Cyprus’ Pillar Two Adoption Calls for MNE Safe Harbor Testing
This action signifies Cyprus’ alignment with international tax standards and the country’s commitment to global tax reform and combating tax avoidance to ensure fair taxation.
The Pillar Two law, published in the Official Government Gazette on Dec. 18, 2024, implements the EU Directive issued on Dec. 14, 2022. It introduces several key provisions that will significantly impact multinationals and large-scale domestic groups operating in Cyprus.
In-scope groups must urgently evaluate the impact of these changes on their operations, including their data, systems, technology, and processes to ensure that they can support the new requirements and ensure full compliance.
Businesses may need to invest in new technologies and processes to meet the reporting and compliance requirements of the new law. This may involve significant costs and resources, but it is essential for ensuring compliance and avoiding penalties.
The law also has implications for the broader business environment in Cyprus. By aligning with international tax standards, Cyprus enhances its reputation as a transparent and compliant jurisdiction.
The interpretation of the Cypriot Pillar Two law aligns with administrative guidance from the OECD/G20 Inclusive Framework provided such guidance is consistent with the Pillar Two law. This also encompasses any future guidance issued by the same body. This provision ensures that the Pillar Two law remains harmonized with international standards and provides businesses with clear directives on compliance.
Notably, the Pillar Two law doesn’t amend the Cypriot Income Tax Law. Instead, it establishes an additional tax framework that functions alongside the existing income tax law. Further, the Pillar Two law doesn’t specifically include a general anti-avoidance rule—aligning with the EU Directive and Model Rules, which also don’t explicitly include such a rule.
Key Provisions
Qualified income inclusion rule. The QIIR, which applies for financial years starting Dec. 31, 2023, requires a local parent company to ensure that its profits and those of its local subsidiaries are taxed at a minimum effective tax rate of 15%. The rule aims to prevent profit shifting and base erosion by ensuring that income is taxed at a minimum effective rate of 15%, regardless of its geographical location.
Qualified undertaxed profits rule. Commencing this year and applying to financial years starting Dec. 31, 2024, the QUTPR imposes a top-up tax to address any insufficient taxation not taxed by the QIIR by using a denial of deduction mechanism under corporate income tax. This goal is similar to that of the QIIR, as the QUTPR acts as a backstop to the QIIR, ensuring that any profits not sufficiently taxed under the QIIR are subject to additional taxation.
Domestic minimum top-up tax. Also effective starting this year, applying to financial years starting Dec. 31, 2024, the rule applies to constituent entities in Cyprus. This provision takes precedence over the two rules above, ensuring that all constituent entities meet the minimum tax requirements.
The DMTT is designed to prevent tax avoidance by ensuring that all profits are taxed at a minimum rate, regardless of the jurisdiction in which they are earned. This measure is particularly important for Cyprus, given its strategic location and role as a hub for international business.
Compliance and administration. Entities within the scope of the Pillar Two law must notify the Cyprus tax authorities within 15 months after the fiscal year-end (18 months for the transition year).
They must also submit a local self-assessment filing and make any payments due within 30 days of the global anti-base erosion, or GloBE, information return submission deadline. These administrative provisions aim to ensure compliance with the new tax rules and provide clarity for businesses operating in Cyprus.
Penalties and grace period. The Pillar Two law outlines penalties for late filings and payments. However, no administrative fines will apply for fiscal years beginning before Dec. 31, 2026, provided the group acts in good faith in compliance efforts. This provision is designed to encourage compliance while providing a grace period for businesses to adjust to the new requirements.
Actions for Multinationals
When navigating the complexities of the Pillar Two law, businesses operating in Cyprus must remain vigilant and should consider the following steps.
- Evaluating the applicability of the law to determine whether the particular group falls within the scope of the rules, along with an impact analysis to identify high-risk subsidiaries based on their location.
- Conducting high-level safe harbor testing based on country-by-country reporting.
- Performing quantitative impact assessments to calculate the top-up tax due.
- Evaluating the potential for substance-based income exclusions, which allow for a reduction in the amount of income subject to the top-up tax based on tangible assets and payroll.
The article was published in Bloomberg BNA at International Tax News
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Christos Theophilou
T: +357 22 875 723
E: ctheophilou@stitaxand.com
