On 04 July 2020, the law implementing the remaining provisions of the EU Anti-Tax Avoidance Directive was published in the Official Gazette. The anti-tax avoidance measures which have been transposed into law are the following:
- Exit taxation
- Hybrid mismatches (including reverse hybrid mismatches and tax residency mismatches)
The provisions regarding exit taxation rules and hybrid mismatches and tax residency mismatches rules will apply retroactively as of 1 January 2020, whereas the provisions regarding the reverse hybrids mismatches rules will go into effect on 1 January 2022.
This article will analyse the exit taxation rules/provisions which are applicable as of 1 January 2020.
Exit taxation rules
The Cypriot corporate taxpayer (i.e. a Cyprus tax resident company or a Cyprus permanent establishment of a non-Cyprus tax resident company) will be subject to tax( under the provisions of the Cyprus Income Tax Law) at an amount equal to the market value of the transferred assets, at the time of exit of the assets, less their value for tax purposes, in any of the following cases:
a. A Cyprus tax resident company transfers assets from its head office in Cyprus to its permanent establishment in another EU Member State or in a third country in so far Cyprus no longer has the right to tax the transferred assets due to the transfer;
b. A non-Cypriot tax resident company with a Permanent Establishment in Cyprus transfers assets from its Permanent Establishment in Cyprus to its head office or another Permanent Establishment in another EU Member State or in a third country in so far Cyprus no longer has the right to tax the transferred assets due to the transfer;
c. A Cyprus tax resident company transfers its tax residence to another EU Member State or to a third country, except for those assets which remain effectively connected with the permanent establishment in Cyprus and for which Cyprus has the right to tax;
d. A non-Cyprus tax resident company with a permanent establishment in Cyprus transfers the business carried on by its permanent establishment from Cyprus to another EU Member State or to a third country in so far as Cyprus no longer has the right to tax the transferred assets due to the transfer.
In the event where a company or a Permanent Establishment tax resident in another EU Member State transfers its assets, residency, or business to Cyprus, the starting value of the transferred assets for tax purposes, shall be equal to the value established by the EU Member State unless this does not reflect the market value.
‘Market value’ is defined as the amount for which an asset can be exchanged, or mutual obligations can be settled between willing unrelated buyers and sellers in a direct transaction.
In the event where the assets are set to revert to Cyprus within a period of 12 months, the above provisions shall not apply for the below assets:
- assets transfers related to the financing of securities
- assets posted as collateral or
- where the asset transfer takes place in order to meet prudential capital requirements or for the purpose of liquidity management
At the time of the transfer, the profit is calculated as the difference between the market value of the transferred assets less their value for tax purposes. Any amount subject to corporate tax in accordance with the above provision will also be subject to the exemptions provided by the Income Tax Law. For example, any gain arising from the transfer of securities may be subject to the exemption provided in the law.
Deferral of exit tax payments
Under certain circumstances and conditions, a taxpayer has the right to defer the exit taxation payment by paying it in instalments over five years. Such deferral is subject to interest and the provision of guarantees to leverage non-recovery risks where appropriate and may be discontinued immediately with the tax being deemed recoverable if the provisions of the income tax law are not met.