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 entered into force in 2021. A Protocol to the Cyprus-Germany DTT was signed in 2021, ratified by both countries and expected to enter into force on 1 January 2022. Finally, a first-time Cyprus-Netherlands DTT was signed in 2021 and is pending ratification.
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).
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 European Union (EU) Directives on Administrative Co-operation and Mutual Assistance (i.e. 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. The law is effective as of 1 January 2021 with retroactive effect covering transactions from 25 June 2018 and onwards.
On 15 Oct 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 minimum €55.000 p.a. The above exemption, already in effect for remuneration over €100.000 p.a., will be extended from 10 to 17 years (covering existing employees who currently enjoy this benefit). Existing employees who earn between €55.000-€100.000 p.a. 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 costs from taxable income to an amount equal to 120%; and
- Right to transfer social insurance contributions based on bilateral agreements to come into force.
Finally, 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 from 01/01/2023, 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.
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 a Directive 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. 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 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 provided that the said reduction n is not lower than the monthly rental amount.
For the year 2021, the person (i.e. company or individual) will be eligible for the aforesaid tax credit provided also that:
- 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);
- No tax credit is allowed for any rental reduction that exceeds 50% of the monthly rental amount;
- The reduction of the rental amount is granted under a written agreement between the landlord and the tenant;
- The landlord and the tenant are not related persons (as defined under Article 33 of the Cyprus income tax law);
- The tax credit can be utilised against the total income tax charge of the landlord for tax year 2021; and
- 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 CTA has clarified that certain benefits provided by the Cyprus government to support employees and businesses during the COVID-19 pandemic should be exempt from Cyprus income tax due to their extraordinary and temporary nature. More specifically, the said benefits include the special sickness benefit, the special benefit for self-employed, the special unemployment benefit, and the special leave benefit.
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 the 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 3,500,000 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.