A Detailed Review of the Cyprus Global Minimum Tax Law

General

On October 3, 2023, the Cyprus Ministry of Finance issued the ‘Ensuring a Global Minimum Level of Taxation of Multinational Enterprise Groups and Large-Scale Domestic Groups in the Union Law of 2023’ to implement the Pillar Two GloBE rules/EU Minimum Tax Directive. It was open for consultation until October 31, 2023.

The Law was published in the Official Government Gazette on December 18, 2024 (the ‘Law’).

As provided in the EU Directive, the Law includes an income inclusion rule (IIR) and an under-taxed profits rule (UTPR).

The IIR is to apply to financial years beginning on or after December 31, 2023.

The UTPR will generally apply to financial years beginning on or after December 31, 2024.

Section 12 of the Law provides that Cyprus will apply a domestic minimum top-up tax (DMTT), intended to be a Qualified Domestic Minimum Top-Up Tax (QDMTT) . Section 61 of the Law provides that this will apply to financial years beginning on or after December 31, 2024.

In the January 2025 Central Record of Legislation with Transitional Qualified Status issued by the OECD, the Cyprus IIR and DMTT are both treated as qualified for GloBE purposes.

GloBE Application

As expected, the Law closely follows the EU Minimum Tax Directive. There are very few options given to member states in the EU Directive in terms of flexibility over national implementation.

As noted below, many aspects of the First Set of OECD Administrative Guidance are included in the Law, however, none of the Second, Third or Fourth (or January 2025) OECD Administrative Guidance is included (aside from Safe Harbours).

Section 59 of the Law states that in implementing the provisions of the Law, the OECD Guidelines are to be used as a ‘source of example or interpretation’, to the extent that there is no inconsistency in the application of the Law or EU Minimum Tax Directive.

The OECD Guidelines includes the:

–OECD Consolidated Commentary;

–June 2024 OECD Administrative Guidance;

–December 2023 OECD Administrative Guidance;

–July 2023 OECD Administrative Guidance;

–February 2023 OECD Administrative Guidance;

–OECD Examples;

–OECD Safe Harbours and Penalty Relief Guidance;

–OECD GloBE Information Return Guidance; and

-Subsequent documents published by the OECD, as defined by Ministerial Decree.

OECD Administrative Guidance

Aspects of the First Set of OECD Administrative Guidance included in the Law are:

-Sovereign wealth funds and the definition of Ultimate Parent Entity (it also excludes the National Investment Fund from the UPE definition) (Article 1.4)

-Clarifying the definition of ‘Excluded Entity’ (Article 1.5)

-Forex hedge election (Article 2.2)

-Excluded Dividends – Asymmetric treatment of dividends and distributions (Article 2.3)

-Debt release election (Article 2.4)

-Accrued pension expenses (Article 2.6)

-Excess negative tax carry-forward guidance (Article 2.7)

-Substitute loss carry forwards (Article 2.8)

-Equity gain or loss inclusion election (Article 2.9)

-The extension of the taxable distribution method election to insurance investment entities (Article 3.1)

-Exclusion of Insurance Investment Entities from the definition of Intermediate Parent Entity and Partially-Owned Parent Entity (Article 3.2)

-Liabilities related to Excluded Dividends and Excluded Equity Gain or Loss from securities held on behalf of policyholders (Article 3.4)

-Portfolio shareholding election (Article 3.5)

None of the provisions of the Second Set of OECD Administrative Guidance are included in the Law (aside from Safe Harbours).

As such, the following are not included in the Law:

-Blended controlled foreign company regimes;

-Transferable tax credits;

-Meaning of “ancillary” for Non-Profit Organisations;

-The extension of the tax transparency election to mutual insurance companies

-Additional rules (such as the deemed 50% requirement where employees perform work outside the employer’s jurisdiction for the SBIE).

No aspects of the December 2023, June 2024 or January 2025 OECD Administrative Guidance are included (aside from Safe Harbours).

Safe Harbours 

The Law provides for the application of OECD Safe Harbours.

This includes the Transitional CbCR Safe Harbour, the QDMTT Safe Harbour and Transitional UTPR Safe Harbours.

The approach to Safe Harbours differs in the Law from some other jurisdictions.

In particular, the applicability of safe harbours is determined by a decree of the Minister of Finance. Section 33 of the Law does provide that there will be no top-up tax for entities that meet the requirements of an ‘acceptable international safe harbour agreement’.

This is defined as an ‘international set of rules and conditions to which all the member states of the EU have agreed’.

Although applying the safe harbours by a Ministry Decree may reduce Parliamentary oversight it does significantly ease the introduction of new safe harbours.

On July 24, 2024, the Ministry of Finance issued a Decree to announce the domestic application of all OECD Safe Harbours as provided in the Safe Harbours & Penalty Relief Guidance and other Administrative Guidance.

Section 12(3) of the Law also applies the EU QDMTT safe harbour.

Elections in the OECD Model Rules

All of the elections included in the OECD Model Rules and the EU Minimum Tax Directive are provided in the Law, including:

-Excluded Entity Election (Section 4(4) of the Law)

-Stock-Based Compensation Election (Section 17(3) of the Law)

-Election to use the Realization Method (Section 17(6) of the Law)

-Election to Spread Capital Gains (Section 17(7) of the Law)

-Consolidation Election (Section 17(9) of the Law)

-Unclaimed Accrual Election (Section 23(1b) of the Law)

-GloBE Loss Election (Section 24(1) of the Law)

-Prior Year Adjustment Election (Section 26(1) of the Law)

-De minimis Election (Section 31(1) of the Law)

-Substance-Based Income Exclusion Election (Section 29(2) of the Law)

-Deemed Disposal of Assets Election (Section 36(5) of the Law)

-Taxable Distribution Election (Section 44 of the Law)

-Tax Transparency Election (Section 43 of the Law)

-Distribution Tax Regime Election (Section 41(1) of the Law)

Elections in the Administrative Guidance

Elections included in the OECD Administrative Guidance that are included in the Law include the:

-Debt Release Election (Section 17(13) of the Law);

-Equity Investment Inclusion Election (Section 22(6) of the Law);

-Foreign Exchange Hedge Election (Section 17(12) of the Law);

-Portfolio Shareholding Election (Section 17(3a) of the Law);

-Excess Negative Tax Carry-Forward Election (Section 22(5b) of the Law)

Differences to Model Rules

As expected, the Law closely follows the EU Directive. There are very few options given to member states in the EU Directive in terms of flexibility over national implementation.

The main options relate to the design of the QDMTT.

The key differences are with the OECD model rules. ie:

• The Law extends the GloBE rules to include large scale, purely domestic groups,

• Cyprus applies the IIR to not only foreign subsidiaries but also to all domestic constituent entities. This is permitted but not mandatory under the GloBE Model Rules.

The OECD Model Rules allow flexibility as to how to apply the UTPR. Cyprus’s approach is to apply a UTPR top-up tax rather than a denial of deduction.

As such the carry forward provisions in Article 2.4.2 of the Model Rules for UTPR amounts not sufficient to provide for the additional cash tax expense are not relevant and these rules are not included in the Law.

Sections 10(2)/13(1)/14(1) of the Law provides that an MNE group can transfer the amount of top-up tax due either in whole or in part, by a constituent entity to another constituent entity or entities of the same group located in Cyprus. This option requires the applicant entity to register an application with the receiving entity and obtain the receiving entity’s consent. If the top-up tax is not paid by the payment date the liability for the tax returns to the original constituent entity.

Qualifying Domestic Minimum Top-Up Tax

Section 12 of the Law provides that Cyprus will apply a domestic minimum top-up tax (DMTT). Section 61 of the Law provides that this will be effective for financial years beginning on or after December 31, 2024.

The amount of top-up tax under the DMTT is the general GloBE top-up tax calculated under the Law. However, the Law provides for a number of adjustments.

It applies irrespective of the shareholdings in the group entities located in Cyprus. This reflects the OECD Administrative Guidance that provides that Top-up Tax that is subject to the QDMTT is based on the whole amount of the jurisdictional Top-up Tax calculated, irrespective of the ownership interests held in the Constituent Entities located in the QDMTT jurisdiction by any Parent Entity of the MNE Group.

Tax paid or incurred by a Constituent Entity-owner under a CFC Tax Regime that is pushed down to a domestic Constituent Entity in the GloBE Rules must be excluded, as provided in the OECD Administrative Guidance. This is included in Section 2 of the Law.

This preserves Cyprus’s primary right to tax income accruing to a Cypriot member entity which is also a CFC. If there were no statutory derogation from the general GloBE rules for the calculation of the domestic minimum tax, and the CFC tax paid by the controlling company abroad were included in the included taxes of the Cypriot CFC, the effective tax rate would be increased. Therefore, excluding the CFC tax from the Cypriot CFCs covered taxes allows Cyprus to tax low-taxed income at a higher rate than would be the case under an IIR.

Section 2 also prevents the pushdown of tax to hybrids, PEs and for taxes on distributions.

Any DMTT that has not been paid within four years is usually taken into account for top-up tax purposes in the fifth year. This does not apply for the DMTT calculation (just for tax under an IIR or UTPR). This is required to avoid circularity and ensure the DMTT is not taken into account for the domestic minimum tax calculation.

Section 12 applies the default GloBE rules for determining the accounting standard to be used. Therefore, GloBE income for DMTT purposes is calculated using the financial accounting standard of the ultimate parent entity, and, if that is not practicable, on the basis of an accepted or approved accounting standard, if:

-the constituent entity’s financial statements are prepared in accordance with that standard;

-the information contained in the financial statements is reliable;

-in the case of an Authorised Financial Accounting Standard, the financial accounts have been prepared subject to adjustments to prevent any Material Competitive Distortions;

-permanent differences of more than EUR 1 million are conformed with the UPEs accounting standard.

Section 12 of the Law provides that the Safe Harbours (as adopted by the EU/OECD) and the de minimis rule apply for the purposes of the DMTT.

Section 12(1)(c) applies the UTPR exemption for the Initial Phase of International Activity for DMTT purposes to:

-Large-scale domestic groups

-Constituent Entities/Joint Ventures where no ownership interest in the Constituent Entity or Joint Ventures is held by a parent entity outside Cyprus that is subject to a Qualifying IIR;

-Constituent Entities/Joint Ventures where the ownership interest in the Constituent Entity or Joint Ventures is held by a parent entity outside Cyprus that is subject to a Qualifying IIR and the ownership interest in the parent entity is held either by a Cypriot UPE or a Cypriot intermediate parent entity which is held by a UPE which is an excluded entity.

Section 12(1)(d) of the Law provides that an MNE group can transfer the amount of top-up tax due either in whole or in part, by a constituent entity to another constituent entity or entities of the same group located in Cyprus. This option requires the applicant entity to register an application with the receiving entity and obtain the receiving entity’s consent. If the top-up tax is not paid by the payment date the liability for the tax returns to the original constituent entity.