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03 November 2020

Cyprus: Anticipated tax measures to be implemented including adoption of withholding taxes on payments made to EU non-cooperative jurisdictions

Executive summary

The Cypriot Council of Ministers approved the Draft Budgetary Plan (DBP) 2021 on 22 October 2020. The DBP will now be laid before the Cyprus House of Representatives. The DBP contains an analysis of the Cypriot economy and forecasts which are based on the latest available results of 2020 (i.e., the cut-off date for the macroeconomic and fiscal forecasts was 29 September 2020), as well as the Budget Bill for 2021 that was submitted to the House of Representatives on 9 October 2020.

Detailed discussion

Current and anticipated Cyprus tax revenues

According to the DBP, Cyprus’s revenue from taxes on production and imports is expected to decrease by 6% during the year 2020 and marginally increase as a percentage of gross domestic product (GDP) to 15.3% compared to 15.2% in 2019. The forecasted negative growth of this revenue category is stemming from expected losses from reduced value-added tax (VAT) receipts due to the restrictive measures taken by the Cyprus Government related to the COVID-19 crisis, as well as from the estimated impact from the reduction of the special VAT rates as of 1 July 2020 until the end of the year, of about 0.1% of GDP.

In 2021, revenue from taxes on production and imports are expected to grow by 5.4% and remain unchanged as a percentage of GDP. Current taxes on income and wealth receipts are expected to exhibit a decrease of 5.4% in 2020, in line with the related to the crisis developments in the labor market. As a percentage of GDP, current taxes on income and wealth are expected to record a marginal increase of 0.1% of GDP reaching 9.6% of GDP compared to 9.5% of GDP in 2019 and remain at the same level the year after.

Tax measures expected in 2021

Withholding tax on non-cooperative jurisdictions and incorporation test for tax residency

The DBP 2021 highlights the support by Cyprus of the European Commission’s initiatives to fight aggressive tax planning, including the adoption of the European Union (EU) Anti-Tax Avoidance Directive II and the EU Directive on Administrative Cooperation Vol. 6. In addition to the European and international measures, Cyprus unilaterally announced two additional measures to address aggressive tax planning, namely by the introduction of:

  • Withholding tax on dividends, interest and royalty payments to countries in Annex I of the EU list of non-cooperative jurisdictions on tax matters (currently the countries on the list are American Samoa, Anguilla, Barbados, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands, Vanuatu, Seychelles).
  • Corporate tax residency test based on incorporation, in addition to the existing ”management and control.” The purpose of this measure is to expand the definition of ”resident of the Republic” to include companies incorporated in Cyprus but whose management and control are exercised outside of Cyprus, unless such company is a tax resident in any other state (other than the states included in Annex I of the EU list of non-cooperative jurisdictions on tax matters).

Respective draft bills have been sent to the Attorney General’s office for legal vetting. It is expected that these bills will be submitted to the House of Representatives in the near term and will be voted on before the end of 2020, with effect as of 1 January 2021.

Spontaneous exchange of information

In relation to the actions taken by the Cyprus Government to address the concerns that the ”Citizenship” and ”Residence by investment” schemes may circumvent the Common Reporting Standard initiative, Cyprus is in the process of developing the appropriate infrastructure to promptly enable the spontaneous exchange of information mechanism regarding individuals that have obtained residence rights through the Citizenship by Investment” and “Residence by Investment” programs with all original jurisdictions of tax residence.

Digital transformation

The Cyprus Government intends to follow a new approach for accelerating the digital transformation and as of 1 March 2020, a new Deputy Ministry has been established with the mandate, inter alia, to lead Cyprus into the digital era, through the promotion of scientific excellence, the support and facilitation of innovative entrepreneurship, and the implementation of a digital transformation program.

For taxation, the target is to establish a new information system for the Cyprus Tax Department in order to simplify the processes and procedures and to utilize more modern Tax Department methods to increase personnel productivity and improve operational efficiency.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young Cyprus Limited, Limassol
Ernst & Young Cyprus Limited, Nicosia

ATTACHMENT

 

Document ID: 2020-6428

 
 

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