The latest update in Cyprus and future of international Tax planning Christodoulos Damianou The Best Legal Conference 26 September 2019
CONTENTS ✓ Implementing the EU ATAD ✓ EU CFC Rules ✓ Implementation of the MLI ✓ Transfer pricing ✓ Substance and tax residency ✓ Reporting under DAC 6 ✓ The new Bank Reality
THE EU ANTI-TAX AVOIDANCE DIRECTIVE
The EU Anti-Tax Avoidance Directive – Interest Limitation • Restriction of deductibility of interest so not to exceed 30% of taxable EBITDA. • Taxable EBITDA is defined as the total of net taxable income increased by the exceeding borrowing costs, the depreciation and amortization of fixed assets and intangibles. • “Exceeding borrowing costs” is defined as the excess of borrowing costs over interest income and other economically equivalent taxable revenues. • The definition of “borrowing costs” is based on the provisions of the ATAD, i.e., interest expenses on all forms of debt, other costs economically equivalent to interest , as well as expenses incurred in relation with the raising of finance. • There is no distinction on the deductibility based on who is the lender/ creditor and the rule applies to interest under intra- group and third-party loans alike.
The EU Anti-Tax Avoidance Directive – Interest Limitation • The restriction doesn’t apply for amounts < € 3ml per Company. • The restriction doesn’t apply to standalone companies (not part of a group). • The law also excludes financial undertakings • Credit institutions, investment firms, AIFMs and management companies of UCITS • Institutions for occupational retirement provision • Pension institutions (considered to be social security schemes legal entity and other relevant legal entity
The EU Anti-Tax Avoidance Directive – Interest Limitation Exclusion of certain exceeding borrowing costs • Interest on loans used to fund long term public infrastructure projects where the: a) operator b) borrowing costs c) assets are all located in the EU. d) income • Income earned from such a long-term public infrastructure project is also excluded from the definition of taxable EBITDA.
Controlled Foreign Corporation Legislation (CFC Rules)
The EU CFC Rules EU countries without CFC legislation before ATAD For example: • Cyprus • Malta • Bulgaria • Etc. [Example of Cyprus explained in the following slides]
The EU CFC Rules A CFC is defined as an entity or a permanent establishment (“PE”) whose income is not taxable or exempt if the following two conditions are met: 1. In the case of a non tax resident entity, the tax resident company, alone or together with its associated enterprises, holds a direct or indirect participation of more than 50% in such entity. The threshold is determined in terms of participation in the share capital, voting rights or the entitlement to profits. 2. The company or PE is low-taxed, i.e. the income tax it pays is lower than 50% of the country’s corporate income tax that it would have paid locally in the country.
The EU CFC Rules • When a company is a CFC, then the undistributed profits of the CFC which result from not genuine arrangements which have been put in place in order to take tax advantage are added to the resident taxable person who holds the shares in the CFC. • For the purpose of the previous paragraph, an arrangement or a series thereof shall be regarded as non-genuine to the extent that the entity would not own the assets or would not have undertaken the risks which generate all, or part of, its income if it were not controlled by a company where the significant people’s functions, which are relevant to those assets and risks, are carried out and are instrumental in generating the controlled company’s income.
The EU CFC Rules The above do not apply in the case of a company whose accounting profits: ➢ Do not exceed Euro 750.000 and the passive income does not exceed Euro 75.000 ➢ Do not exceed 10% of its operating costs for the tax period
MULTI-LATERAL INSTRUMENT (MLI) TREATY SHOPPING TREATY ABUSE IMPLEMENTATION
Multi-Lateral instrument • In June 2017 under the OECD BEPS initiative, 87 countries (including Ukraine but not the USA) signed the MLI • On 22 March 2018, the OCED announced that the MLI will enter into force on 1 July 2018, following the deposit of the ratification instrument by a fifth jurisdiction. • By today 21 countries deposited the ratification instruments with the OECD. • These countries are: Australia, Austria, Curacao, Finland, France, Georgia, Guernsey, Ireland, the Isle of Man, Israel, Japan, Jersey, Lithuania, Malta, Monaco, Netherlands, New Zealand, Poland, Serbia, Singapore, Slovakia, Slovenia, Sweden and the UK
Multi-lateral instrument The MLI offers concrete solutions for governments to close the gaps in existing international tax rules by: • Modifying the application of thousands of bilateral tax treaties concluded to eliminate double taxation • Implementing agreed minimum standards to combat treaty abuse • Improving dispute resolution mechanisms • Providing flexibility to accommodate specific tax treaty policies
Multi-lateral instrument The MLI covers the following subjects: • Hybrid mismatches • Treaty abuse • Avoidance of permanent establishment status • Improving dispute resolution • Arbitration Most countries have elected to deal only with the Treaty Abuse provisions
MLI – The purpose of Double Tax Treaties The instrument is quite flexible. At their own discretion, signatories may define which treaties will be covered and which provisions will apply. The signatories to the MLI have three options on international tax treaty abuse: • Option 1: adopting only the principal purpose test (PPT) • Option 2: adopting the PPT test and the simplified limitation of benefits provision (Simplified LOB) • Option 3: adopting the detailed LOB in combination with the mechanism to address conduit financing .
Limitation of benefits • DTT benefits can be denied to a person where the principal purpose, or one of the principal purposes of any arrangement, or transaction, or of any person was to obtain those benefits.
Limitation of benefits This means that if in a structure there are only tax reasons for putting the structure in place in the first place and there are no business reason to support, then no DTT benefits will be granted and normal taxes will be paid.
Next step on the MLI process • Exchange of notes with the respective countries which have completed the ratification process under the their laws • The question is whether there will be pressure on the small countries to complete their internal procedures and notify the OECD accordingly • Russia and Ukraine are expected to complete these formalities soon • It is understood that discussions are taking place at the OECD level on certain aspects of the MLI • Thus it could reasonably be expected that no pressure would be exerted until the end of this year
Position of Cyprus on the MLI • Cyprus extended the application of the MLI to the 55 individual treaties signed by Cyprus, plus three treaties covered under the old treaty with the Republic of Yugoslavia (Bosnia and Herzegovina, Montenegro and Serbia) plus three treaties covered under the old treaty with the USSR (Azerbaijan, Kyrgyzstan and Uzbekistan) • No tax treaties of Cyprus have been excluded
TRANSFER PRICING REQUIREMENTS EXISTING AND NEW LEGISLATION
Transfer pricing requirements in Cyprus • The interpretative Circular refers to the tax treatment of intra group back- to-back financing arrangements • In addition it covers the granting of loans to related parties out of funds borrowed from banks or other third parties • It covers also back-to-back interest free loans • It does not cover loans granted to related parties out of the company’s own funds
Transfer pricing requirements in Cyprus • The Transfer pricing analysis should be prepared by a TP expert and must be submitted to the Cypriot Tax Department by a person who has a license to act as an auditor of a company • The Circular applies with effect from 1 July 2017 for all existing and future transactions irrespective of the date of entering into the relevant transactions • Any tax rulings issued on transactions within the scope of this circular, which were issued prior 1 July 2017 will no longer be valid for tax periods after 1 July 2017
Expected Additional Measures in Cyprus on Transfer Pricing • Additional guidelines for the application of the transfer pricing rules to the forms of financing activities not covered by the circular • Transfer pricing rules and documentation for other forms of intercompany transactions, such as sales, licensing and provision of services • The above are expected to be introduced during 2019 and apply from the year 2020
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