The latest update in Cyprus and future of international Tax planning - - PowerPoint PPT Presentation

Christodoulos Damianou The Best Legal Conference 26 September 2019 The latest update in Cyprus and future of international Tax planning

✓ Implementing the EU ATAD ✓ EU CFC Rules ✓ Implementation of the MLI ✓ Transfer pricing ✓ Substance and tax residency ✓ Reporting under DAC 6 ✓ The new Bank Reality CONTENTS

THE EU ANTI-TAX AVOIDANCE DIRECTIVE

The EU Anti-Tax Avoidance Directive – Interest Limitation

• Restriction of deductibility of interest so not to exceed

30% of taxable EBITDA.

• Taxable EBITDA is defined as the total of net taxable income increased by

the exceeding borrowing costs, the depreciation and amortization of fixed assets and intangibles.

• “Exceeding borrowing costs” is defined as the excess of borrowing costs over

interest income and other economically equivalent taxable revenues.

• The definition of “borrowing costs” is based on the provisions of the ATAD,

i.e., interest expenses on all forms of debt, other costs economically equivalent to interest , as well as expenses incurred in relation with the raising of finance.

• There is no distinction on the deductibility based on who is the

lender/ creditor and the rule applies to interest under intra- group and third-party loans alike.

The EU Anti-Tax Avoidance Directive – Interest Limitation

• The restriction doesn’t apply for amounts < €3ml per

Company.

• The restriction doesn’t apply to standalone companies (not

part of a group).

• The law also excludes financial undertakings
• Credit

institutions, investment firms, AIFMs and management companies of UCITS

• Institutions for occupational retirement provision
• Pension

institutions (considered to be social security schemes legal entity and other relevant legal entity

The EU Anti-Tax Avoidance Directive – Interest Limitation

Exclusion of certain exceeding borrowing costs

• Interest on loans used to fund long term public infrastructure projects

where the: a)

• perator

b) borrowing costs c) assets are all located in the EU. d) income

• Income earned from such a long-term public infrastructure project is also

excluded from the definition of taxable EBITDA.

Controlled Foreign Corporation Legislation (CFC Rules)

The EU CFC Rules EU countries without CFC legislation before ATAD For example:

• Cyprus
• Malta
• Bulgaria
• Etc.

[Example of Cyprus explained in the following slides]

A CFC is defined as an entity or a permanent establishment (“PE”) whose income is not taxable or exempt if the following two conditions are met: 1. In the case of a non tax resident entity, the tax resident company, alone

• r together with its associated enterprises, holds a direct or indirect

participation of more than 50% in such entity. The threshold is determined in terms of participation in the share capital, voting rights

• r the entitlement to profits.

2. The company or PE is low-taxed, i.e. the income tax it pays is lower than 50% of the country’s corporate income tax that it would have paid locally in the country.

The EU CFC Rules

• When a company is a CFC, then the undistributed profits of

the CFC which result from not genuine arrangements which have been put in place in order to take tax advantage are added to the resident taxable person who holds the shares in the CFC.

• For the purpose of the previous paragraph, an arrangement
• r a series thereof shall be regarded as non-genuine to the

extent that the entity would not own the assets or would not have undertaken the risks which generate all, or part of, its income if it were not controlled by a company where the significant people’s functions, which are relevant to those assets and risks, are carried out and are instrumental in generating the controlled company’s income.

The EU CFC Rules

The above do not apply in the case of a company whose accounting profits: ➢ Do not exceed Euro 750.000 and the passive income does not exceed Euro 75.000 ➢ Do not exceed 10% of its operating costs for the tax period

The EU CFC Rules

MULTI-LATERAL INSTRUMENT (MLI) TREATY SHOPPING TREATY ABUSE IMPLEMENTATION

• In June 2017 under the OECD BEPS initiative, 87 countries

(including Ukraine but not the USA) signed the MLI

• On 22 March 2018, the OCED announced that the MLI will

enter into force on 1 July 2018, following the deposit of the ratification instrument by a fifth jurisdiction.

• By today 21 countries deposited the ratification instruments

with the OECD.

• These countries are:

Australia, Austria, Curacao, Finland, France, Georgia, Guernsey, Ireland, the Isle of Man, Israel, Japan, Jersey, Lithuania, Malta, Monaco, Netherlands, New Zealand, Poland, Serbia, Singapore, Slovakia, Slovenia, Sweden and the UK

Multi-Lateral instrument

Multi-lateral instrument

The MLI offers concrete solutions for governments to close the gaps in existing international tax rules by:

• Modifying

the application

• f

thousands

• f

bilateral tax treaties concluded to eliminate double taxation

• Implementing

agreed minimum standards to combat treaty abuse

• Improving dispute resolution mechanisms
• Providing flexibility to accommodate specific tax

treaty policies

Multi-lateral instrument The MLI covers the following subjects:

• Hybrid mismatches
• Treaty abuse
• Avoidance of permanent

establishment status

• Improving dispute resolution
• Arbitration

Most countries have elected to deal only with the Treaty Abuse provisions

MLI – The purpose of Double Tax Treaties

The instrument is quite flexible. At their

• wn

discretion, signatories may define which treaties will be covered and which provisions will apply. The signatories to the MLI have three options on international tax treaty abuse:

• Option 1: adopting only the principal purpose test

(PPT)

• Option 2: adopting the PPT test and the simplified

limitation of benefits provision (Simplified LOB)

• Option 3: adopting the detailed LOB in combination

with the mechanism to address conduit financing.

Limitation of benefits

• DTT benefits can be denied to a person

where the principal purpose, or one of the principal purposes of any arrangement,

• r transaction, or of any person

was to obtain those benefits.

This means that if in a structure there are only tax reasons for putting the structure in place in the first place and there are no business reason to support,

then no DTT benefits will be granted and normal taxes will be paid.

Limitation of benefits

Next step on the MLI process

• Exchange of notes with the respective countries which have completed

the ratification process under the their laws

• The question is whether there will be pressure on the small countries to

complete their internal procedures and notify the OECD accordingly

• Russia and Ukraine are expected to complete these formalities soon
• It is understood that discussions are taking place at the OECD level on

certain aspects of the MLI

• Thus it could reasonably be expected that no pressure would be exerted

until the end of this year

Position of Cyprus on the MLI

• Cyprus extended the application
• f the MLI to the 55 individual

treaties signed by Cyprus, plus three treaties covered under the

• ld treaty with the Republic of

Yugoslavia (Bosnia and Herzegovina, Montenegro and Serbia) plus three treaties covered under the old treaty with the USSR (Azerbaijan, Kyrgyzstan and Uzbekistan)

• No tax treaties of Cyprus have

been excluded

TRANSFER PRICING REQUIREMENTS EXISTING AND NEW LEGISLATION

Transfer pricing requirements in Cyprus

• The interpretative Circular refers to the tax treatment of

intra group back- to-back financing arrangements

• In addition it covers the granting of loans to related parties
• ut of funds borrowed from banks or other third parties
• It covers also back-to-back interest free loans
• It does not cover loans granted to related parties out of the

company’s own funds

Transfer pricing requirements in Cyprus

• The Transfer pricing analysis should be

prepared by a TP expert and must be submitted to the Cypriot Tax Department by a person who has a license to act as an auditor of a company

• The Circular applies with effect from 1

July 2017 for all existing and future transactions irrespective of the date of entering into the relevant transactions

• Any tax rulings issued on transactions

within the scope of this circular, which were issued prior 1 July 2017 will no longer be valid for tax periods after 1 July 2017

Expected Additional Measures in Cyprus on Transfer Pricing

• Additional guidelines for the application of the transfer pricing rules to the forms
• f financing activities not covered by the circular
• Transfer pricing rules and documentation for other forms of intercompany

transactions, such as sales, licensing and provision of services

• The above are expected to be introduced during 2019 and apply from the year

2020

Transfer pricing requirements in Cyprus Steps to be taken by taxpayers:

• Determine if the company has intercompany loans the funds

which originate out of borrowed funds

• Carry out functional analysis
• Determine if it meets the minimum criteria for regulated

financial institutions or criteria for simplification procedures

• If yes, then no full transfer pricing study necessary
• If yes, but want to apply lower margins/returns then the

prescribed ones, then full transfer pricing study is necessary

• If no, then full transfer pricing study is necessary

EU countries without TP legislation before ATAD For example:

• Cyprus
• Malta
• Bulgaria
• Etc.

[Example of Cyprus explained in the following slides] EU Transfer Pricing Rules

Transfer pricing Update (CYPRUS)

• Similar to regulated financial institutions: For intra-group financing companies

with functional profile similar to that of a regulated financial undertaking, an after-tax return on equity equal to 10% is considered at arm’s length

• Simplification measures: The transactions carried out by a Cypriot tax resident

group financing company, which pursues a purely intermediary activity (i.e. if grants loans or advances to related companies, which are refinanced by loans or advances obtained from related companies), are deemed to comply with the arm’s length principle, if the company receives in relation to its controlled transactions under analysis, a minimum after tax return 2,3% on the assets (i.e. 2,3% on assets)

• The Company must prove that it acts as a purely intermediary company

i.e. performing reduced functions, assets deployed for that purpose are very few and the risks associated with the transactions analysed as low

• The transfer pricing study should initially include only a functional analysis
• If the functions do not prove that the assumed risks are reduced then a full

economic transfer pricing analysis is required

Expected TP Measures in Cyprus

• Cyprus proposes to introduce legislation to require transfer

pricing studies for all transactions between related parties

• Related parties are considered those where there is more

than 25% shareholding or the same persons own more than 25% in two or more companies

• The OECD Transfer Pricing Guidelines will apply
• The Transfer Pricing Documentation will include the Basic

File and the Cypriot File

• There will be no requirement to maintain a transfer pricing

file for companies whose value of transactions with related parties is below EURO 750.000 per annum

• It is expected that the new legislation will apply as from

2020

EXCHANGE OF INFORMATION UPDATE

EoI UPDATE

FORMS OF EXCHANGE OF INFORMATION

• Under a double tax treaty between the two

countries

• Under the Common Reporting Standard
• Under the country by country reporting
• EU

Council Directive 2011/16/EU

• f

15 February 2011 on administrative cooperation in the field of taxation

• EU Council Directive (EU) 2018/822 of 25 May

2018, amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements

Country by Country reporting (“CbC”)

• CbC reporting requires large multinational enterprises (“MNE”) to file a

CbC report that will provide a breakdown of the amount of revenue, profits, taxes and other indicators of economic activities for each tax jurisdiction in which the MNE group does business. CbC reporting only applies to MNE groups with annual consolidated groups revenue of Euro 750 million or more in the preceding fiscal year (“MNE Groups”)

Country by Country reporting (“CbC”)

• CbC reporting requirements apply in Cyprus for fiscal years beginning on
• r after 1 January 2016
• The tax authorities of all countries concerned will have for the first time

the opportunity to see the whole allocation of profits between the various jurisdictions, the taxes paid in each jurisdiction and the substance available in each location

The new banking reality in Cyprus

The NEW Banking reality in Cyprus

• Banks in Cyprus are closing bank

accounts of holding companies with no real substance and transactions in Cyprus-Circular issued by Central Bank of Cyprus in June 2018

• Credit institutions instructed “not

to open new bank accounts or continue existing accounts with companies that are regarded as "shell" or "letter box" companies”.

No bank accounts anymore for shell company: What are ‘shell’ or ‘letter’ box companies? – No physical presence in its country of incorporation apart from a mailing address; – No established economic activity, little to no independent economic value, and no documentary evidence to the contrary; – It is registered in a jurisdiction where companies are not required to file independently audited financial statements; – It has a tax residence in a jurisdiction recognized as a tax haven or no tax residence whatsoever.

The new banking reality

EoI Update

CRS – Reportable Persons

• An individual resident in the other state
• An entity (including funds and foundations)resident

in the other state

• There is a requirement to look through passive

entities in order to find out and report on controlling persons who are resident in the other state

• It excludes publicly listed companies and Financial

Institutions

CRS – Controlling persons

• For companies – the UBO who is the natural person

who ultimately owns or controls a legal entity through direct or indirect ownership meaning: i. 25% + of shares with voting rights ii. Right to appoint board members, right to exercise significant influence

• For trusts – the settlor, trustees, the protectors, the

beneficiaries and any

• ther

natural persons exercising ultimate effective control over the trust

EoI update

SUBSTANCE AND TAX RESIDENCY FOR COMPANIES

BVI CO CY CO RUS CO LOAN INTEREST INTEREST LOAN

Structures that are under scrutiny

• What was the purpose of these

kind of structures?

• No withholding tax for interest

payments from RUS to CY and from CY to BVI

• No withholding tax on

dividends paid from CY to BVI and from BVI to UBOs

• No tax paid on dividends

received at level of CY co

• Up to 2017 only a 0.35% margin
• f interest was taxed in Cyprus
• Secrecy of UBOs in the BVI

DIVIDEND DIVIDEND

BVI CO CY CO RUS CO LOAN INTEREST INTEREST LOAN

Structures that are under scrutiny Tax considerations

What is the problem of these kind

• f structures?
• Back to back loan arrangements

no longer accepted

• Transfer pricing introduced in

Cyprus as of 2017

• Beneficial ownership issues –

who is the actual owner of the interest and dividends?

• Signing of MLI and adaptation
• f Articles 6 to 11 on treaty

abuse

• BVI registry of UBOs

• Tax authorities around the world are getting more

sophisticated

– Increased transparency – Exchange of information

• DAC 6 directive

mandatory disclosure and exchange of cross border tax The first reportable cross-border arrangements will be those where the first implementation step occurs between 25 of June 2018 and 1 July 2020. This information will then be required to be filed with the EU Member State competent authority by 31 August 2020 and should be communicated among EU members states by 31 October 2020

• EU moves to tackle letter box firms' tax avoidance, social dumping

➢ Relocation to other EU countries may be blocked in the case of artificial arrangements to circumvent tax

Structures that are under scrutiny DAC 6

Demonstrating Substance

SUBSTANCE AND TAX RESIDENCY FOR COMPANIES

Substance Requirements

• New rules on substance in the new EU P/S Directive
• Rules under EU ATAD from 2019
• Rules under BEPS 2020
• Substance for TP
• Substance in BO of income
• Increased attention by the foreign tax authorities in

the EoI

SUBSTANCE AND TAX RESIDENCY FOR COMPANIES

Substance would determine the company’s tax residency

• Statutory substance proves that the company is actually a

real company and not a conduit, by paying its taxes filing its tax returns, preparing audited financial statements and meeting all its statutory obligations;

• Physical substance is statutory substance, plus an office,

telephone facilities, employees, and PROPERLY QUALIFIED directors;

• Economic substance refers to more on day to day activities,

which is a similar concept to the place of effective management. IT IS A MUST FROM NOW ON THAT ALL THE ABOVE MUST EXIST FOR A COMPANY

SUBSTANCE AND TAX RESIDENCY FOR COMPANIES

Physical substance can be achieved by:

• Appointing QUALIFIED Directors, that are local residents and who are not

directors in 100 other companies

• Maintaining fully fledged offices in Cyprus
• Employing full-time or part-time employees
• Relocating senior executives / decision makers to Cyprus
• Avoid shadow Directors
• Carrying out the accounting and HR functions in Cyprus
• Maintaining bank accounts with local banks, where income is first received and
• deposited. At least one of the signatories of the bank accounts should be a

Director located in Cyprus

• Owning a website that is operated by the employees Actively participating in

the local business community / organizations/charities in Cyprus

• Publicly show ‘’a face ‘’ in the community.

SUBSTANCE AND BANKING LOVE AFFAIR

Circulars Issued by ECB ❖ Banks are permitted to close bank accounts of holding companies with no real substance or transactions in the country ❖ Credit institutions have been instructed not to open new bank accounts or to continue to maintain existing accounts with entities that are regarded as “shell” or “letterbox” companies.

SUBSTANCE AND TAX RESIDENCY FOR COMPANIES

Definition of tax residency for companies

• The majority of the directors’ meetings take place in Cyprus,
• The board of directors exercise controls and make the key

management and commercial decisions

• Board of Directors meetings must ACTUALLY take place
• Board of directors minutes are prepared and kept in Cyprus
• The minutes must demonstrate the operation of the company is

exercised by these RESIDENT directors.

• PROPERLY QUALIFIED directors with appropriate knowledge and

expertise of the company’s business (i.e. : a doctor as a director in a hospital or a medical company)

• Employment relevant to qualified personnel
• Having properly equipped offices relevant

to the size and operation of the company.

Recent examples RECENT EXAMPLES:

• 1 Legal Substance
• 2 Transaction Substance- SPA
• 3 Ukrainian PEP UBO
• Romanian formerly PEP UBO with court cases

in progress

BENEFICIAL OWNERSHIP OF INCOME ISSUES

BENEFICIAL OWNERSHIP OF INCOME ISSUES

Income which is affected by the beneficial ownership issues:

• Dividends
• Interests
• Royalties
• Capital gains / distribution of

dividends

BENEFICIAL OWNERSHIP OF INCOME ISSUES

Beneficial ownership of income provisions in Cypriot DTT Russia Dividends (in practice the Russian tax authorities apply this also for interest and royalties) Ukraine Dividends, interest, royalties Belarus Dividends, interest, royalties Bulgaria Dividends, interest, royalties Czech Republic Dividends, interest, royalties Poland Dividends, interest, royalties Romania Interest

BENEFICIAL OWNERSHIP OF INCOME ISSUES

Beneficial ownership concept

• The beneficial owner is a person who actually benefits from

the income received and determines its further economic

• destiny. In this regard, it is also necessary to take into account

the functions performed and the risks taken by the foreign

• rganization
• The application of reduced rates can be recognized as

unlawful, if the foreign company pays directly or indirectly all

• r almost all the income received at any time and in any

form to another person who would not have had benefits if such income were paid directly to such

BENEFICIAL OWNERSHIP OF INCOME ISSUES Criteria for establishing beneficial ownership Companies that receive income must:

• Have an economic presence in their country of residence
• Have wide authority to dispose of the income
• Use the income in their business activities
• Take independent decisions through their officials
• Show signs of performing business operations (office, hired staff, general

business expenses)

• Receive economic benefit from the income
• Bear individual risks pertaining to assets
• Have no legal or actual obligations to transfer the income to third parties

(specifically parties not entitled to DDT benefits)

BENEFICIAL OWNERSHIP OF INCOME ISSUES

Documentation to support beneficial ownership – Russia MinFin With respect to the confirmation of beneficial ownership of income, in its letter the Russian Ministry of Finance sates that this may be confirmed by the following documents (which may not be considered as an exhaustive list):

• Letters signed by the directors of the foreign company
• Documents confirming that the recipient of the income enjoys discretion on the

disposal and use of the income received (for example documents confirming the absence of legal obligations that limit the right of the recipient of the income to use of the income and confirming that the subsequent transfer of the income to third parties was not predetermined)

• Documents confirming that the recipient of the income has tax obligations in its

country of residence and that there was no saving on Russian withholding tax because of the subsequent transfer of the income to third party

• Documents confirming that the recipient of the income carries on actual business

in the state of which the recipient is a tax resident

BENEFICIAL OWNERSHIP OF INCOME ISSUES How can you overcome beneficial ownership issues :

• Establish / improve real substance and move

decision making persons to Cyprus

• Replace back-to-back loans with loans out of

equity and claim notional interest deduction

• Replace back-to-back licensing arrangements with
• wning the IP Box regime (patents/computer

software)

• Avoid transferring funds to NO tax or very LOW tax

jurisdictions

• Be prepared to pay more taxes in Cyprus, it is

cheaper than paying high withholding taxes

Demonstrating Substance

Why Cyprus? A brief look at the Cyprus Tax System

• Low corporate tax of 12.5%
• No withholding tax on dividends paid to non-tax resident individuals
• 50% tax exemption for new tax residents who earn more than €100.000 per

year

• Cyprus tax residents who are not domiciled in Cyprus are exempt from

special defense contribution

• Profits on the disposal and revaluation of shares is not taxable
• Full compliance with EU and OECD
• Beneficial IP Regime
• Dividend income exempt from taxation (under certain conditions)
• Capital gains tax only on property situated in Cyprus
• Foreign exchange gains are not taxable (not applicable for Forex)

WHAT YOU NEED TO DO More observations

• EU Directive on intermediaries (DC6)
• Review: IP, B2B loans, Holding structures
• Apply PPT in your structure
• Convert B2B to NID instead
• Beneficial Ownership issues
• Does your structure have a CFC?
• Substance. Revisit urgently.
• Trends:

– Caribbean moving to Cyprus and Bulgaria and Montenegro – Substance in Lux/Netherlands = Onerous & very high cost. – Companies from L/N moving to lower cost countries-Cyprus – (MHP Myronivsky Hliboproduct example)

• Substance will Re- Open your bank account !!!!

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21

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Team members in every office

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Service areas

1

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• rganization

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