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A.I. Kitsios LLCLimassol, Cyprus

Christoforos Ioannou KitsiosAdvocate (LL.B, LPC, LL.M)Partner

International Tax CongressMoscow, March 2017

“EU and Cyprus Recent Tax Amendments”

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OverviewEU• EU Anti Tax Avoidance Directive• Common Corporate Tax Base and Common

Consolidated Corporate Tax Base

Cyprus• New IP Tax regime• Cyprus-Russia Tax Treaty

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EU Anti-Tax Avoidance Directive (ATAD)• ATAD• Interest Limitation Rule• Exit Taxation Rule• GAAR• Controlled Foreign Company Rule• Hybrid Mismatches Rule• Implementation

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ATAD• OECD’s BEPS Action • EU Action Plan “A fair and efficient Corporate Tax

System in the EU” (COM (2015) 302 final)• “EU Anti-Tax Avoidance Package: Next Steps towards

delivering effective taxation and greater transparency in the EU” (COM (2016) 23 final)

Council Directive (EU) 2016/1164 laying down rules against tax avoidance practices that directly affect the functioning of the internal market (OJ L 193, 19.7.2016.)

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ATAD• Applies to taxpayers who are subject to corporate tax

in the EU (entities and permanent establishments)

• ATAD contains only general provisions which leave implementation to Member States

• Member States need to ensure at least the level of protection provided by the Directive

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ATAD: Interest Limitation Rule• Aim: Discourage artificial debt arrangements• Net interest expenses deductible only up to 30% of

the taxpayer’s earnings before interest, tax, depreciation and intangibles amortisation.

• Member States may by derogation provide that a taxpayer is allowed to deduct net interest expense up to €3million.

• Grandfathering Provision: Debts in place before 17 June 2016 and loans used to fund long-term public infrastructure projects

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ATAD: Interest Limitation RuleEU

Co. A

Non-EUCo. B

EUCo. C

Loan

Co. C, will be able to deduct from profits only interest up to

30%

Interest

Example • Co. A, based in the EU, sets up a

subsidiary in a no tax third country• Subsidiary provides a high interest loan

to another company in the group, Co. C located in the EU

• Result: Group Reduces taxable income and interest received by Co. C is not taxed

• Under this rule, the amount of interest that the EU company will be able to deduct will be 30%. The remainder will be taxed

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ATAD: Exit Taxation Rule• Aim: Prevent companies from transferring assets or

their tax residence purely to avoid taxation• The Rule provides the imposition of an exit tax when a

taxpayer:▫ Transfers assets between its head office and its PEs

out of a MS whilst the legal or economic ownership remains under the same taxpayer; or

▫ Transfers tax residence to another MS or third country; or

▫ Transfers its PE out of a MS.

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ATAD: Exit Taxation Rule• Amount of tax

▫ The exit tax will be based on the market value of the transferred assets at the time of the exit of the assets, less their value for tax purposes.

• Market value▫ The amount for which an asset can be exchanged or

mutual obligations can be settled between willing unrelated parties

• Deferral of payment▫ Installments over 5 years▫ Deferral may be discontinued in certain

circumstances

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ATAD: Exit Taxation RuleExample• A pharmaceutical company based in a

MS, develops a new product and deducts costs of development from its profits

• When the product is developed and it starts generating income, the said company, moves it to a no tax country and applies for a patent there.

• Result: All value generated on the IP of this product is now untaxed

• Under this rule, the MS where the product has originally been developed, will be able to tax the said company on the value of this product it before it is moved abroad

EU Pharmaceutical Company

Subsidiary out of EU (no tax)

Product Developed

Exit taxation is imposed before transfer on the

value of the product

IP Transfer

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ATAD: GAAR• Aim: Tackle artificial tax arrangements if there is no

other anti-avoidance rule that specifically covers such an arrangement.

• Non-Genuine Arrangements: Not put in place for valid commercial reasons that reflect economic reality.

• Wide and uncertain

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ATAD: Controlled Foreign Company• Aim: Deter profit shifting from high tax jurisdiction to

a no or low tax jurisdiction• CFC: Directly or indirectly holds together with an

associate enterprise more than 50% of capital or voting rights or entitled to more than 50% of profits of that entity and subject to a low tax rate

• Low tax Rate: When the CFC is subject to an effective corporate tax rate of less than 50% of what would have been charged in the parent company jurisdiction

• Effect of the Rule: Re-attribution of income of a low taxed controlled foreign company to its parent company

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ATAD: Controlled Foreign CompanyIncome attributed in one of two methods• 1st Method: Non-distributed income of the CFC or

income of a PE which is derived from interest or other income from financial assets, Royalties or other income generated from IP, Dividends, etc.

• Exceptions:▫ Substantive economic activity, staff, equipment, assets

and premises▫ One third or less of the income accruing to the entity or

PE falls within the listed categories (i.e. interest, royalties, dividends, etc.)

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ATAD: Controlled Foreign Company• 2nd Method: Income from non-genuine

arrangements • The MS shall attribute the non-distributed income of a

CFC arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining tax advange.

• “Non-genuine Arrangement”• Exceptions:

▫ Accounting profits of no more than €750.000 and non-trading income of no more than €75.000; or

▫ Accounting profits no more than 10% of its operating costs

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ATAD: Controlled Foreign CompanyExample• A company based in the EU sets up a

subsidiary in a no tax third country• Subsidiary does not carry out

substantive economic activity relating to its income

• The company makes inflated royalty payments to the subsidiary and it reduces the

• Result: EU company reduces its taxable profits in the EU

• Under this rule, the EU MS will be allowed to tax the profits of the subsidiary as though they have not been shifted

EU Headquarters

Subsidiary out of EU (no tax)

CFC: Subsidiary Profits

attributed to the EU company

Royalty Payments

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ATAD: Hybrid Mismatches RuleHybrid Mismatch:• The situation between a taxpayer in a MS and an

associated enterprise in another MS or a structured arrangement between parties in MSs where due to differences in the legal characterisation of a financial instrument or entity leads to:

▫ Double deduction of the same payment from both MSs; or

▫ Deduction of a payment in one MS without a corresponding inclusion in the other MS.

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ATAD: Hybrid Mismatches• Article 9 of ATAD provides that if there is

▫ A double deduction Deduction only in the MS payment has its source

▫ If deduction without inclusion MS of payer denies deduction

• Associated Enterprise: 25% voting rights, capital ownership or entitlement to profits and in the case of hybrid entities 50%

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ATAD II: Hybrid Mismatches Amendment• Article 9 of ATAD did not apply on:

▫ 3rd countries mismatch▫ Hybrid Entity Mismatch▫ Hybrid PE mismatches▫ Financial Instrument Mismatch▫ Dual Resident mismatches▫ Imported mismatches

• Proposal for a Council Directive amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries COM (2016) 687 final.

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ATAD II: Hybrid Mismatches Amendment• On 21 February 2017 ECOFIN (Economic and Financial

Affairs Council) reached a political agreement on the terms of the draft ATAD II.

• ATAD II scope is expanded include mismatches with third countries and cover the following mismatches not covered from ATAD I:▫ Hybrid PE mismatches▫ Hybrid transfers▫ Dual Resident mismatches▫ Imported mismatches

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ATAD II: Hybrid Mismatches Amendment• Associated Enterprise definition is widened: In

addition to the 50% voting rights, capital ownership or entitlement to profits, an associated enterprise also means an entity that is part of the same consolidated group for financial accounting purposes and on which the taxpayer has a significant influence in the management or the enterprise has significant influence in the management of the taxpayer.

• Structured Arrangement: An arrangement designed to produce a hybrid mismatch outcome

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ATAD II: Hybrid Entity Mismatches• A hybrid entity mismatch occurs if an entity is treated

as transparent for tax purposes by one jurisdiction and as non-transparent by another which lead to:

▫ Deduction without inclusion▫ Double Deduction of the same payment

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ATAD II: Hybrid PE Mismatches• Business activities in one jurisdiction are treated as

being carried on through a permanent establishment by one jurisdiction, while those activities are not treated as being carried on through a permanent establishment by another jurisdiction

• i.e. Deduction without inclusion of a payment to a disregarded PE

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ATAD II: Financial Instrument Mismatch• Different characterisation of financial instrument in

two States• Deduction in the jurisdiction where the payment is

made without a corresponding inclusion for tax purposes of that payment in the payee jurisdiction.

• The mismatch outcome has to be the result of differences in the characterisation of the financial instrument or the payment made under it between the two jurisdictions.

• i.e. a loan is treated as debt instrument in one jurisdiction and as equity instrument in another interest is deducted and dividends are exempted (deduction without inclusion)

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ATAD II: Hybrid MismatchDouble DeductionDeduction shall be denied in the investor jurisdiction;

andWhere the deduction is not denied in the investor

jurisdiction, the amount of the payment shall be denied in the MS that is the payer jurisdiction.

Deduction without inclusionDeduction shall be denied in the MS of the payer; andIf not denied, then the amount of the payment shall be

included in the income in the MS of the payee.

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ATAD II: Tax Residency Mismatches • Dual Residency, leads to double deduction under the

laws of both jurisdictions where the taxpayer is resident

• MS of the taxpayer should deny the deduction to the extent that the other jurisdiction allows the duplicate deduction

• If both jurisdictions are MSs, the treaty applies and the MS where the tax payer is not deemed to reside shall deny deduction.

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ATAD II: Imported mismatches • Deductible payment in a MS under a non-hybrid

instrument that is used to fund expenditure involving a hybrid mismatch

• EU MS shall deny the deduction of interest except to the extent that the other states involved have made equivalent adjustments in respect of the hybrid mismatch

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ATAD I and II: Implementation• The ATAD I has to be implemented by the MSs by 31

December 2018 and apply as from 01 January 2019.

By way of derogation, MSs may implement article 5 on exit taxation by 31 December 2019 and apply as from 01 January 2020.

• If the proposal for ATAD II is accepted by all the Member States in its current form, Member States will have to implement it by 31 December 2018 and the provisions will have to apply as from 1 January 2019.

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Common Corporate Tax Base (CCTB) and Common Consolidated Corporate Tax Base (“CCCTB”)• Common Corporate Tax Base (CCTB) and Common

Consolidated Corporate Tax Base (CCCTB) proposals

• The CCTB provides for the determination of a single set of rules for calculation of the corporate tax base

• CCCTB provides for the cross-border consolidation of profits and losses

• CCTB and CCCTB will be mandatory for all groups with global consolidated revenues of more than EUR 750 million

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CCTB and CCCTB Implementation• The CCTB proposal provides for implementation by

the MSs by 31 December 2018 and apply as from 01 January 2019.

• Whereas the proposal for the CCCTB Directive, provides for implementation by the MSs by 31 December 2020 and apply as from 01 January 2021.

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Cyprus: IP Box Amended• OECD Project Action 5 on Countering Harmful Tax

Practices More Effectively, Taking into Account Transparency and Substance

• Nexus approach: A taxpayer will benefit from an IP regime only to the extent that the it has incurred qualifying research and development expenditures that gave rise to the IP

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Cyprus: IP Box AmendedThe new IP Box implements the nexus approach• Notional deduction of 80% will apply only when the IP

assets have been acquired, developed or exploited by a person in the course of its business as a result of R&D activities.

Qualifying Assets• Patents, Computer software, Utility models, IP assets

which are non-obvious, useful and novel where the person utilizes them in the course of its business and it does not generate annual gross revenue exceeding €7.500.000 and in case of a group €50.000.000, which are not trade names, brands, trademarks, image rights and other rights relating to the marketing of products or services

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Cyprus: IP Box AmendedQualifying persons• Taxpayers eligible to qualify the new IP regime, are

Cyprus tax resident persons, PEs of non-resident persons and foreign PEs that are subject to tax in Cyprus

Tax exemption• 80% tax exemption on the qualifying profits

Qualifying Profits

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Cyprus: IP Box AmendedGrandfathering provision• The previous regime will phase out by until 30 June

2021• Qualifying under the previous IP regime before 02

January 2016; or • Acquired directly or indirectly from a related party

after 02 January 2016 and before 30 June 2016, provided the IP assets would be eligible to qualify under the previous Cyprus IP regime or a similar IP regime in another State; or

•  Acquired from an unrelated party or developed after 02 January 2016 and before 30 June 2016.

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Cyprus-Russia Tax Treaty• Article 13 postponement of amendments• Gains derived from a resident of a contracting state

from the alienation of shares, deriving more than 50% of their value from immovable property situated in the other contracting state, would be taxed in that other state (excluding gains in the course of corporate reorganizations, from listing of shares on a registered stock exchange or by a pensions fund and provident funds)

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Thank you!