Tax News Letter – Snapshot on Cyprus: The Anti Tax Avoidance Directive

Tax News Letter – Snapshot on Cyprus: The Anti Tax Avoidance Directive

April 2019 Dear Clients and Associates,   Cyprus has recently incorporated in its laws the anti tax avoidance measures contained in the EU Directive on Anti-Tax Avoidance 2016/1164 (ATAD) with retroactive effect (as of 1st January 2019)(ATAD Law).   Brief analysis of key areas:

Interest Barrier Rule (IBR)

The Interest Barrier Rules is a new provision that limits the deductibility of interest expenses and other related borrowing costs (‘Borrowing Costs’) to 30% of the calculated earnings before interest, depreciation and amortisation (EBITDA). The deductibility limitation is linked to the Borrowing Costs which exceed interest income. The limitation applies at the level of a Cyprus company or at the level of a Cyprus tax Group (as defined in the ATAD Law and assuming the Cyprus company is part of such Group).   Certain exceptions apply, such as: (i) monetary threshold of EUR 3m (calculated either at the level of Cyprus company or Cyprus tax Group), (ii) exclusion of loans entered into before June 2016, (iii) standalone companies, and (iv) if the equity over total assets ratio of the Cyprus Company is within 2% of the consolidated group equity to total assets ratio.

Controlled Foreign Companies Rule (CFC Rule)

The CFC rule captures foreign companies which (i) are held (individually or jointly) by a Cyprus Company and the participation exceeds 50% (directly or indirectly) and (ii) the foreign tax is lower by 50% to the hypothetical Cyprus tax.  The CFC rule only captures the CFC’s undistributed income which is linked to the Cyprus company’s significant people’s functions (SPF) and only to the extent this should be attributed to this SPF using the arm’s lent principle. In the event the CFC’s undistributed income is incorporated in the Cyprus company’s tax base, a double tax credit relief will be allowed.

General Anti avoidance Rules (GAAR)

As the name suggests, this is a general anti avoidance provision designed to capture non genuine arrangement(s) conducted wholly or for the main purpose to obtain tax benefits which defeats the purpose and object of the Law. The intention being that the GAAR will shift the burden of proof of demonstrating that the arrangement(s) occurred in the context of a genuine commercial transaction and reflect the economic and business reality to the taxpayer, otherwise the Authorities may ignore / re-characterize such arrangement(s) for tax purposes.    The effect of ATAD is the introduction of mechanism to tackle (i) excessive interest expense, (ii) curb the non-genuine diversion of profits to nil tax jurisdictions eg BVI and (iii) function as a ‘back stop’ capturing non genuine transactions which are not tackled by Specific anti avoidance provisions of the Law. The ATAD Law needs careful consideration and handling in regards to its impact to existing and future transactions. Whilst we await the Cyprus Tax Department to issue guidelines on the application of ATAD Law. Our dedicated team of experts and associates remains at your disposal for any advice or guidance you may require.