Executive summary

On 12 December 2024, the Cyprus House of Representatives voted to transpose into law Council Directive (EU) 2022/2523 of 14 December 2022 to ensure a global minimum level of taxation for multinational enterprise (MNE) groups and large domestic groups in the Union (the Law), also known as the Pillar Two Directive. The Pillar Two Directive introduces a 15% minimum effective tax rate for ΜΝΕ groups and large-scale domestic groups with consolidated annual revenues exceeding €750m.

The Law will come into effect once it is published in the official Government Gazette.

Details on the new Law

The Law incorporates all the provisions of the Pillar Two Directive and has been enriched with certain provisions issued to date through administrative guidance from the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), as well as provisions regulating administrative matters to enhance the interpretation of the Law.

A specific provision also requires the interpretation of the Law in line with all the administrative guidance issued to date by the OECD/G20 Inclusive Framework on BEPS to the extent these are consistent with the Law, as well as any further guidance to be issued by the same body.

The Law introduces an Income Inclusion Rule (IIR) for financial years starting from 31 December 2023 in line with the Pillar Two Directive. The IIR requires a parent entity of an MNE group or a large-scale domestic group to pay a top-up tax on its low-taxed income and the low-taxed income of its subsidiaries to ensure that the group's overall income is taxed at a minimum rate of 15%.

A Domestic Minimum Top-up Tax (DMTT) and an Undertaxed Profits Rule (UTPR) are also introduced for financial years starting from 31 December 2024.

The DMTT provides for the imposition of top-up tax on the low-tax income of entities and joint ventures of an MNE group or large-scale domestic group located in Cyprus. The Cyprus DMTT rule deviates from the definition of a qualified DMTT as per the guidance issued and allows for the push down of foreign taxes, such as taxes resulting from a Controlled Foreign Company regime. The DMTT also respects all the pertinent safe harbors, including the Transitional Country-by-Country Reporting (CbCR) safe harbor.

The UTPR serves as a backstop to the IIR and applies to MNE groups that have low-tax income in jurisdictions where a top-up tax has not been collected through a Qualified IIR. It effectively allocates the top-up tax to other jurisdictions based on a formulaic approach, ensuring the group's overall tax burden meets the minimum effective tax rate of 15%.

Cyprus has also consented to all safe harbors, including the Transitional CbCR Safe Harbor as well as a Transitional UTPR Safe Harbor.

New compliance and filing requirements are introduced for reporting and collecting the Top-up Tax under the DMTT, IIR and UTPR. This includes requiring all Cypriot entities and joint ventures of in-scope groups to notify the Cypriot tax authorities no later than 15 months after the end of the relevant financial year (or 18 months for the first year of application).

Implications

Given the introduction of the Law, it will be essential for all MNE groups and large-scale domestic groups to thoroughly evaluate the impact of this legislation on their operations. These entities must ensure their readiness to comply with the new requirements.

For help navigating these changes and ensuring compliance with the new rules, in-scope taxpayers should reach out to their tax advisors.