On 12 December 2024 the Cyprus Parliament
approved the harmonisation of the country with EU Directive 2022/2523 of 14
December 2022, otherwise known as Pillar 2 Directive (the ‘Directive’). The
Directive is set to ensure a global minimum level of taxation for multinational
enterprise (MNE) groups and large domestic groups in the EU. It introduces a
15% minimum effective tax rate for such groups with consolidated revenues
exceeding €750 million per annum.
The law introduced (the ‘Law’) includes certain
provisions from administrative guidance issued to date in relation to the OECD Base
Erosion and Profit Shifting (BEPS) project. It also includes provisions
regulating administrative matters to enhance the interpretation of the Law.
The Law incorporates into national legislation
the Income Inclusion Rule (IIR) and the Under Tax Profit Rule (UTPR), as well
as a Domestic Minimum Top-up Tax (DMTT).
The IIR applies to financial years starting
from 31 December 2023 and requires a parent entity of an MNE or a large-
domestic group to pay a top-up tax on its low-taxed income and the low-taxed
income of its subsidiaries to ensure that the group's overall income is taxed
at a minimum rate of 15%.
The UTPR applies to financial years starting
from 31 December 2024 and applies to MNE groups that have low-tax income in
jurisdictions where a top-up tax has not been collected through a Qualified
IIR. It effectively allocates the top-up tax to other jurisdictions based on a
formulaic approach, ensuring the group's overall tax burden meets the minimum
effective tax rate of 15%.
The DMTT also applies to financial years
starting from 31 December 2024 and provides for the imposition of a top-up tax
on the low-tax income of entities and joint ventures of a Cyprus headquartered MNE
group or large domestic group. The rule introduced in Cyprus deviates from the
definition of a qualified DMTT as per the guidance issued and allows for the
push down of foreign taxes, such as taxes resulting from a Controlled Foreign
Company regime. Furthermore, the Cyprus DMTT takes in to account all the
pertinent safe harbours, including the Transitional Country-by-Country (CbC)
Reporting safe harbour.
New compliance and filing requirements concerning
the reporting and collection of a top-up tax have been introduced. These
include a notification to the Cyprus Tax Department that must be made within 15
months from the end of the financial year (18 months in case of the first year
of application) by entities to which the rules apply.
