CYPRUS & INTERNATIONAL TAX

CPV Audit Services Limited 21, 28th October Street • 1st Floor • Office 104 • Engomi 2414 • Nicosia - Cyprus Tel: +357 22028470

• Fax: +357 22028474 • info@cpvaudit.com www.cpvaudit.com

LATEST AMENDMENTS TO THE CYPRUS AND INTERNATIONAL TAX LAWS

This publication intends to inform the readers regarding latest amendments in the Cyprus tax laws that came into law or are coming into law very soon. Also it describes certain tax practices overseas which affect Cyprus tax resident Companies. Recent Local Tax Changes

1. Back-to-back loan arrangements: The current practice of back-to-back loan arrangements provides for certain net profit margins for Cyprus Companies acting as financial intermediaries within a group. These margins range from 0,125% to 0,35% depending on the amount of funds (up to Euro 50m 0,35%, between Euro 50m to Euro 200m 0,25% and for amounts exceeding Euro 200m 0,125%). This practice will cease to exist as from 01/07/2017 because it is considered to be in contrary of the provisions of the OECD and BEPS and due to the international tax developments, which consider the back-to-back arrangements as public injection, and shifting of profits. As from 01/07/2017 and for tax purposes, the transactions of this type should be supported by Transfer Pricing Studies prepared by independent experts and are incompliance with the provisions of the OECD. Therefore as from 01/07/2017 the existing back-to-back loan arrangements cease to exist and any tax rulings issued or are to be issued until 30/06/2017 are becoming void. The profit margins should be therefore supported with Transfer Pricing Studies and should be conducted on an Arm’s Length Basis.

2. Payment of overdue taxes by monthly instalments: The approved new law provides for settlement of overdue taxes by monthly instalments and the new law gives the right to the Tax Commissioner to reduce additional liabilities such as penalties and interest due to late settlements for those taxpayers who will comply with the new law. The new law provides for 54 monthly instalments for amounts below Euro 100.000 and for 60 monthly instalments for amounts exceeding Euro 100.000 (minimum instalment Euro 50 for amounts below Euro 100.000 and minimum instalment of Euro 1.852 for amounts exceeding Euro 100.000). Taxpayers having overdue taxes must submit application for payment of overdue taxes within three months from the date the new law will become effective and this application must be accepted by the tax commissioner. The taxes covered by the new law includes income tax, VAT, special defence contribution, capital gains tax, immovable property tax, stamp duty and special contribution on salaries. More guidelines on the new law are expected to be published by the Tax Commissioner.

3. Issue of Tax Residency Certificate during the same Fiscal Year Individuals can request issue of tax residency certificate during the fiscal year even if the criterion of 183 days is not completed. This is important for individuals receiving income from abroad in order to obtain the benefit of the Double Taxation Treaty that provides for either reduced withholding tax rate or even for no imposition of tax in the Country of source.

CPV Audit Services Limited 21, 28th October Street • 1st Floor • Office 104 • Engomi 2414 • Nicosia - Cyprus Tel: +357 22028470

• Fax: +357 22028474 • info@cpvaudit.com www.cpvaudit.com

The above change in the law presupposes that the individual must have TIC (Tax Identification Code) and to complete – submit a special application in which is declared that the individual intends to stay in Cyprus for period or periods exceeding in total 183 days.

4. Electronic Submission of VAT declarations The VAT declarations are obligatory to be submitted in electronic form as from 02/05/2017 and onward (except the persons falling within the special category of agriculture and taxi services). The persons who are registered for VAT purposes must submit special application for taxisnet registration for VAT purposes in order to be registered electronically to the system. Until 01/05/2017 the VAT declarations can be submitted in both paper format or electronically. As from 02/05/2017 the submission can be done only electronically through the taxisnet VAT system. INTERNATIONAL TAX CHANGES The second part of this publication examines tax practices of other Countries that affect tax resident Cyprus Companies. Conduit Companies: These are the Companies that are incorporated in a treaty Country in order to channel funds beneficially owned by a person in other Country in order to obtain advantage of the benefits of a Double Taxation Treaty. The conduit companies are considered that they do not have real powers to the disposition and use of the income. Instead are accused as having limited powers and they are acting on behalf of the beneficial owner who is resident overseas and instructing the company to pass all or substantial part of the income to another person i.e. they are considered that they are acting purely as nominee Companies with no power at all. It is considered that the ultimate recipient of the income is another person resident in other country, which has less favourable or no double taxation treaty (DTT) with the country from which the funds are paid and the only reason for its establishment is to take advantage of the DTT. The conduit company, in substance, is considered as artificial arrangement with no substance and commercial rational, with no substantial expenses, no skilled personnel to operate the Company, no payment or little payment of taxes and having only passive income like interest, royalties and dividends. In substance the conduit company is incorporated between the payer of the income and the actual recipient of the income with only reason to take advantage of the benefits of the DTT. Base Companies: These are similar to conduit companies since they are incorporated in a low tax jurisdiction in order to collect income that is beneficially owned by a taxpayer in a higher tax jurisdiction and normally this income should have been collected by this taxpayer and subject to tax on the latter’s resident state. The base companies are considered that they have similar characteristics to the conduit companies. The BEPS (Base Erosion Profit Shifting) action plan initiated by G20 is attacking the above two arrangements as well as other areas like transfer pricing, harmful tax practices, Permanent Establishments, CFCs etc. It is gradually adopted by countries around the world, which are trying to secure their tax revenues and are taking measures to counter abusive use of tax treaties and illegitimate reduction of tax liabilities (particularly on the MNEs).

CPV Audit Services Limited 21, 28th October Street • 1st Floor • Office 104 • Engomi 2414 • Nicosia - Cyprus Tel: +357 22028470

• Fax: +357 22028474 • info@cpvaudit.com www.cpvaudit.com

Certain tax court cases were noted in Russian courts during 2016 which where countering conduit and base companies and in the majority the Russian tax authorities won these cases. These cases were related to passive types of income like dividends and interest. One case to be noted is the PAO Severstal case in which dividends were paid by a Russian Company to Cyprus Companies and then from the Cyprus Companies to BVI Companies. After examination by the Russian tax authorities was considered that the Cyprus Companies have limited rights to their investments (could not sell the shares of the Russian Company to a third party), limited power to the disposition of the income, they did not have any other activity or any other assets except the shares and they were considered as acting technical agents for transferring funds to the BVI Companies. The Russian authorities refused to impose the reduced withholding tax rate of 5% based on the DTT Cyprus – Russia and they imposed the applicable withholding tax rate of 15% since they considered that the Beneficial Owner of the income is the BVI Companies (not tax treaty Country with Russia). The above anti-abuse action by the Russian tax authorities is to counter the use of conduit companies. The Russian tax authorities won the case on 31 October 2016 in the Moscow Arbitration Court. Conclusion: The tax environment is changing rapidly. It is now very important the Companies to restructure their international operations and to operate with commercial rational. It is also recommended to have substance in their country of tax residency and not to be acting simply on behalf of the Beneficial Owner situated overseas. It is also obvious that artificial arrangements like financing and licensing lack business rational and substance and are the primary reasons for being under attack by tax authorities overseas. Our office can assist your business and to give you the necessary tax advises so as to minimize the risks. The Author Antonis Chrysanthou FCCA, ADIT Olesia Rybkina ACCA CPV Group