Cyprus is expanding and updating its double tax treaty (DTT) network. A Protocol to the Cyprus-Germany DTT was signed in 2021 and became effective on 1 January 2022. Additionally, a first-time Cyprus-Jordan DTT was signed on 17 December 2021 and entered into force as of 11 April 2022. 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, which are 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 that are 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 jurisdiction. 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) implementing the EU Directive 2018/822 (DAC6) on mandatory reporting and exchange of information of cross-border arrangements. The law transposing the DAC6 Directive 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 15 October 2021, the Cyprus Minister of Finance presented the action plan of Cyprus to encourage companies to operate and/or expand their activities in Cyprus, including the following reforms related to tax and social insurance:
- Expansion of the 50% income tax exemption to new employees with a remuneration of a minimum 55,000 euros (EUR) per annum. The above exemption, already in effect for remuneration over EUR 100,000 per annum, will be extended from 10 to 17 years (covering existing employees who currently enjoy this benefit). Existing employees who earn between EUR 55,000 and EUR 100,000 per annum can benefit for the remaining period of the 17 years.
- Extending the 50% tax exemption for investment in certified innovative companies to cover corporate investors as well.
- Increased deduction of research and development (R&D) costs from taxable income to an amount equal to 120%.
- Right to transfer social insurance contributions based on bilateral agreements to come into force.
On 9 December 2021 the Cyprus Parliament voted for the introduction of two unilateral tax measures to address aggressive tax planning. The measures, which will be applicable as of 1 January 2023, are the following:
- Introduction of withholding tax (WHT) on dividend (17%), interest (30%), and royalty payments (10%) to companies that are tax resident in a country that is listed 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.
Value-added tax (VAT)
Zero rate for services closely connected to the supply of COVID-19 diagnostic medical devices
As of 23 December 2020, the application of the zero rate of VAT has been extended to include, in addition to the supply of in vitro diagnostic medical devices and vaccines for COVID-19, the supply of services closely related to the supply of these goods. The zero rate will apply up to 31 December 2022. The zero rate applies only to in vitro diagnostic medical devices for COVID-19 and closely related services thereof, which comply with the applicable conditions of the Directive 98/79/EC of the European Parliament and of the Council of 27 October 1998 on medical devices used in diagnosis or with the Regulation (EU) 2017/746 of the European Parliament and of the Council of 5 April 2017 for in vitro diagnostic medical devices and only for vaccines against COVID-19 approved by the European Commission.
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 EUR 3.5 million 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.