing up to adopt the Directive on Minimum Effective Tax Rate, which was approved in Council in December 2022. Member States were given until the 31 December 2023 to incorporate the provisions of the new Directive into domestic law.

There are also a number of other legislative tax proposals in the pipelines, which have not yet been approved in Council: for example, the proposed “Unshell” Directive, the proposed Directive on Faster and Safer Relief of Excess Withholding Taxes and the (not yet proposed) SAFE Directive which will look at the activity of tax enablers.

Recently, the Commission has also  proposed three very important Directives: the BEFIT Directive (Business in Europe: Framework for Income Taxation), the Transfer Pricing Directive and the Directive on Head Office Tax.

In addition to EU legislative instruments that must be incorporated into domestic legislation, like all Member States, Cyprus needs to closely follow the jurisprudence and the precedents emanating from tax litigation at the Court of Justice. This is necessary so as to ensure that Cyprus domestic law remains compatible with EU primary law (i.e. the fundamental freedoms, the Charter of Fundamental Rights, the state aid prohibition etc). For example, if the tax legislation of another Member State is found to be in breach of freedom of establishment and Cyprus contains similar tax rules, these must be amended. Similarly, if a tax provision or administrative practice of the tax department of another Member State is investigated by the Commission and found to be in breach of the state aid prohibition, if Cyprus has a similar tax provision or administrative practice, this must be repealed.

Failure to do so could lead to an infringement procedure by the Commission. Furthermore, affected taxpayers could also sue the Cyprus government in domestic courts on the basis of the Francovich principle of state liability.

Apart from legislative amendments, Cyprus has had to follow closely the work of the Code of Conduct Group, to ensure compatibility with the Code of Conduct on Business taxation. Although this is soft law, as explained above, it has significant political force. In fact, since 2004, Cyprus’ tax system was formally investigated twice by the Code of Conduct Group.

The first investigation focused on the Cyprus Intellectual Property Regime which provided for a deductible expense for corporate income tax purposes, calculated as 80% of the qualifying profits (Art 9(1)(e) of Income Tax Law). The effective rate on the profits qualifying for the CIPR was 2.5%. This regime was found not to be harmful.

The second investigation focused on the Notional Interest Deduction rule (Art 9B of Income Tax Law). The amended version of the legislation was found in 2020 not to be harmful.

Furthermore, following the Code of Conduct Group’s Guidance on defensive measures in the tax area towards non-cooperative jurisdictions, Cyprus’ has had to introduce withholding taxes to payments of dividends, interest and royalties flowing to countries included in the EU’s list of non-cooperative jurisdictions. In the latest update to this list, Russia was added.

Moreover, there have been important changes as a result of the international tax community’s initiatives. For example, even though Cyprus is not an OECD member country nor included in the Inclusive Framework due to Turkey blocking its membership, nevertheless, Cyprus has been following closely the work of the OECD/G20 and its recommendations. Cyprus has signed up to the Multilateral Instrument. It also updated its Transfer Pricing Regime in light of the OECD’s Transfer Pricing Guidelines.

Whilst Cyprus has been broadly compliant with EU (hard law and soft law) obligations and OECD/G20 standards, it is currently being asked by the EU to revamp aspects of its corporate tax system which are perceived to be facilitating aggressive tax planning. Other Member States such as Luxembourg and Malta have also been asked to amend their tax systems to curb aggressive tax planning.

In the Council’s 2020 country specific recommendations for Cyprus, in paragraph 26 it was reiterated that tackling aggressive tax planning was key to improving the efficiency and fairness of tax systems. Furthermore, in the Cyprus Recovery and Resilience Plan, there is a reform objective to increase the effectiveness, efficiency and fairness of the tax system by combatting tax evasion and aggressive tax planning practices by multinational enterprises (MNEs) by June 2026 (Reform 10 of component 3.5).

In the more recent Commission 2023 Annual Report on Taxation, it is stated that under the Recovery and Resilience Facility “several Member States have committed to address aspects of their tax systems that facilitate [aggressive tax planning], with key milestones (including the establishment of withholding taxes on outbound payments or a similar defensive measure) expected to be completed by the end of 2023 (e.g. HU) and in 2024 (e.g. CY, IE)”. It is expressly stated that country specific recommendations have been put on hold for some Member States, including Cyprus, in order to take account of the progress made in the context of the Recovery and Resilience Facility.

Going forward it should be noted that Cyprus’ corporate tax laws are currently being evaluated and legislative changes are expected in some areas. Broadly, although EU hard law has had a rather limited impact on the Cyprus corporate tax system after the country’s accession to the EU, it would seem that lately, many of the significant constraints or drivers for reform are derived from EU soft law. This is likely to change if the legislative initiatives that are in the pipeline, especially BEFIT, are eventually approved in Council and adopted.

For any information on any of the issues raised in this newsletter in the context of your business strategy and longer term tax planning please get in touch with us.

Cyprus New Pre-Action Protocols: A mere formality or a substantive change of mentality?

Posted on | by Paschalis Paschali

In an attempt to modernize and expediate the legal procedures in our country, new Civil Procedure Rules have come into force since the 1st of September 2023, thus changing drastically our legal system. The just and proportionate as to costs handling of the cases, is placed at the heart of the reforms, as reflected in the overriding objective codified in Part 1 of the new Rules. In fact, the new Rules require the Court to handle all cases proactively by encouraging the parties to cooperate with each other, to identify the issues of dispute at an early stage and to facilitate the use of alternative dispute resolution procedures if necessary. To this end, the new Rules introduce certain Pre-Action Protocols that the parties are expected to follow before the initiation of legal proceedings before the Court.

It is worth noting that up to date, parties in litigation were not obliged to engage to any kind of pre-action conduct, apart from very limited circumstances such as in instances where a creditor of a company was obliged to send a 21-days’ notice of demand before filing a winding-up petition against the debtor company (see Art. 211 and 212, Cap. 113). The establishment therefore, of a formal mechanism which promotes the cooperation of the parties at a pre-action stage is certainly innovative.

The new Pre-Action Protocols aim at enhancing the pre-action communication and exchange of information between the parties, while the ultimate purpose they serve is the effective settlement rather than the adjudication of claim. The parties shall comply with the said protocols in a substantive way. Non- substantive adherence with the protocols’ requirements e.g. by omitting to disclose to the other party adequate information or evidence required by the protocol, may be considered as breach of the same and the Court may impose sanctions to the party in breach. In instances, for example, where, to the judgment of the Court, the non-adherence with the pre-action protocols has led to the initiation of an action, the claim of which could have been settled, the Court may order the party in breach to pay the total or part of the amount of the costs incurred. It is therefore evident that, through the imposition of sanctions, a more pragmatic approach as to the compliance of the protocols is adopted rather than merely a theoretical one.

Certain kinds of claims, such as personal injury claims, require the use of a specific Pre-Action Protocol as provided by the new Rules. It is however remarkable that even for claims for which no specific type of Pre-Action Protocol is required to be used, the Rules provide that the parties must act reasonably regarding the exchange of evidence and information and in a way so as to avoid the filing of an action before the Court. Parties are discharged from the obligation to engage in any sort of pre-action conduct only in instances where their claims are considered to be urgent, in instances where the claim is close to become time-barred or in instances where there are sufficient reasons not to engage to pre-action conduct. In such instances the reasons for the non-engagement must be outlined in the statement of claim.

In light of the above, it is obvious that from 1st September 2023 onwards, parties will be obliged to adhere to some kind of pre-action conduct. Potential omission from their part to do so will have to be accompanied with reasons for their non-compliance, while non-compliance for no good reasons may lead to them being penalized in relation to the legal costs incurred. It is therefore evident, that the new Rules attempt to introduce a  new mechanism which will encourage potential litigation parties to settle their claim in an effective and cooperative way prior to submitting their action before the Court.

This, is believed to be achieved through the exchange of evidence and information at an early stage, contrary to what used to be the case until today where proceedings initiated with the exchange of pleadings, which by default did not include evidence. As a result, parties were unable to assess the strength of their case and therefore, settlement could not easily be reached.

Consequently, the new reforms seem to “push” towards a more settlement-based legal system rather than a more adversarial one. A system that would perhaps place litigation at the top of the pyramid of our legal system and that would render it as a solution of a last resort when it comes to the resolution of a dispute.

What is certainly inarguable is that the application of the new Civil Procedural Rules must be accompanied with a change of culture, mindset and philosophy by all legal representatives who will definitely need to embrace and uphold this freshly-introduced mentality.

BIM and the Cypriot construction industry, a construction lawyer’s perspective

Posted on | by Paschalis Paschali

What is BIM?

BIM, which is the acronym for Building Information Modelling is not new. In fact, BIM as a concept was first developed in the 1970s. The acronym BIM crept into existence sometime in the late 1980s and the protogenic BIM software, albeit quite limited in its  functions, was  first issued in the mid 1990s. Nowadays, the technology has progressed to such an efficiency that most developed construction markets, irrespective of location, have shifted to BIM.

Such is the level of growth and acceptance of BIM that in 2011, just 13% of industry professionals surveyed by UK construction software provider NBS were actively using BIM software, and 43% had yet to hear of the technology. A decade on, according to the annual NBS BIM Report, 73% of practices now use BIM, while just 1% remain unaware.

A very apposite yest easily comprehensible explanation of what BIM is and how it functions is that it is software which creates digital representations of the physical and functional characteristics of spaces. In short, it is software which is used to plan, design, construct, operate and maintain buildings.

In truth though, BIM is much more than mere computer software. It is a new construction process centred around the complete collaboration of all the parties involved in the construction process through the sharing of information throughout the planning and construction process in real time

BIM software allows for the creation of the 3D models of what is actually to be built so that the Employer, Architect, Contractor, Civil engineer, M&E engineer, QS and Interior Designer can use the model to control the design, cost and the construction process itself. Most significantly BIM is relied upon as a tool for quick and independent problem identification and remedial decision-making, from project inception to handover.   BIM is naturally most beneficial when implemented at the beginning of project so that  the planning and tendering process is done through BIM. Thereafter the model can be further developed as the project moves along its life cycle.

BIM model rendering
BIM model rendering

What does BIM do?

Simply put, everyone associated with the project works and in fact designs and builds using the same 3D model and all aspects of the planning and design are inputted into the BIM software. Any and all matters and/or issues relating to every aspect of the construction process are viewable to all and can be resolved so as to identify and eradicate any potential error before an error occurs or to deal with any necessary alteration of any aspect of the project.

BIM software flagging up a clash between the Architect’s plans and the M&E Engineer’s plans

A notable and, in terms of Cyprus, very relevant example of BIM operation is the instance of a variation. A variation, once decided upon will be inserted into the 3D BIM model by the Architect and is instantly and contemporaneously viewed by all other parties. In principle the cost of the variation can be calculated by the software itself since the software can be linked to the BOQ. Also, the software, which is linked to the planning and construction schedules can be used to develop the extension or saving of time calculation that the variation warrants. Then the Contractor and any other party whose work is affected by the variation proceeds with its execution, thereby minimising the potential or time wasting and costs involved in disputing or arguing about the implications in time and costs in relation to the variation.

BIM and Sustainability

We are all becoming aware of the need for sustainability. The BIM model can interact with specific sustainability software to carry out sustainability analysis so as to achieve optimum comfort and design optimisation as well as energy efficiency.

It is significant to note that one is able to track and attain Sustainability Certifications by the interlinking of BIM and sustainability software.

Finally, BIM software also allows for facility management as it may be integrated with computer-aided Facility Management Systems to ensure a smooth transition from the handover stage to the facility management stage once the project is completed and the Employer takes over its operation.

When BIM is utilised by a proficient Project team, the software allows for the archaic 2D modelling (i.e. plans on paper) construction process to move to 7D.

The 7 dimensions are as follows:

3D = Interactive plans

4D = Time calculation

5D= Cost calculation

6D= Sustainability

7D= Facility Management

Energy efficiency gauge on BIM model

How will BIM change the Cypriot construction industry?

Through BIM design, issues will be identified and resolved before they enter the critical path for construction. This means that parties will no longer be forced to argue about cost and extension of time claims since these factors will be calculated by the BIM software itself.

Projects will be planned and executed in the most cost effective and sustainable manner and budgets will be monitored much greater accuracy.

The adoption of BIM will effectively usher in a new era of construction in which most disputes associated with the construction process are resolved by the software itself. One can only imagine the decrease in cost to the public purse if government projects were tendered for and constructed with the use of BIM.

At the same time Contractors bidding for government projects will benefit from the increased certainty, transparency and objectivity that BIM will introduce. As a result the market will become much more competitive due to the renewed confidence in how the project will be run.

Most importantly BIM will promote greater confidence, cooperation and trust in the beleaguered construction industry of Cyprus due to the minimisation of disputes that lead to delays in payments and protracted and increasingly expensive legal disputes.

An Employer who uses the BIM model will benefit from more competitive prices due to the elimination of the uncertainties that BIM can achieve.

Even though constructing with the use of BIM has a cost, this cost is by no means restrictive in large development and public projects. In fact the opposite is the case. By using BIM the Employer, whether private or the government will end up saving money for the plethora of reasons outlined above.

BIM vs Lawyers

One could think that BIM could spell bad news for lawyers since the software eliminates many of the reasons for disputes that occur during the construction process. This is, however not the case. Recent case law in the United Kingdom and in the US has flagged up a plethora of BIM related legal disputes. After all, BIM works through human input. BIM has not yet reached the stage where it can eliminate human error. As shown above BIM can greatly reduce the effects of human errors as it can identify it and possibly aid in resolving the effects of it on site but the capacity for human error still remains a risk.

Recent disputes that have reached the courts have involved questions like:

Determining liability: Questions arise as to who bears responsibility for design errors and other human errors imputed into the BIM software. If numerous parties are sharing and using the same model then it becomes harder to ascertain who is at fault for the error once the error occurs.

Responsibility issues: A breakdown of communication can occur when not all parties on the project are using BIM (which sometimes is precisely the case). Sometimes the project might be both on BIM and on 2D plans which if not checked thoroughly might have discrepancies between them which can lead to errors which are then built into the project, and which will have to later me remedied.

Finally, ownership / title issues: Disputes as to who has ownership and/or copyright of the BIM software relating to a project are the most common form of dispute. This usually happens when there is a breakdown in relationship and the party most in control of the BIM pulls the plug and locks the other parties out of using it to finish the project.

With the above in mind, even though BIM will help prevent or resolve a large percentage of traditional disputes, it will not go as far as to eradicate disputes altogether. Even with BIM, disputes as to workmanship, design, cost and time will still occur, but simply to a lesser extent. Coupled with the BIM related disputes mentioned above there will still be ample ground for lawyers to “cross swords” in construction.  

Parties will therefore do well to look to lawyers with the relevant legal experience and expertise in understanding BIM, its implementation and the legal issues that arise through its use. Contract clauses will have to be drafted with BIM usage in mind and parties will need to incorporate the use of this technology in the actual terms of the contract itself, both in relation to the terms relating to the construction as well in relation to the clauses regulating the dispute resolution mechanisms of the contract. Simply put, lawyers will not be out of a job anytime soon but rather their scope of operations will evolve to include BIM.

Using BIM now

Readers operating in the Cypriot construction industry may be excused for thinking that BIM is years away from becoming a significant factor in the Cypriot construction industry. We are however confident that that is not the case and the situation will change rather rapidly.

One of the main reasons supporting this view is the commonly held belief that the current state of the construction industry in Cyprus is not sustainable. This is one of the few things that both Employers and Contractors agree upon.

The time is therefore ripe for the introduction of BIM into the construction market. In this context it is significant to note that BIM can be used on a project even if all parties to the process do not yet know how to use and/or do not yet have access to the relevant software. The fact of the matter is that if an Employer wishes it to be so, any Cypriot project can be run on BIM starting tomorrow.

We are currently working with construction professionals operating in Cyprus with long standing international experience working with BIM. They are very well placed to advise on and to provide BIM implementation by assisting clients in the construction and development of the models required for BIM to operate on a project and in setting out the necessary BIM process and procedures in relation to the project, irrespective of its stage of development or construction.

For any related queries and/or more information on how BIM can be put to use on your construction project please contact the Construction and Real Estate team at Ioannides Demetriou LLC.

All photos and model depictions used in this article are the property of and have been graciously provided by DG Jones and Partners (www.dgjones.com).

State Aid and Taxation

Posted on | by Paschalis Paschali

Fiscal state aid is a hot topic right now, with a number of high-profile cases going through the European courts.

Under EU law, Member States are prohibited from giving an advantage in any form whatsoever to undertakings on a selective basis, unless it is justified by reasons of general economic development. 

The test is set out in Art 107 of the Treaty on the Functioning of the European Union (TFEU):

“[…] any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.”

The concept of state aid is wider than that of a subsidy, embracing not only positive benefits, such as subsidies, but ‘also interventions which, in various forms, mitigate the charges which are normally included in the budget of an undertaking and which, without therefore being subsidies in the strict meaning of the word, are similar in character and have the same effect’.

An aid could include subsidies, interest-free or low-interest loans or interest rate subsidies, guarantees on preferential terms, supply of goods or services on preferential terms, capital injections on preferential terms etc.

In order to fall under the scope of Art 107 TFEU, the aid must be granted by a Member State or through Member State resources. This encompasses regional or local authorities and public bodies. There must be a burden on state resources, not just an incidental benefit given without a financial burden.

Very importantly, the aid must favour certain undertakings or the production of certain goods (the ‘selectivity’ principle), which distort or threaten to distort competition, and must be capable of affecting trade between Member States.

The salient question is whether the recipient of the advantage is receiving a benefit that it would not have otherwise received under normal market conditions. The benefit should improve the undertaking’s financial position or reduce the costs that it would have had to bear.

The Commission does not need to prove that trade will be affected. It is sufficient to show that the measure threatens competition, i.e. that intra-EU trade may be affected and not necessarily permanently. For general guidance, see the Commission’s 2016 Notice.

Under Art 107(2) TFEU, certain types of aid such as aid of a social character or aid to help in case of a natural disaster are deemed to be compatible with EU law. Furthermore, aid may be compatible with the internal market if it falls within any of the six derogations laid down in Art 107(3) TFEU. These derogations have been construed strictly, though some of these proved essential in the context of past financial crises and the COVID-19 era.

Whether or not a measure is state aid for the purposes of this provision is a question that the courts both at European and national level have competence to decide. However, whether such state aid is compatible with the common market (i.e. whether it is lawful), is a question that the national courts do not have legal competence to deal with – only the European Commission at first instance.

The Commission has a pivotal role in the application of the state aid prohibition. It keeps constant review of existing aids offered by Member States. Furthermore, Member States are required to notify the Commission as to any plans to grant or alter state aid. The Commission may also ask the Court of Justice to order a Member State to recover illegal state aid.

Companies themselves may trigger investigations by lodging complaints with the Commission. In fact, during an investigation (or even prior to it), the Commission often invites interested parties to submit comments. A company may be affected by the state aid prohibition whether it is the recipient of aid or the competitor of the recipient. Recently, a direct action against a Commission decision brought by competitors of the beneficiaries of a state aid measure was allowed in the Scuola Elementare Maria Montessori case.

Aid given to a company must be repaid if it is unlawful or has not been properly notified or approved by the Commission. If repayment is demanded, within a period of four months, the taxpayer must reimburse the full amount of the financial benefit conferred, including interest, for up to a maximum of ten years prior to the start of an investigation. No recovery is necessary when the unlawful aid was given more than ten years before the Commission’s decision.

The state aid prohibition has become very high profile in the tax field. Tax measures that relieve the recipients of charges that are normally borne from their budgets such as reductions in the tax base, total or partial reduction in the amount of tax (exemption of tax credit), deferment, cancellation or even special rescheduling of tax debt are examples of fiscal state aid. Such tax measures are thought to be granted by the state or through state resources. This is because a tax exemption mitigates the charge that would normally be recoverable from the undertaking. Therefore, the state loses tax revenue. This loss of tax revenue is equivalent to consumption of state resources in the form of fiscal expenditure.

Recent state aid investigations have centred around tax rulings or advance pricing agreements given by Member State tax authorities to various multinationals. What was objectionable to the Commission in each of these cases was that the tax rulings given by Member States allowed the MNE beneficiaries to depart from market conditions in setting the commercial conditions of intra-group transactions, which led to significant tax reductions and very low effective tax rates.

Questioning discretionary practices of tax administrations is not something new in the area of state aid. As noted in the 1998 Commission state aid notice on business taxation, treating economic agents on a discretionary basis may mean that the individual application of a general measure takes on the features of a selective measure, in particular where exercise of the discretionary power goes beyond the simple management of tax revenue by reference to objective criteria.

In the last few months, decisions of the European Court of Justice on some of these cases have come out but we are still waiting for many more. What seems to be emerging from the Fiat and Starbucks appeals is that a tax ruling which does not seem to follow the OECD’s arm’s length principle does not necessarily mean that it falls within the scope of the EU’s state aid prohibition. It is important to assess the reference system of the investigated Member State in order to determine whether the tax ruling is an exception to that system and not whether it deviates from a general abstract arm’s length principle.

Of course as the arm’s length principle as well as the OECD’s Transfer Pricing Guidelines are now incorporated or closely followed by most Member States, including Cyprus, a tax ruling or advance pricing agreement given by the tax administration which allows a tax treatment incompatible with the arm’s length principle is very likely to fall foul of the state aid prohibition. Therefore, special caution should be taken by tax authorities in giving tax rulings, to ensure that the rulings are aligned with the OECD Transfer Pricing Guidelines. Furthermore, undertakings receiving beneficial tax treatment – whether through a ruling or advance pricing agreement or other mitigating measure – should bear in mind that if it is too good to be true, it is probably state aid and will need to be reimbursed at some point.

For more information on any of the issues raised in this newsletter, please get in touch with us.

Trademark protection in the Metaverse

Posted on | by Paschalis Paschali

As the Metaverse continues to grow and evolve, it brings about exciting opportunities and challenges for businesses and creators alike. With virtual worlds becoming a significant part of our digital lives, intellectual property protection becomes crucial in this immersive digital realm. In this article, we will explore how trademark protection in the Metaverse has been addressed so far.

The Metaverse can be described as a virtual universe where users interact with one another and digital content in real-time. It encompasses virtual reality (VR), augmented reality (AR), and other immersive technologies. Within this vast digital landscape, brands and trademarks play a crucial role in distinguishing products and services, fostering consumer trust, and promoting healthy competition.

Recently, in a groundbreaking ruling, a New York court applied trademark infringement analysis to non-fungible tokens (NFTs) and found that a collection of digital images called ‘MetaBirkins,’ featuring fur-covered handbags attached to an NFT, could confuse consumers with the luxury fashion brand Hermès Birkin bag. Hermès argued that the MetaBirkins collection infringed its trademark for the word ‘Birkin’ violated its trade dress rights, and involved cyber-squatting and unfair competition. The court upheld all of Hermès’ claims and awarded the brand $133,000 in damages. This decision has significant practical implications, suggesting that existing trademark rights on physical goods can potentially be enforced against their unauthorized use in virtual environments. It also highlights the importance of balancing fundamental rights when addressing trademark infringements related to NFTs and new forms of artistic expression. Additionally, the ruling raises questions about the distinction between owning the digital images and owning the ownership rights to the NFT in terms of legal action against infringement.

Although this decision has no binding effect in Europe, significantly, it indicates that existing trade mark rights on physical goods could potentially be enforced against their unauthorised use in virtual environments, in spite of the fact that the trade mark proprietor is not yet active in the metaverse or in the market of NFTs certified digital assets.

While most businesses have trademark registrations for “real world” goods/services, some are extending their trademark portfolios to include virtual goods and services. The European Union Intellectual Property Office (EUIPO) has provided guidance to brand owners on describing metaverse and NFT-related goods/services and the appropriate NICE classes to use. According to the guidelines, classes 9 (downloadable virtual items), 35 (retail store services encompassing virtual products), 41 (online entertainment services), and 42 (minting of NFTs) are relevant for trademark registrations related to the Metaverse. Generic terms like “virtual goods” or “non-fungible tokens” are not sufficient and must be further specified, such as “downloadable virtual goods, namely, virtual clothing” or “downloadable digital files authenticated by non-fungible tokens.”

There are also several infringement issues to address, including whether reproducing a trademark in the metaverse constitutes an infringement. Mere reproduction of a mark by an avatar in the metaverse may not satisfy the criteria for trademark infringement, similar to how wearing a T-shirt with a third-party logo does not infringe in the real world. However, offering an avatar design or accessory service using a third-party trademark or using a third-party trademark for a virtual store front likely constitutes infringement.

As the Metaverse continues to shape the digital landscape, the EU is proactively addressing trademark protection to safeguard brand owners’ rights. The established trademark protection framework, through institutions like the EUIPO, enforces legal remedies, prevents consumer confusion, and fosters international cooperation. This concerted effort ensures that the Metaverse remains a secure and innovative space for businesses, creators, and consumers alike. By upholding trademark rights, the EU promotes a thriving virtual environment where brands can flourish while providing users with a trusted and engaging experience.

Ultimately, the level of trademark protection in the Metaverse will depend on the legal and regulatory developments that emerge as the concept evolves and becomes more established. It is advisable for brand owners and businesses to closely monitor the legal landscape and consult with legal experts who specialize in intellectual property and emerging technologies to understand the specific implications and protections related to trademarks in the metaverse.

Get in touch for a consultation with our team.

The Protection of Taxpayers’ Rights

Posted on | by Paschalis Paschali

In the past, the application of human rights provisions in the field of taxation was scarce. The European Court of Human Rights had in the past considered tax matters as falling within the protection of the European Convention of Human Rights, but only in so far as they were classified as criminal charges.

Today, there is a major shift of attitudes. In the European Union, as of 1 December 2009, with the entry into force of the Lisbon Treaty, the Charter of Fundamental Rights constitutes primary EU law. As such, the restrictive application of the European Convention of Human Rights as regards taxation is no longer an issue as there is a provision in the Charter which limits the scope of the rights to criminal tax charges.

It should first be pointed out that the provisions of the Charter are addressed primarily to Union institutions and bodies. They are also binding on Member States but only when and in so far as they are implementing Union law. Therefore, the Charter applies when the Member State authorities apply an EU regulation directly as this involves the implementation of EU law. It also applies when national authorities adopt or apply a domestic law transposing an EU directive. Furthermore, it applies to national rules imposing penalties for non-compliance with a directive, even if the directive itself does not make an express reference to penalties.

There are several articles of the Charter that provide for procedural guarantees and are applicable to tax procedures. These articles include:

  • Article 7, which provides for the right of respect for private and family life
  • Article 8, which provides for the right of protection of personal data
  • Article 11, which provides for the right of protection of the freedom of expression and information
  • Article 17, which provides for the right to good administration
  • Article 47, which provides for the right to an effective remedy and a fair trial
  • Article 48, which provides for the right of presumption of innocence and the right of defence
  • Article 49, which provides for the principles of legality and proportionality of criminal offences and penalties
  • Article 50, which provides for the right not to be tried or punished twice in criminal proceedings for the same criminal offence.

There have been some interesting cases at the CJEU where some of these rights were invoked. In this newsletter, we look at some of the areas in which the EU’s Charter has afforded protection to taxpayers which may be relevant to the audit process, investigations, information orders and penalties.

Tax Investigations/Searches/Seizures – The right of respect for private and family life

In the WebMindLicenses case, the CJEU dealt with the question whether in a situation where a taxpayer was being investigated for tax abuse concerning VAT, the tax authorities could use evidence obtained without the taxpayer’s knowledge in the context of a parallel criminal procedure that had not been concluded, when such evidence was obtained through interception of telecommunications and seizure of emails.

Here, the CJEU found that the interception of telecommunications and the seizure of emails in the course of searches at the professional or business premises of a natural person or the premises of a commercial company, could constitute an interference with the exercise of the right to privacy under Article 7 of the Charter.

Whilst the tax authorities were allowed, in order to establish the existence of an abusive practice concerning VAT, to use evidence obtained without the investigated taxpayer’s knowledge, this had to be done in a manner compatible with Article 7. The authorities had to show that the interception of telecommunications and the seizure of emails were means of investigation provided for by law and were necessary in the context of the criminal procedure. The authorities also had to show that the right of defence was respected and the investigated taxpayer had the opportunity, in the context of the administrative procedure, to gain access to the evidence seized and to be heard. National courts must also have a power to review whether the evidence obtained by the authorities was in accordance with EU law.

If these safeguards were not met, then the evidence obtained had to be disregarded, being fruits of a poisonous tree. It appears that irrespective of what the national law stipulates on the use of illegally obtained evidence, the CJEU demands that a separate and autonomous assessment should be made, based on the guarantees protected by the EU Charter. However, this is not settled yet and there is conflicting precedent by the European Court of Human Rights in a subsequent case (K.S. and M.S. v Germany), whereby information obtained by the tax authorities under questionable circumstances was still admissible.

It should not be forgotten that the EU’s Charter rights are only applicable as regards the implementation of EU law. Therefore, if the investigation is for abuse of a non-EU tax, arguably, the evidence illegally obtained might be admissible. This would depend on local law.

Reporting Obligations & the Legal Professional privilege – The right of respect for private and family life

Due to the increasing reporting obligations of tax intermediaries under EU law following DAC 6, there was concern that the legal professional privilege may in some cases be eroded, especially as regards the provision which had the effect of requiring a lawyer acting as an intermediary, where they were exempt from the reporting obligation on account of the legal professional privilege, to notify any other intermediary who was not their client of that intermediary’s reporting obligations (Art 8ab(5)). In a recent important judgment in the Vlaamse case, the CJEU found that this provision was invalid as it infringed Article 7 of the Charter.


The obligation of the lawyer acting as an intermediary (otherwise exempt from reporting due to the legal professional privilege) to notify other intermediaries, in so far as these other intermediaries did not necessarily have knowledge of the identity of the lawyer-intermediary, interfered with the right to respect communications between lawyers and their client, as guaranteed in Article 7 of the Charter. Furthermore, as the third-party intermediaries notified were not themselves bound by legal professional privilege, they had to inform the competent tax authorities of the disclosure under the provisions of the Directive – another interference with Article 7.


Therefore, any reporting obligations on tax intermediaries covered by the legal professional privilege which indirectly affect this privilege, to the extent that they are derived from EU laws, may be struck off.

Naming and Shaming/Beneficial Ownership Registers – The right of protection of personal data

The right of protection of personal data under Article 8 of the Charter of Fundamental Rights is also a very important right which, in theory, can curb the extensive power of tax authorities in relation to the use and exchange of personal data of taxpayers.

In Puškár, the CJEU considered a case where the Slovakian tax authorities published a list of names of individuals, referring to them as white horses – i.e. persons acting as fronts in company director roles. It was questioned whether this was compatible with Article 8 of the Charter. The CJEU found that the processing of personal data by the authorities for the purpose of collecting tax and combating tax fraud was allowed, subject to strict conditions. Firstly, the relevant authorities had to be invested by the national legislation with tasks carried out in the public interest. Secondly, the drawing-up of that list and the inclusion on it of the names of the data subjects had to be adequate and necessary for the attainment of the objectives pursued. Thirdly, there were sufficient indications to assume that the data subjects were rightly included in that list.

In a landmark case decided recently, the Luxembourg Business Register case, it was held that Luxembourg’s requirement that beneficial ownership registry information be displayed online and remain accessible for all members of the public violated the right of protection of personal data. The Luxembourg rules were implementing the rules of the Anti-Money Laundering Directive (Directive (EU) 2018/843) and as such, fell within the scope of the Charter of Fundamental Rights. The rules of the Directive were found to be invalid by the CJEU, as they constituted a serious interference with the fundamental rights enshrined in Articles 7 and 8 of the Charter.

Personal tax data, including tax information exchanged between a Member State and a third country, may also be protected under the General Data Protection Regulation. It could be problematic if the level of protection of the information by the recipient third country is not adequate, as per the EU standards.  

Information Orders and Requests for Recovery – The right to effective remedy and fair trial

In recent times, tax authorities have acquired extensive powers for information requests and recovery orders. Some of these powers have been given to tax authorities as a result of EU legislation, for example, the Directive on Administrative Cooperation (and all its amendments), the Mutual Assistance Directive for the Recovery of Claims, the Anti-Money Laundering Legislation etc. The enhanced powers of tax authorities are a common feature of the post-BEPS era. The exercise of some of these powers can, however, affect the rights of taxpayers to a fair trial, or the right to effective remedy.

In the Berlioz case,  the Spanish tax authorities sent requests for exchange of information to the Luxembourg tax authorities in the context of an investigation of a Spanish taxpayer. The Luxembourg tax authorities did not possess the requested information and made an information order pursuant to the Directive on Administrative Cooperation, to a Luxembourg company and a Luxembourg bank with a possible fine of 250.000 euros in the case of non-compliance. This was irrespective of the fact that the Directive did not contain any provisions as regards penalties.

Under Luxembourg law, the information holder could challenge the amount of the fine but not the information request. The addressees of the information order (i.e. the Luxembourg company and bank) and the taxpayer challenged the legality of the order under Article 47 of the Charter.

The CJEU found that the addressees of the information order had the right to challenge the legality of the information orders, as well as the penalties. The foreseeable relevance of the requested information was also a condition of the validity of an information order.

Here, the addresses of the order had challenged its legality also on the basis that the information requested was not foreseeably relevant. They argued that they should have the right of access to Spain’s request for information to the Luxembourg authorities. Here, the CJEU, taking into account the secrecy provisions of the Directive, found that the request for information must remain confidential, including to interested parties in the course of the administrative and judicial proceedings. This provision did not infringe the rights of the defence and the right to a fair hearing, as long as the relevant person (here, the addressees of the order) could access the minimum information set out in the Directive (Article 20(2)), to assess the lawfulness of the information order: namely, the identity of the taxpayer concerned and the tax purpose for which the information is sought.

Issues regarding the legality of proceedings when there is a breach of the right to an effective remedy have also been raised in relation to the Mutual Assistance Directive for the Recovery of Claims.

In the Donellan case, the CJEU found that an authority of a Member State may refuse to enforce a request for recovery on the ground that the decision imposing that fine was not properly notified to the person concerned before the request for recovery was made to that authority by the authorities of another Member State. In order to comply with Article 47 of the Charter it was important not only to ensure that the addressee of a document actually receives the document in question but also that he was able to understand effectively and completely the meaning and scope of the action brought against him abroad, so as to be able to assert his rights in the Member State of transmission.

Simultaneous application of sanctions – Ne bis in idem

The principle of ne bis in idem, i.e. the right not to be tried or punished twice for the same offence, comes into play when administrative and criminal sanctions are imposed on the same person for the same offence.

In the case of Åkerberg Fransson, the CJEU held that under the ne bis in idem principle, a Member State is not allowed to impose, successively, for the same acts of non-compliance with VAT declaration obligations, a tax penalty and a criminal penalty, in so far as the first penalty (the administrative one) was criminal in nature. This was a matter which was for the national court to determine.

In a later case, the Luca Menci case, the CJEU examined a situation where criminal proceedings were initiated against a taxpayer who had previously been subject to a final administrative penalty for non-payment of VAT. It was found that for the national legislation to be compatible with Article 50 of the Charter it had to pursue an objective of general interest which justified such a duplication of proceedings and penalties. Furthermore, the national legislation had to limit the duplication, including the penalties imposed, to what was strictly necessary.

Know your taxpayer rights

It is very important to know your rights as a taxpayer. This newsletter provided a very limited overview of some important rights and protections offered mainly under EU law. There are many more rights affecting taxpayers’ dealings with tax authorities and principles derived from case law, not only under the Charter but also under the European Convention of Human Rights, which Cyprus follows.

We can help you navigate this area and ensure your rights and interests are protected in your dealings with the Cyprus tax authorities. This is especially important if some of the proposals that the European Commission has been working on, which we discussed in our previous newsletter (e.g. the UNSHELL proposal and the Anti-Facilitation proposal), are eventually adopted.

Digital nomads, international remote working and tax implications (Part II)

Posted on | by Paschalis Paschali

In the previous part, we briefly touched upon the type of tax issues that digital nomads (and/or their employers) might encounter. In this part, we review the legal position in Cyprus. We also review how some jurisdictions have dealt with some of the tax implications affecting international remote workers for non-resident companies and whether they gave rise to a permanent establishment.

So far, the Cyprus tax authorities have adopted a light touch approach. This is facilitated by the Cypriot legislation’s objective test for tax residency of individuals. As of 2017, an individual is a tax resident of Cyprus if it satisfies either the ‘183-day rule’ or the ‘60-day rule’ for the tax year. The 183-day rule is satisfied for individuals who spend more than 183 days in any one calendar year in Cyprus. The 60-day rule for Cyprus tax residency is satisfied for individuals who, cumulatively, in the relevant tax year do not reside in any other state for a period exceeding 183 days in aggregate, are not considered tax resident by any other state, reside in Cyprus for at least 60 days, and have other defined Cyprus ties.

During the COVID-19 pandemic, the Cyprus tax authorities followed the OECD’s non-binding guidance and as such, the presence of persons within Cyprus (or abroad) due to restrictions related to the pandemic were not taken into account when assessing the existence of a permanent establishment. Similarly, the tax residency of a foreign company or a non-resident individual were not affected by extended stays in Cyprus as a result of the pandemic. However, the provisions of this guidance are no longer relevant after the lifting of all restrictions. Therefore, the 183-day rule and the 60-day rule are to be strictly adhered.

For digital nomads working from their holiday home in Cyprus or from a temporary location, even if they do not meet the test for tax residency, they could still trigger a permanent establishment for their employer/company. For this, an assessment of all the facts needs to be made to determine whether the arrangement has sufficient permanency. Furthermore, Cyprus legislation and any underlying tax treaties between Cyprus and the state of the employer need to be reviewed.

It is useful to keep abreast of how other jurisdictions have dealt with some of the tax issues relating to digital nomads.

In 2022, the Spanish tax authorities issued guidelines and later on a binding ruling to confirm that individuals who stayed at home to work remotely during the COVID-19 pandemic were doing so by an extraordinary event. This was not at the employer’s request. The activity lacked a sufficient degree of permanency or continuity and as such, it did not create a permanent establishment for the employer.

Whether after the termination of the public health measures the home office in Spain would give rise to a permanent establishment in Spain, this depended on whether the home office was at the disposal of the foreign employer (in this case a UK employer).

In assessing this, a number of factors were taken into account, such as whether the activity previously performed by the employee changed after he moved to Spain, whether the move was for a purely personal decision, whether the employer had asked the employee to move to Spain for a specific business reason, whether the employer bore the costs of the move, whether the employer had an office in the UK which could be used by the employee etc.

In 2022, a number of rulings were given by the Danish tax authorities relating to international remote work. One ruling found that a CEO of two Norwegian companies who was working from home three days per week was a permanent establishment. By contrast, in another ruling, it was found that a managing director working from home due to personal reasons was not a permanent establishment. One important factor was that the director was not involved in sales-related activities taking place in Denmark. Similarly, a CFO working from home two days a week for a Swiss employer was not a permanent establishment for similar grounds. Although the CFO was also a member of the board of directors, this was not determinative as his functions primarily related to activities in Switzerland.

The Swedish tax authorities have also updated their guidance on remote working. According to the updated guidance, working from home due to government restrictions or force majeure cases (e.g. the COVID-19 pandemic) will not give rise to the existence of a permanent establishment. Similarly, if an employee works from home for personal reasons and this is not required or imposed by the foreign employer and there is no commercial interest for the foreign employer, then the employee’s home will not be considered to be at the disposal of the foreign employer and as such, will not give rise to a permanent establishment.

More recently, the Dutch tax authorities issued a ruling accepting that a foreign EU company did not have a Dutch permanent establishment as a result of having three employees who worked fully remotely from their home offices in the Netherlands. It was crucial that the home offices were not at the disposal of the employer. It was also important that the employees had no authority to bind the company, the foreign company was subject to tax where it was based and, very importantly, the employer offered an office but the employees preferred to work from home. This appears to be the first ruling involving multiple employees.

Of course, these rulings do not bind the tax authorities of other countries, including Cyprus, but they provide useful guidance. It would appear from some of the rulings issued so far that someone generating sales, or a management team or senior staff could give rise to a permanent establishment in Cyprus for the employer/company. For senior management or employees creating significant value for the employer, it is advisable to obtain a tax ruling from the Cyprus tax authorities before any international remote working arrangement is approved by the employer.

We can help you in this process and protect you and your employee from triggering any unexpected tax liabilities. Of course, given Cyprus’ very competitive tax regime and relatively low tax rates, it might be tax efficient to create a permanent establishment in Cyprus, or even transfer your tax residence. Currently, many incentives are offered by the Cypriot government for relocation to Cyprus, especially for non-domiciled individuals, which might make the change of tax residency a very appealing option. However, the transfer of tax residence, whether by an individual or a company needs to be carefully planned, in order to avoid creating dual tax residency. A relocation before you break your previous tax residency could give rise to double taxation of the employee’s worldwide income.

Our experienced lawyers can help you navigate this complex area whether you prefer to avoid the creation of taxable presence in Cyprus, or whether you wish to transfer your tax residency as an employer or that of your employees in Cyprus. We can assist you with all the technical formalities (e.g. registration as a local employer, maintaining payroll in Cyprus etc.) and we can help you obtain any necessary tax rulings from the tax authorities for a seamless transition.

For more information, please get in touch with us.

Digital nomads, international remote working and tax implications

Posted on | by Paschalis Paschali

Digital nomad arrangements are becoming very popular. Although there is no single definition of a digital nomad, the concept tends to encompass remote workers who regularly travel while working. These could be employees or self-employed people who use digital telecommunications technology to carry out their work. Traditionally, digital nomads were mostly self-employed people but since the start of the COVID-19 pandemic, the number of digital nomads who are employees has increased exponentially.

There is a wide range of digital nomads. Some could live completely nomadic lives with no permanent home base, moving from one jurisdiction to another. Others might only work remotely for short periods of time, or during workcations. The rise of digital nomads means that the workplace is no longer geographically restricted, with flexible location-independent working arrangements on the rise. A working environment with remote work is now the rule rather than the exception. However, complete freedom for international remote work is still rare due to a number of obstacles such as local immigration rules, employment, tax, social security etc.

Although many digital nomads might rely on tourist visas to work from a jurisdiction, working on a tourist visa for extended periods might be against local law. Getting a work permit or work visa each time a nomad goes to a new jurisdiction might also be too cumbersome. In order to cut down on red tape and boost the economy through tourism, many countries now give out digital nomad visas. The conditions of such visas vary and could include a minimum earnings threshold, private health insurance, proof of employment, police background checks etc. Cyprus also has a digital nomad visa scheme and in March 2022 increased the number of available visas from 100 to 500.

Taxation is one of the biggest obstacles to international remote work.

Depending on each country’s tax residency rules, a digital nomad might be found to be tax resident in the jurisdiction they are working from. This could lead to double taxation if the jurisdiction of his employment continues to tax him/her as resident. Sometimes, double taxation is eliminated through tax treaty mechanisms or agreements between tax authorities, but this is not always the case.

Even if the digital nomad is not found to be tax resident in the jurisdiction they are working from, or if they are found tax resident, double taxation is avoided, a travelling employee could trigger taxation for the employer in the form of a permanent establishment. Generally, countries can tax non-resident companies or individuals if they have a permanent establishment in another jurisdiction. Therefore, the foreign employer could be taxable in the jurisdiction where the employee is working from if under local rules, the activities and overall working arrangements of the employee give rise to a permanent establishment.

Although each jurisdiction might have its own rules in determining when a permanent establishment is established, there are several common triggers derived from the OECD Model Tax Convention, which jurisdictions tend to follow. An employee who has an office or fixed place of business in another jurisdiction could trigger a permanent establishment for their employer. This can include a co-working space, hotels, Airbnb spaces, if they are paid and chosen by the employer and especially if they are used repeatedly by the same employee or other employees of the same firm. In some jurisdiction, a home office might also be considered as a giving rise to a permanent establishment.  

A permanent establishment might also be triggered by having someone locally who has the authority to sign contracts on the employer’s behalf, or who has an executive or senior management role, or who provides core business services or undertakes sales activities.

If a permanent establishment is established in the jurisdiction where the remote work is taking place, then profits of the employer/company might be allocated (and taxed) by that jurisdiction. This could have serious cost implications, especially if the remote worker is in a senior management position. Let us not forget that prolonged presence of a director of a company in another jurisdiction could affect that tax residence of the company.

Apart from the taxes that may be due (which could be negligible), an employer who has a permanent establishment abroad might need to register the permanent establishment according to local rules. This can be a significant burden especially for partnerships. The employer might also have to run a local payroll and undertake transfer pricing analyses to show the allocation of profits to the permanent establishment. This is likely to be costly, especially if the employer has no foreign presence elsewhere.

EU nationals who wish to work remotely within the EU obviously do not need a digital nomad visa, as they benefit from the EU’s freedom of establishment and the free movement of workers. Nevertheless, EU nationals face the same tax issues, as far as the possible change of tax residency, or creation of a permanent establishment. It is up to Member States to decide whether a remote worker is tax resident in their jurisdiction, or generates a permanent establishment of their employer. EU law and the fundamental freedoms are not triggered, unless there is discrimination (i.e. different treatment of a foreign remote worker with a resident remote worker).

In order to mitigate the tax risks, companies/employers need to assess and approve requests for travel on a case-by-case basis, as the threshold for triggering a permanent establishment might vary under local rules. So far, tax rulings in this area have gone in all directions. We will be reviewing these and the situation in Cyprus in the next instalment of this newsletter.

New EU Directive on improving the gender balance among directors of listed companies and related measures (EU 2022/238): Women on Boards of Listed Companies

Posted on | by Paschalis Paschali

In the context of the EU Gender Equality Strategy 2020–2025, the EU Parliament has adopted a new directive aiming to close the gender gap on corporate boards of large (the “Directive”), with listed EU companies imposing at the same time the obligation for transparent assessment procedures on the basis of the candidates’ merits, irrespective of their gender.

Pursuant to the said Directive, Member States must set an objective to ensure that at least 40% of non-executive director positions at listed companies are held by members of the underrepresented sex. If Member States choose to apply the new rules to both executive and non-executive directors, the target would be 33% of all director positions.

 Listed companies that are not subject to this latter objective, must set individual quantitative objectives with a view to improving the gender balance among executive directors. Also, Member States must ensure that listed companies which do not achieve the objectives referred to above (40% and 33% respectively), as applicable, adjust the process for selecting candidates for appointment or election to director positions. Hence, if the targets set are not being met, companies will need to explain how they intend to meet these objectives.

To ensure compliance with the requirements of the Directive, listed companies will be obliged to provide information, once a year, regarding their respective boards’ gender representation and measures being undertaken to achieve the applicable quotas. On the basis of the information provided by the listed companies, a list of those companies satisfying either of the Directive’s requirements (executive, non-executive directors, all directors) annually will be published by each Member State.

The Directive exempts from its application SMEs, i.e. companies that employ fewer than 250 persons and have either an annual turnover not exceeding EUR 50 million or an annual balance sheet total not exceeding EUR 43 million.

Finally, Member States are required to implement “effective, proportionate and dissuasive” penalties for infringements by listed companies. Τhe Directive further obliges Member States to ensure that in the performance of public contracts and concessions, listed companies comply with applicable obligations relating to social and labour law in accordance with the applicable EU law.

Key dates:

The Member States must adopt and publish the laws, regulations and administrative provisions necessary to comply with the Directive by 28 December 2024.

Listed companies in the EU must meet the targets set above by 30 June 2026.

Comment:

Generally, Cyprus enhanced its position in the gender equality field (there has been an increase in women actively involved in politics) having of course considerable room for improvement while laying solid foundations at a socio-political level. Cyprus has adopted a National Action Plan on Gender Equality 2019 – 2023 setting various measures aiming the promotion of equal participation in decision-making. It remains now to be seen how the Directive’s provisions will be implemented at national level, undoubtedly bringing about a positive effect for the country’s economy and a safeguard of equal labour opportunities especially for women’s employment in the companies concerned.

Navigating EU sanctions – overview and predictions for 2023

Posted on | by Paschalis Paschali

European Commission President Ursula von der Leyen has recently announced that the EU is preparing a 10th package of sanctions on Russia and is planning to have it in place by 24 February 2023 – the 1 year anniversary of Russia’s actions in Ukraine. The new package is said to be focusing on technology that may be used by the military of Russia and in cutting sanctions circumvention. It may further include financial sanctions against four Russian banks. Overall, the EU has progressively imposed sanctions against Russia since 2014, in light of the annexation of Crimea and the non-implementation of the Minsk agreements.

EU sanctions do not apply extraterritorially. The Sanctions Regulation applies, inter alia, to any person inside or outside the territory of the Union who is a national of a Member State, and to any legal person, entity or body, inside or outside the territory of the Union, which is incorporated or constituted under the law of a Member State.

The measures forming part of the various sanctions packages as found and developed under the two main EU regulations, namely Council Regulation (EU) No 833/2014 (a.k.a. economic or sectoral sanctions) and Council Regulation (EU) No 269/2014 (a.k.a. individual or targeted sanctions) are complex and multi-layered, and understanding their full scope and compliance is becoming an increasingly challenging exercise for the stakeholders involved.

The EU economic sanctions regime imposes prohibitions and limitations via the targeting of specific sectors of the Russian economy as a whole including inter alia prohibitions on new investments in the energy sector; prohibitions on certain operations in the aviation sector; prohibitions on imports of iron and steel; prohibitions on the financing of the Russian government and Central Bank as well as banning all those transactions related to the management of the Central Bank’s reserves and assets; prohibitions on a range of financial interactions, financial rating services and transactions with Russia; prohibitions on accepting deposits; prohibitions on trust and a number of business-related services.

The EU individual sanctions regime imposes the freezing of assets belonging to, owned, held, or controlled by listed persons or entities: all their assets in the EU are frozen and EU persons and entities cannot make any funds available to those listed. Both Regulations have broad anti-circumvention provisions, pursuant to which it is prohibited to participate, knowingly and intentionally, in activities the object or effect of which is to circumvent prohibitions as found under the Regulations. Additionally, any person who facilitates the circumvention of sanctions by others, may now be included in the sanctions list himself – and this includes EU natural and legal persons.

The year ahead

It seems unlikely that developments in sanctions policy and regulations will be slowing down in 2023. On the contrary, we expect to see more packages but also enforcement actions as regulators and prosecutors come under increasing pressure to show more “teeth” rather than simply introducing and drafting new policies. The controversial idea of ceasing and not only freezing assets has also been increasingly under discussion.

On 28 November 2022, the European Council unanimously decided to add violations of EU sanctions to the list of “EU crimes”. On 2 December 2022, the European Commission introduced a proposal for an EU Directive which sets out minimum rules concerning the definition of criminal offences and penalties in respect of violating EU sanctions. The willingness to introduce such a Directive is reflective of the EU’s objective for stronger harmonization in the enforcement of sanctions by Member States and for dissuading circumvention at the EU level. Of course, for the Directive to take effect, Member States will have to incorporate it via the passing of national legislation. The Commission has also recently launched an EU whistle-blower tool enabling the anonymous reporting of possible sanctions violations, including circumvention.

Additionally, a Directive on asset recovery and confiscation has been proposed with the aim to tackle “the serious threat posed by organised crime” and provide the means to competent authorities to “effectively trace and identify, freeze, confiscate and manage the instrumentalities and proceeds of crime and property that stems from criminal activities.” Should such proposal solidify further, EU member states would be required to make substantial changes to their national laws and confiscation regimes for instance, the confiscation of unexplained wealth – enabling judicial authorities to confiscate property when they are convinced it derives from criminal activities, even if it cannot be linked to a specific crime. Such confiscation measures will inevitably be raising inter alia various property and human rights considerations, which will eventually have to be determined by the member state courts.

At the moment, while EU regulations set out the prohibitions and licensing grounds with respect to sanctions, it is implementing legislation at each Member state level which imposes the applicable penalties. Cyprus currently adopts The Implementation of the Provisions of the United Nations Security Council Resolutions or Decisions (Sanctions) and the European Union Council’s Decisions and Regulations (Restrictive Measures) Law (Law 58(I)/2016) which renders violation of any provisions of such sanctions/restrictive measures a criminal offence subject to imprisonment and/or penalties.

The above information and challenges make it even more important that businesses adopt their own robust and up-to-date sanctions compliance measures. It is the individual responsibility of each person and organisation to carefully examine risks potentially arising under the EU sanctions regime and verify whether any of the listed individuals or entities are part of their business relationships or whether their activities violate sanctions.

The contents do not constitute legal advice, are not intended to be a substitute for legal advice and should not be relied upon as such. It is recommended to seek independent legal advice when considering participating in activities or transactions which may give rise to sanctions-related matters. Engaging in thoughtful due diligence at the outset of any investment/transaction will help you to prevent pitfalls further down the line.