Cyprus: Approval Of The Recovery And Resilience Plan Of Cyprus

Introduction

On 26 July 2021, the Economic and Financial Affairs Council (ECOFIN) approved Cyprus' National Recovery and Resilience Plan (RRP). The RRP sets out the measures that will be supported by the Recovery and Resilience Facility (RRF). The RRF is supported by the NextGenerationEU which will provide ?800 billion across the EU to help EU member states recover from the COVID-19 pandemic.

In relation to Cyprus, the RRP includes several reforms and investments ranging from accessibility and overall resilience of the healthcare sector to furthering the green economy and measures to improve tax collection and combat aggressive tax planning. These measures include a set of milestones for their enactment and assessment.

We summarise the most important measures below which will affect the Cyprus taxation system.

Component 2.1 - Climate neutrality, energy efficiency and renewable energy - Reform 1: Green Taxation

The objectives of this component are to improve the environment policy through measures relating to green taxation. More specifically, this component aims to promote a shift towards a more efficient use of environmental resources, reduce greenhouse gas emissions and to increase the penetration of renewable energy.

The proposed legislative changes will be based on the findings of an independent study and should be implemented by 30 June 2026.

The expected legislative changes include:

• Carbon tax for fuels used in sectors of the economy not under the EU greenhouse gas Emissions Trading System
• Levy on water
• Charge on household/landfill waste

Component 3.2 - Enhanced Research and Innovation - Reform 2: Incentives to encourage and attract investments and human capital in Research and Innovation

The objectives of this component are inter-alia to strengthen links between research organisations and enterprises and increase intensity in research & development (R&D) activity and investments by both public and private organisations. Furthermore, it aims inter-alia to enhance financial support to start-ups, scale-ups, SMEs and internationalise the local research and innovation (R&I) ecosystem.

Reform 2 of C3.2. relates to the extension of the application of the tax scheme for investing in innovative companies to legal entities (from physical persons currently) and shall be implemented by 30 September 2022.

Component 3.5 - Safeguarding Fiscal and Financial Stability

The aim of this component, apart from safeguarding a financial stability, is to ensure a fiscal stability by combating tax evasion, tax avoidance and aggressive tax planning; and providing policy makers with comprehensive data in order to design a fair tax system. The envisaged measures are expected to make revenue collection more efficient and Cyprus' tax system fairer, reducing the spill-over effects from aggressive tax planning.

Reform 9: Improving tax collection and effectiveness of the Tax Department

The objective of the measure is to make tax collection more efficient and effective, through a higher level of digitalisation and tax compliance, and improve customer service.

The reform shall consist in integrating different tax units, procedures and processes, so as to offer single point of taxpayer service, legislative changes and implementing a new IT system and digitising the Tax department. The latter shall include:

1. a single registration to the tax base and Taxisnet (for electronic submission of Income Tax Returns by Individuals, Legal Persons and Employers);
2. an integrated tax auditing process based on risk assessment;
3. an integrated refunds audit;
4. an integrated and enhanced single point of service, including the direct payment of VAT and connecting businesses to a server held within the Tax Department, without the use of specialised mechanisms;
5. a process to issue single tax clearances:
6. possibility for immediate adjustments of the system to accommodate any changes in the legislation and/or procedures and extension of secure interfaces with other information systems;
7. data analysis capabilities and
8. scanning and electronic storage of all taxpayer paper documents regarding the real estate (immovable property) and capital gains with relevant security, integrity and confidentiality parameters.

The legislative changes shall include and should be implemented by 31 December 2025.:

1. a recently introduced legislation to implement the mandatory submission of tax returns by every natural person with income as defined in Article 5 of the Income Tax Law, regardless of the threshold starting from the tax year 2020 (subject to exceptions); and
2. criminalising the non-payment of income taxes.

Reform 10: Addressing Aggressive Tax Planning

The overall objective of the measures under Reform 10 of C3.5 is to increase the effectiveness, efficiency and fairness of the tax system by combatting tax evasion and aggressive tax planning by Multinational Enterprises.

The first reform sub-measures which will be enacted by 31 December 2021 and enter into force by 31 December 2022 consist of:

• Imposing a withholding tax on outbound payments of interest, dividends and royalty payments made to jurisdictions in Annex I of the EU list of non-cooperative jurisdictions on tax matters¹.
• Introducing the corporate tax residency test which will be additional to the management and control test. More specifically, the first test shall be the management and control and, in cases where a company is incorporated in Cyprus but its management and control is done from another jurisdiction, it shall be considered as a Cyprus tax resident and shall be taxed in accordance with the relevant provision of the Income Tax Law, provided that the company is not a tax resident elsewhere (to avoid dual residency status).

The second reform sub-measure which should be enacted by 31 December 2024 consist of:

• Introducing a withholding tax on outbound payments of interest, dividends and royalty payments to low tax jurisdictions. In respect of interest and royalty payments, the Cypriot authorities may explore instead the approach of applying non-deductibility.

The third reform sub-measure which should be enacted by 30 June 2026 consist of:

• An independent evaluation which should be completed by 31 December 2024 where Cyprus shall assess the effectiveness of the overall set of measures related to aggressive tax planning. This evaluation shall assess the Cyprus tax framework holistically including all measures adopted by then. The evaluation shall lead to policy action to be undertaken by Cyprus to address any shortcomings identified, including in the form of legislative changes, which shall enter into force by 30 June 2026.

Footnote

1. Taxation: EU list of non-cooperative jurisdictions - Consilium (europa.eu)

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.