Cyprus Parliament Approves Pillar 2 Law

General

On 12 December 2024, the Cyprus House of Representatives voted to approve domestic legislation to implement Pillar 2. The Law will come into effect once it is published in the Official Government Gazette.

As provided in the EU Minimum Tax Directive, the draft 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 draft law provides that Cyprus will apply a domestic minimum top-up tax. Section 61 of the draft law provides that this will apply to financial years beginning on or after December 31, 2024.

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

Administrative Guidance

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

-Sovereign wealth funds and the definition of Ultimate Parent Entity (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 draft law (aside from Safe Harbours).

As such, the following are not included in the draft 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).

Safe Harbour and Penalty Relief Guidance

The draft 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 in the draft law differs 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 draft 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’. Section 33(3) of the draft law then provides that the Minister can determine which of the relevant acceptable international safe harbour agreement’ are to be applicable.

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 announced the domestic application of all OECD Safe Harbours as provided in the Safe Harbours & Penalty Relief Guidance and other Administrative Guidance.

Article 12(4) of the draft law also applies the EU QDMTT safe harbour.

Qualifying Domestic Minimum Top-Up Tax

Section 12 of the draft law provides that Cyprus will apply a domestic minimum top-up tax (intended to be a Qualified Domestic Top-Up Tax). Section 61 of the draft 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 QDMTT is the general GloBE top-up tax calculated under the Law. However, the draft law provides for a number of adjustments.

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 Article 2 of the draft 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.

Articles 2 also prevents the pushdown of tax to hybrids, PEs and for taxes on distributions (aside from Cypriot withholding tax on distributions).

Any QDMTT 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 QDMTT calculation (just for tax under an IIR or UTPR). This is required to avoid circularity and ensure the QDMTT is not taken into account for the domestic minimum tax calculation.

Article 12 provides that GloBE income for the QDMTT purposes can be be calculated on the basis of an acceptable financial accounting standard or an approved financial accounting standard adjusted to avoid any material distortion of the competition, and not on the basis of the financial accounting standard used in consolidated financial statements.

Section 2 of the draft law provides that the Safe Harbours (as adopted by the EU/OECD) apply for the purposes of the QDMTT.