Tag: EU

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.

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.

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.

Court of Justice (EU) ruling on accessing information of beneficial owners (AML Directive)

Posted on | by Paschalis Paschali

On 22 November 2022 the Court of Justice of the European Union (“CJEU”) ruled that the provision of Directive (EU) 2015/849, as amended (“AML (EU) Directive”) providing that Member States must ensure that information on the beneficial ownership of legal entities is accessible in all cases to any member of the general public is invalid.

In addition to granting access to the public on beneficial owner information, the AML (EU) Directive also allows Member States to provide for an exemption to the public’s access on a beneficial owner’s information where the access would expose the beneficial owner to “disproportionate risk, risk of fraud, kidnapping, blackmail, extortion, harassment, violence or intimidation, or where the beneficial owner is a minor or otherwise legally incapable”. This exemption for restricting access “in exceptional cases” and on a “case-by-case basis”, did not prevent the CJEU from ruling that the provision for granting the right to such access is invalid.

The judgement concerned CJEU’s joined Cases C-37/20, Luxembourg Business Registers and C-601/20, Sovim. The two cases were referred to the CJEU following a request for a preliminary ruling from the tribunal d’arrondissement de Luxembourg (Luxembourg District Court) pursuant to Article 267 of the Treaty on the Functioning of the European Union.

The concerned provision

The question referred to the CJEU concerns, inter alia, the provision of Article 30(5)(c) of the AML (EU) Directive which reads as follows:

Member States shall ensure that the information on the beneficial ownership is accessible in all cases to:

(a) […]

(b) […]

(c) any member of the general public.

The persons referred to in point (c) shall be permitted to access at least the name, the month and year of birth and the country of residence and nationality of the beneficial owner as well as the nature and extent of the beneficial interest held.

[…]

Conflict with the EU’s Charter of Fundamental Rights

In declaring invalid the provision permitting the general public’s access to information on beneficial ownership, the CJEU stressed in its decision that the concerned provision constitutes a serious interference with the fundamental rights enshrined in Article 7 (Respect for private and family life) and Article 8 (Protection of personal data) of the EU’s Charter of Fundamental Rights.

Effect on Cyprus AML legislation

The Cyprus AML Law transposing the respective AML (EU) Directive includes a similar provision permitting members of the general public to have access “in all cases” to information on the beneficial owner’s name, the month and year of birth, the nationality, the country of residence and the nature and extent of the beneficial interest held.

The CJEU’s decision is expected to impact the general public’s access “in all cases” on information concerning beneficial owners. It remains to be seen whether the AML (EU) Directive will provide express grounds for the public’s access to such information or whether such grounds will be left to the discretion of each Member State, however, such grounds must be based on a proportionate and balanced approach without violating the Charter’s rights.

In the meantime, the Cyprus AML Law will need to be amended so that access of the public to information on beneficial owners is subject to grounds which are aligned with the EU’s Charter on Fundamental Rights and specifically Article 7 (Respect for private and family life) and Article 8 (Protection of personal data).

As of 23 November 2022, the Cyprus Department of Registrar of Companies and Intellectual Property suspended the access to the register of beneficial owners for the general public, in response to CJEU’s decision. Obliged entities will continue to have access to information maintained in the beneficial owner’s register by submitting a solemn declaration confirming that the information is requested within the context of performing customer due diligence.

Our services

Ioannides Demetriou LLC advises on matters concerning regulatory AML compliance and the protection of fundamental rights such as your right to the protection of personal data and your right for private and family life.

Reach out to our team to ensure that your regulatory obligations are protected in a manner that respect and safeguard your fundamental rights.

You can contact us directly by calling + 357 22 022 999 or by email at [email protected]

The information provided in this article does not and is not intended to constitute legal advice; instead, all information contained in this article is for general informational purposes only. If you require assistance with any legal matter, including a matter referred to in this article, you should contact one of our attorneys to obtain advice tailored to your specific circumstances.