How group of companies are taxed in Cyprus?
Group relief provisions refer to a tax benefit that allows companies in the same group to transfer tax losses from loss-making companies to profitable ones, subject to certain conditions. Essentially, this means that if one company in a group is experiencing financial difficulty, other profitable companies within the same group can use the tax losses of the struggling company to reduce their own tax liabilities.
To be considered part of the same group, a Cyprus company must directly or indirectly hold at least 75% of the voting shares of another Cyprus tax resident company. Alternatively, two or more Cyprus tax resident companies must be at least 75% (voting shares) held, directly or indirectly, by a third company. It’s worth noting that the interposition of a non-Cyprus tax resident company will not affect the eligibility for group relief as long as the company is tax resident in either another EU member state or a country with which Cyprus has in place a Double Taxation Treaty (DTT) or an exchange of information agreement, which may be bilateral or multilateral.
In addition, a Cyprus tax resident company may claim the tax losses of a group company that is tax resident in another EU member state, provided that the EU company first exhausts all possibilities available to utilize its losses in its EU member state of residence or in the EU member state of any intermediary EU holding company.
By taking advantage of group relief provisions, companies can reduce their overall tax burden and increase profitability. However, it’s important to ensure that all conditions for group relief are met and that the necessary documentation is in place to support any claims made. Seeking the advice of a qualified tax professional can help to ensure that all requirements are met and that the benefits of group relief are maximized.
In summary, group relief provisions provide a valuable tax benefit for companies in the same group, allowing profitable companies to utilize the tax losses of loss-making group companies. With careful planning and the right professional advice, companies can take advantage of these provisions to reduce their tax liabilities and increase their profitability.
Transfer Pricing in Cyprus
Related party transactions can have significant tax implications, particularly in the context of Cyprus tax legislation. As per general provisions, transactions between related parties should be carried out on an arm’s-length basis. Failure to do so may result in adjustments to taxable profits and the potential for additional income to be deemed in order to reflect arm’s-length prices. Compensating deductions may apply in some cases.
In certain circumstances, however, the transfer of shares of companies within a group at a value different than the market value should not have any adverse Cyprus tax implications. The Cyprus tax authorities have provided guidance on this and on the tax treatment of intra-group financing transactions (IGFTs). On 30 June 2017, the authorities issued a Circular that closely follows the application of the arm’s-length principle of the OECD Transfer Pricing Guidelines. The Circular applies to all relevant existing and future IGFTs.
The Circular requires a comparability analysis to describe the IGFT and determine the applicable arm’s-length remuneration. Of particular note are the requirements for sufficient equity levels for the assumption of risks and adequate substance in Cyprus relating to the IGFTs. Taxpayers carrying out a purely intermediary intra-group financing activity may opt for a Simplification Measure, resulting in a minimum 2% after-tax return on assets under certain conditions.
While the Cyprus tax legislation did not explicitly include transfer pricing documentation requirements until the end of 2021, the tax authorities had an expectation that taxpayers should provide adequate supporting documentation that evidences the arm’s-length pricing of related-party transactions. However, as of tax year 2022, transfer pricing documentation requirements have been introduced for all related-party transactions.
The transfer pricing documentation compliance obligations require the preparation of a Master File, Cyprus Local File, and Summary Table for Cyprus tax resident persons and PEs of non-Cyprus tax resident persons that engage in transactions with related parties. The assessment and collection of taxes law has been amended, and specific penalties for non-compliance with the new obligations are now in place from the tax year 2022 onwards.
By ensuring compliance with transfer pricing documentation requirements, taxpayers can avoid potential tax implications and penalties. It is recommended that taxpayers seek professional advice to ensure compliance with these requirements and to mitigate related risks.
Controlled foreign company rules
In Cyprus, a controlled foreign corporation (CFC) refers to a non-Cyprus tax resident company or an exempt foreign permanent establishment in which a Cyprus corporate income tax payer, individually or jointly with its associated companies, owns a direct or indirect interest exceeding 50%. If the foreign corporate tax paid by the non-resident company on its profits is less than 50% of the corporate income tax that would have been payable in Cyprus under the Cyprus corporate income tax regulations, it is deemed low-taxed.
If the CFC is considered low-taxed, the Cyprus tax authorities may require the Cyprus CIT payer to include in its taxable income a share of the CFC’s income equivalent to the percentage of the Cyprus CIT payer’s holding. This share of income is calculated based on the proportionate holding of the Cyprus CIT payer in the CFC, regardless of whether the income is distributed or not.
However, there are exceptions to the CFC rule in Cyprus. Non-Cyprus tax resident companies or exempt foreign permanent establishments are not subject to the CFC rule if their accounting profits are less than €750,000 and their non-trading income does not exceed €75,000. Alternatively, if the accounting profits do not exceed 10% of their operating costs for the tax period, they are exempt from the CFC rule.
It is important to note that CFC rules are complex and can vary by jurisdiction. The Cyprus tax authorities are continuously updating and revising these regulations, so it’s vital for Cyprus CIT payers to keep themselves updated on the latest developments.
If you are a Cyprus CIT payer with an interest in a foreign company, it’s essential to seek professional advice to ensure compliance with the CFC regulations. At our law office, our experienced tax lawyers can provide tailored solutions to help you meet your tax obligations while minimizing your tax liabilities. Contact us today to learn more.
General Anti-Abuse Rules in Cyprus
The implementation of the first Cyprus ATAD law introduces the ATAD GAAR, which requires that any arrangement or series of arrangements be ignored when calculating the Cyprus CIT liability of the Cyprus CIT payer if they are mainly or partially established to obtain a tax advantage that undermines the purpose of the applicable tax law and are not genuine based on all relevant facts and circumstances.
Arrangements or a series of arrangements that are not created for valid commercial reasons that reflect economic reality will be considered non-genuine. The ATAD GAAR rule is designed to prevent contrived tax schemes that seek to avoid tax liability and ensure that companies comply with the applicable tax laws.