Anti-Tax Avoidance Measures

In response to the EU Council Directive 2016/1164 issued on July 12, 2016, which sets forth measures against tax avoidance practices affecting the internal market, Cyprus has integrated several key provisions into its Income Tax Law. These provisions are designed to combat tax avoidance and ensure tax fairness.

Interest Limitation Rule

The Interest Limitation Rule restricts the deductibility of Excess Borrowing Costs (EBC), which are the borrowing costs exceeding 30% of a company’s Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) related to business operations involving fixed and intangible assets. However, there is a derogation where EBC is deductible up to a threshold of €3 million per fiscal year for each company or Cypriot tax group. This rule aims to discourage artificially high interest deductions and excessive profit shifting through financing arrangements. Additional exceptions and clarifications on this rule can be found in Circular 5/2023 by the Cyprus Tax Department.

Controlled Foreign Company (CFC) Rule

Under the CFC rule, non-distributed income from a Controlled Foreign Company (CFC) or a foreign permanent establishment, which arises from arrangements that are deemed non-genuine and controlled by a Cyprus tax resident entity, is added to the taxable income of the controlling company in Cyprus. An arrangement is considered non-genuine if it is set up to obtain a tax advantage without reflecting economic reality. Tax credits for foreign taxes paid on the income of a CFC are available to mitigate double taxation.

General Anti-Abuse Rule (GAAR)

The General Anti-Abuse Rule provides that any arrangements, or series of arrangements, that do not have valid commercial reasons which reflect economic reality, should be disregarded for tax purposes. This rule is intended to counteract aggressive tax planning strategies that lack genuine business substance. Read more on GAAR here.

Exit Taxation

Exit taxation applies when a taxpayer relocates assets, such as moving them from a head office to a permanent establishment or transferring tax residence outside of Cyprus. The tax is calculated on the market value of the transferred assets at the time of exit, minus their value for tax purposes. Taxpayers have the option to defer this tax payment, spreading it over five years, which can alleviate financial pressures associated with restructuring and relocation.

Hybrid Mismatches

The rules on hybrid mismatches address discrepancies that lead to double deductions or deductions without inclusion. These rules deny tax deductions or tax incomes in cases where such mismatches result in a double tax benefit or non-taxation through disparities in the tax treatment of entities or financial instruments across different jurisdictions.

These provisions collectively enhance Cyprus’s compliance with international tax standards and discourage tax avoidance strategies, thereby protecting the integrity of the tax base.

Disclaimer

Please note that the information provided here is for general guidance only and does not constitute professional tax advice. Tax laws and interpretations are subject to change, and individual circumstances can significantly affect tax obligations and benefits.

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For personalized tax advice tailored to your specific situation, we strongly recommend consulting with a qualified tax professional. Our team is equipped with the expertise to navigate the intricacies of Cyprus tax law and provide you with customized solutions. Contact us to ensure that you are making the most informed decisions for your tax-related matters.

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