Cyprus Adopts Exit Tax and Hybrid Mismatch ATAD Provisions

On 19 June 2020, the Cyprus Parliament voted into law the provisions of the EU Anti-Tax Avoidance Directives (ATAD I and ATAD II), which had not been transposed in to local legislation before (please refer to our previous newsfeed for provisions introduced earlier on). The provisions enacted relate to the following areas:

1. Exit taxation

2. Hybrid mismatches

The law was published in the Official Gazette on 3 July 2020.

The provisions are examined below in some detail.


1. Exit Taxation

Under this provision the taxpayer should be liable for tax in Cyprus at an amount equal to the difference (unrealised gain) between the market value, based on the arm’s length principle, and the value for tax purposes of assets transferred outside the scope of Cyprus taxation, while remaining under the same ownership.

The aim is to prevent taxpayers from avoiding tax, by transferring residence, activities or assets out of the country in which economic value has been created.

The cases related to transfer of assets covered are the following:

a) Transfer of assets to the Head Office (HO) or to Permanent Establishment (PE) in another country with Cyprus no longer having the right to impose tax in relation to the transferred assets

b)   Transfer of tax residence to another country, except for assets for which Cyprus retains the right to impose tax (for example those assets connected with a PE in Cyprus)

c)    Transfer of the business carried out from Cyprus to a PE in another country with Cyprus no longer having the right to impose tax in relation to the transferred assets

 Whether any tax liability will arise in Cyprus as a result of Exit Taxation will depend on the relevant provisions of the Cyprus tax legislation. This means that any exemptions and deductions provided by the Income Tax Law will be applicable, such as the one related to gains from sales of shares and other qualifying securities.

Under certain circumstances and conditions, a taxpayer has the right to defer the exit taxation payment by paying it in instalments over five years.

The provision is applicable retrospectively as from 1 January 2020.


2. Hybrid Mismatches

A hybrid mismatch is the result of a difference in the tax treatment of an entity or a transaction, between two or more jurisdictions.

The objective of this provision is to neutralise the tax effects of hybrid mismatch and reverse hybrid mismatch arrangements.

A hybrid mismatch usually has the following tax effect:

a)     double deduction (i.e. the same deduction in two jurisdictions); or

b)     deduction with no inclusion (i.e. deduction of the income in one jurisdiction without inclusion in the tax base of the other).

 The new provisions only apply where there is sufficient “connection” between the parties, such as the one in the following scenarios:

-     An entity and its associated enterprises

-     Associated enterprises of the same entity

-     A HO and a PE

-     Two or more PEs of the same entity

-     A structured arrangement involving an entity

 The following corrective actions are provided to neutralise the effects of hybrid mismatch arrangements:

a)       The Primary Rule provides that if there is a tax deduction of the payment in one jurisdiction without inclusion of the income in the taxable base of the other jurisdiction, the payer will be denied a deduction of the payment

b)       The Secondary Rule provides that if the payment is deductible for tax purposes at the level of the payer, the income will be included in the taxable base of the jurisdiction of the recipient

If a hybrid mismatch results in a double deduction, any Cyprus-resident recipient will be denied the deduction, if a deduction is given to an overseas resident. To the extent that a hybrid mismatch results in a deduction without inclusion, if the Cyprus resident party is the payer, the deduction will be denied, and if the Cyprus-resident party is the recipient and a deduction is given to the overseas payer, the recipient will be taxed.

Associated Enterprises and Structured Arrangements

Any payment which directly or indirectly covers tax deductible expenditure giving rise to a hybrid mismatch related to a transaction between associated enterprises or entered into as part of a structured arrangement will be denied deduction in Cyprus.

Tax residency mismatches

The new law targets tax residency mismatches whereby payments, expenses or losses are deductible in two jurisdictions because a taxpayer is resident for tax purposes in two or more jurisdictions.

In this case, Cyprus shall deny the deduction for such payments, expenses or losses except if they relate to dual-inclusion income.

Notional Interest

The notional interest deduction available on new equity of Cyprus companies is outside the scope of this provision.

Reverse Hybrid Mismatches

A reverse hybrid is an entity that is treated as transparent under the laws of the jurisdiction where it is established but as a separate entity under the laws of the jurisdiction of the investor.

So, the income of such an entity may be neither taxable in the country in which it is established nor in the jurisdiction of the investor. This might result to a deduction without inclusion mismatch.

For what concerns transparent companies registered in Cyprus (for example partnerships) which are considered as standalone taxable persons by jurisdictions in which non-resident associated entities are established (holding directly or indirectly at least 50% of the voting rights, capital ownership or interest in the profit allocation of the transparent entity), the corrective action will be for the Cyprus entity to be taxed in Cyprus.


This provision does not apply to a collective investment vehicle, such as an investment fund or any other multi-shareholder vehicle, holding a diversified portfolio of investments, which is subject to investor-protection regulation in Cyprus.

The provisions regarding hybrid mismatches are applicable retrospectively as from 1 January 2020, while those relating to reverse hybrid mismatches will come in to effect on 1 January 2022.

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