In brief

On 22 October 2020 the Cyprus Council of Ministers approved the Cyprus draft budgetary plan for 2021 (the "draft budget").

The draft budget reiterates Cyprus' commitment and willingness to continue cooperation in all appropriate fora for taxation, in full respect of the respective competencies under the Treaties and in light of the relevant voting procedures that are applicable for such matters.

In this respect Cyprus announced two unilateral tax measures to address aggressive tax planning.

In detail

Cyprus unilateral tax measures to address aggressive tax planning

  1. 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'). For more information as regards the EU blacklist, please refer to our Tax Update Newsletter N-28-2020.
  2. Introduction of 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 are currently with the Cyprus Attorney General office for legal vetting, after which they will be submitted to the Cyprus House of Representatives.

PwC observation: Both of the measures above address Country Specific Recommendations (CSR) made to Cyprus by the European Commission.

The introduction of WHT for payments to EU blacklisted jurisdictions also follows the EU Code of Conduct Group (business taxation) agreed guidance (the "COCG agreed guidance") which recommends that EU Member States (the "EU MSs") apply at least one additional defensive measure through legislation, and one such additional defensive measure is the "withholding tax measure". Per the COCG agreed guidance the deadline for EU MSs to introduce such measures is generally 1 January 2021.

The takeaway

These unilateral tax measures are further clear indication of Cyprus' willingness to address aggressive tax planning. More details, as well as the actual text of the draft bills, are expected to be available once the draft bills are submitted to the Cyprus House of Representatives. Taxpayers should monitor for further clarification and developments on this matter so as to evaluate how this may affect their existing and new structures as well as their business.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.