Cyprus

Corporate - Significant developments

Last reviewed - 28 July 2021

Cyprus is expanding and updating its double tax treaty (DTT) network. New/amended DTTs with Kazakhstan and Egypt have entered into force in 2020 and are effective in Cyprus as of 1 January 2021. Additionally, the Protocol to the Cyprus-Russia DTT entered into force in 2021 and the amended Cyprus-Russia DTT is effective as of 1 January 2021. A protocol to the Cyprus-Switzerland DTT was signed in 2020 and a Protocol to the Cyprus-Germany DTT was signed in 2021, both currently pending the completion of respective domestic legal procedures for entering into force. Finally, a first-time Cyprus-Netherlands DTT was signed in 2021 and is pending ratification.

On 5 April 2019, Cyprus voted the first implementation law of the European Union (EU) Anti-Tax-Avoidance Directive (ATAD) and, more specifically, the interest limitation rule, controlled foreign company (CFC) rule, and general anti-abuse rule (GAAR), which are effective for tax years starting from 1 January 2019 (see the Deductions and Group taxation sections for more information).

On 19 June 2020, Cyprus voted the second implementation law with respect to the remaining measures provided for in the ATAD will be effective as follows:

  • Exit taxation provisions: As of 1 January 2020.
  • Hybrid mismatch rules: As of 1 January 2020 (except for specific reverse-hybrid mismatch provisions to be effective as of 1 January 2022).

The two ATAD implementation laws impact only Cyprus corporate income taxpayers and, more specifically, Cyprus tax resident companies and Cyprus permanent establishments (PEs) of non-Cyprus tax resident companies, except for a specific reverse-hybrid mismatch provision that may apply more broadly.

Cyprus is an early adopter of the Common Reporting Standard (CRS) on automatic exchange of financial account information and also has signed an intergovernmental agreement (IGA) with the United States (US) for the Financial Account Tax Compliance Act (FATCA) (see the Other issues section for more information).

Cyprus signed the Multilateral Convention to Implement Tax Treaty Related Measures (MLI) to Prevent Base Erosion and Profit Shifting (BEPS) on 7 June 2017.  Subsequently, Cyprus ratified the MLI on 23 January 2020. The date of 'entry into effect' as regards Cyprus’ application of the MLI for any particular bilateral DTT covered by the MLI depends upon various possible legal processes/options by the other contracting party jurisdiction, but such date cannot be earlier than 1 January 2021 for the purposes of Cyprus’ corporate income tax (CIT), personal income tax (PIT), and Special Contribution for Defence (SDC); exceptionally, an application for a Mutual Agreement Procedure (MAP) as revised under the MLI may be possible for tax periods earlier than 1 January 2021, and possibly as of 1 November 2020 for Cyprus capital gains tax (CGT).

Over the last three years, Cyprus has also successfully transposed into its legal and tax framework all EU Directives on Administrative Cooperation and Mutual Assistance (DACs 1-5).

Further, on 18 March 2021, the House of Representatives of the Republic of Cyprus approved the Law on Administrative Cooperation in the field of Taxation (Law N. 205(I)/2012) (hereinafter referred to as the “Law”) implementing the EU Directive 2018/822 (DAC6) on mandatory reporting and exchange of information of cross border arrangements.

The law transposing the DAC6 Directive into domestic law was published in the Official Gazette of the Cyprus Republic on 31 March 2021 and entered into force immediately with retroactive effect covering transactions from 25 June 2018 and onwards.

On 27 July 2020, the Cyprus Tax Authority (CTA) announced Cyprus’ choice for deferral of DAC6 filing deadlines in line with the dates provided by the European Union. The extension of the deadline for DAC6 submissions shall remain in place irrespective of the enactment of the Law.

Furthermore, certain amendments have been introduced to the Cyprus notional interest deduction (NID) regime (see Notional interest deduction (NID) on corporate equity in the Tax credits and incentives section for more information). The Cyprus NID regime has been assessed by the EU Code of Conduct Group of ECOFIN as 'not harmful' since its introduction as of 1 January 2015.

Finally, the draft budgetary plan for 2021 includes two unilateral tax measures to address aggressive tax planning as follows:

  • Introduction of withholding tax (WHT) on dividend, interest, and royalty payments to countries in Annex I of the EU list of non-cooperative jurisdictions on tax matters (commonly referred to as the EU ‘blacklist’).
  • Introduction of a corporate tax residency test based on incorporation, in addition to the existing ‘management and control’ test.

The draft bills for introducing the above measures into the Cyprus tax law have been submitted to the Cyprus Parliament in Q1 2021 and their enactment is currently envisaged for Q4 2021.

COVID-19 economic response 

A summary of the economic measures introduced as part of the Cyprus government’s economic response to COVID-19 include the following (more details can be found here).

Direct tax and payroll taxes

In accordance with an Implementing Directive (ID) issued on 27 October 2020, the CTA will generally follow the Organisation for Economic Co-operation and Development (OECD) non-binding guidance in relation to tax residency of individuals and corporate entities and the existence of PEs during COVID-19. The application of the Directive remains optional on the taxpayer. Furthermore, the Directive also mentions that each case will be assessed on its own merits.

In accordance with a new ID issued in January 2021, it is confirmed that the provisions of the ID issued on 27 October 2020 continue to apply in year 2021 as long as restrictions related to covid-19 are still in place globally.

Furthermore, in accordance with a new article in CIT Law, a company or an individual that earns rental income from immovable property should be eligible for a tax credit equal to 50% of the voluntary reduction of the monthly rental amount if the said reduction provided that the said reduction is not lower than 30% of the monthly rental amount. The person (i.e. company or individual) will be eligible for the aforesaid tax credit provided also that:

  1. The tax credit is for rental reduction that relates to the period between 1 January 2021 and 30 June 2021, but for a maximum of three months (irrespective of the number of months for which a rental reduction has been agreed); 
  2. No tax credit is allowed for any rental reduction that exceeds 50% of the monthly rental amount; 
  3. The reduction of the rental amount is granted under a written agreement between the landlord and the tenant; 
  4. The landlord and the tenant are not related persons (as defined under Article 33 of the Cyprus income tax law); 
  5. The tax credit can be utilised against the total income tax charge of the landlord for tax year 2021; and 
  6.  Any refundable tax that relates to the said tax credit does not exceed the amount of tax that has been already paid.

The tax credit applies to rental agreements for immovable property that houses businesses whose operation has been suspended by virtue of Government measures related to COVID-19.

The Special Defence Contribution (SDC) Law was also amended to provide that the gross amount of rental income of landlords, that voluntarily reduced the rental amount of immovable property that houses businesses whose operation has been suspended by virtue of Government measures related to COVID-19, is exempted from SDC provided that:

  •  The exemption from SDC is for a maximum of three months, and for the period between 1 January 2021 and 30 June 2021 (irrespective of the number of months for which a rental reduction has been agreed); 
  • The reduction of the rental amount is not lower than 30% of the monthly rental amount on which the SDC applies; 
  • The reduction of the rental amount is granted under a written agreement between the landlord and the tenant; and 
  • The landlord and the tenant are not related persons (as defined under Article 33 of the Cyprus income tax law).

In year 2020, a comparable Income Tax credit was available subject to similar (but not identical) conditions. Nevertheless, no SDC credit was available.

The deadline for electronic submission of the 2019 CIT return has been extended until 30 September 2021.

The deadline for electronic submission of the 2020 payroll (Form T.D.7) has been extended from 31 May 2021 to 30 September 2021. 

The deadline for settlement of the second instalment of the 2020 provisional tax has been extended from 31 January 2021 to 30 September 2021.

Value-added tax (VAT)

Obligation to pay VAT

There is a temporary suspension of the obligation to pay VAT for reasons of business liquidity, without the imposition of any penalties and interest for the periods ending 29 February 2020, 31 March 2020, and 30 April 2020, until 10 November 2020, while for the periods ending 31 December 2020 and 31 January 2021, the payment of VAT can be settled in three equal instalments on 10 April, 10 May and 10 June 2021 provided that the relevant VAT returns are submitted within the prescribed deadlines.

This applies to all taxable persons, established and non-established in Cyprus, with the exception of taxable persons whose activities fall within the prescribed trading codes as specified below:

  •     35111 - Production of electricity.
  •     36001 - Water collection, treatment, and supply.
  •     47111 - Retail sale in non-specialised stores with food, beverages, or tobacco predominating.
  •     47112 - Mini markets.
  •     47211 - Retail sale of fruit and vegetables in specialised stores.
  •     47221 - Retail sale of meat and meat products (including poultry).
  •     47241 - Baking and pre-baked bread rolls.
  •     47242 - Retail sale of cakes, flour confectionery, and sugar confectionery in specialised store.
  •     47301 - Retail sale of fuel.
  •     47411 - Retailers of computers, peripheral units, and software in specialised stores.
  •     47621 - Retail sale of newspapers and stationery in specialised stores.
  •     47731 - Retail sale of pharmaceuticals.
  •     61101 - Cyprus Telecommunications Authority.
  •     61201 - Wireless telecommunications activities.
  •     61301 - Satellite telecommunication activities.
  •     61901 - Other telecommunication activities.

VAT prepayment by certain businesses

Taxable persons who have been notified by the Tax Commissioner for amendment of their VAT periods from quarterly to monthly, starting from 30 March 2020 until 30 June 2020, had an obligation to submit monthly VAT returns by the 27th day following the end of the relative month and make payments within the same deadline as follows:

  • If their activities fall within any of the categories noted in the table below: The full amount of VAT for the relevant period.
  • All other taxpayers: 30% of the VAT due for the relevant period. The 30% prepayment is calculated including any balance remaining from previous periods.

Categories of taxpayers:

  •     35111 - Production of electricity.
  •     36001 - Water collection, treatment, and supply.
  •     47111 - Retail sale in non-specialised stores with food, beverages, or tobacco predominating.
  •     47112 - Mini markets.
  •     47211 - Retail sale of fruit and vegetables in specialised stores.
  •     47221 - Retail sale of meat and meat products (including poultry).
  •     47241 - Baking and pre-baked bread rolls.
  •     47242 - Retail sale of cakes, flour confectionery, and sugar confectionery in specialised store.
  •     47301 - Retail sale of fuel.
  •     47411 - Retailers of computers, peripheral units, and software in specialised stores.
  •     47621 - Retail sale of newspapers and stationery in specialised stores.
  •     47731 - Retail sale of pharmaceuticals.
  •     61101 - Cyprus Telecommunications Authority.
  •     61201 - Wireless telecommunications activities.
  •     61301 - Satellite telecommunication activities.
  •     61901 - Other telecommunication activities.

Measures to boost the tourism industry

The VAT rate was reduced from 9% to 5% for the period from 1 July 2020 to 10 January 2021 for the following services:

  • Hotel accommodation.
  • Restaurant and catering.
  • Passenger transport.

Custom and excise duties

Postponement of excise duty payment

The postponement relates to the payment of excise duty payable in accordance with the provisions of the Excise Tax Act 2004, for energy products, tobacco products, and alcohol and alcoholic beverages, subject to certain terms and conditions. An application should be submitted by the interested parties according to the terms and conditions outlined in the relevant notification together with a bank guarantee for the amount of the excise duty and the additional fee, which will become payable as soon as the postponement period expires.

A person qualifies for the postponement if one's business activity is the production, importation, or acquisition from member states of excise goods with an annual turnover exceeding 3,500,000 euros (EUR) and paying excise duty through the Theseass system.

The Minister of Finance may extend the deadline for payment of the deferred amount up to 60 days if this is considered necessary during a period of crisis.

Relief from import duties and VAT exemption on importation for goods needed to combat the effects of the COVID-19 outbreak

The European Commission has decided, on 3 April 2020, to grant relief from import duties and VAT exemption on importation of goods needed to combat the effects of the COVID-19 pandemic outbreak. The relief applies to importations made from 30 January 2020 to 31 December 2021.

Eligible for the relief and exemption of VAT are the goods imported by or on behalf of state organisations, including state bodies, public bodies, and other bodies governed by public law or by or on behalf of other approved by the competent authority organisations, and which will be used free of charge by the persons affected by or at risk from COVID-19 or involved in combating the COVID-19 outbreak.

The relief is also applicable on goods imported by or on behalf of disaster relief agencies in order to meet their needs during the period of providing their services.