- THE LAW
The Council of Europe has introduced Directive 2018/822, as regards the mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements, which constitutes the sixth amendment (“DAC6”) to Directive 2011/16, on administrative cooperation in the field of taxation.
DAC6 has been transposed into Cyprus law through the amendment of the Law on Administrative Cooperation in the Field of Taxation of 2012 (the “Law”), enacted on 31 March 2021.
DAC6 aims to enhance transparency in the field of taxation and fight against aggressive tax planning.
- BASIC PRINCIPLES
The obligation to report to the Tax Department rests with the Intermediaries and under specific circumstances with the Relevant Taxpayers.
The Intermediaries are defined as any person that designs, markets, organises or makes available for implementation or manages the implementation of a reportable cross-border arrangement and any person that, having regard to the relevant facts, circumstances and expertise, knows or could be reasonably expected to know that they have undertaken to provide, directly or by means of other persons, aid, assistance or advice with respect to designing, marketing, organising, making available for implementation or managing the implementation of a reportable cross-border arrangement.
For a person to be considered as an Intermediary, at least one of the below conditions must apply:
a) be resident for tax purposes in an EU Member State (“Member State”);
b) have a permanent establishment in a Member State through which the services with respect to the arrangement are provided;
c) be incorporated in, or governed by the laws of, a Member State;
d) be registered with a professional association related to legal, taxation or consultancy services in a Member State.
The Relevant Taxpayer is defined as any person to whom a reportable cross-border arrangement is made available for implementation, or who is ready to implement a reportable cross-border arrangement or has implemented the first step of such an arrangement. It is important to note, that the obligation to report rests with the Relevant Taxpayer when the Intermediary is waived from the reporting obligation, or when there is no Intermediary.
The Intermediaries or the Relevant Taxpayers are obliged to report information on “reportable cross-border transactions”.
“Cross-border arrangements” are defined as the arrangements that concern either more than one Member State or a Member State and a third country, when at least one of the following conditions are met:
a) not all of the participants in the arrangement are resident for tax purposes in the same jurisdiction;
b) one or more of the participants in the arrangement is simultaneously resident for tax purposes in more than one jurisdiction;
c) one or more of the participants in the arrangement carries on a business in another jurisdiction through a permanent establishment situated in that jurisdiction and the arrangement forms part or the whole of the business of that permanent establishment;
d) one or more of the participants in the arrangement carries on an activity in another jurisdiction without being resident for tax purposes or creating a permanent establishment situated in that jurisdiction;
e) such arrangement has a possible impact on the automatic exchange of information or the identification of beneficial ownership.
“Reportable cross-border transactions” are defined as any cross-border arrangement that contains at least one of the “hallmarks” included in Appendix IV of the Law. Under some circumstances, the “main benefit test” should also apply for a cross-border transaction to be reportable. The main benefit test is satisfied if it can be established that the main benefit or one of the main benefits which, having regard to all relevant facts and circumstances, a person may reasonably expect to derive from an arrangement is the obtaining of a tax advantage.
The hallmarks are divided into the below five categories:
i) Generic hallmarks linked to the main benefit test: focuses on general characteristics that can be found in tax avoidance schemes and planning, such as confidentiality clauses in relation to tax arrangements, remuneration linked to tax savings. The main benefit test should also apply.
ii) Specific hallmarks linked to the main benefit test: focuses on characteristics that are an indication that the tax benefit is the objective of the transaction, such as obtaining a loss making company, income to capital conversion. The main benefit test should also apply.
iii) Specific hallmarks related to cross-border transactions: focuses on cross-border transfers and payments. The main benefit test should apply in certain circumstances.
iv) Specific hallmarks concerning automatic exchange of information and beneficial ownership: focuses on arrangements that undermine the transparency requirements.
v) Specific hallmarks concerning transfer pricing: focuses on intragroup transfers and arrangements that contain uncertain pricing.
The information to be provided to the Tax Authority shall contain the following, as applicable:
a) the identification of Intermediaries and Relevant Taxpayers, including their name, date and place of birth (in the case of an individual), residence for tax purposes, TIN and, where appropriate, the persons that are associated enterprises to the Relevant Taxpayer;
b) details of the hallmarks that make the cross-border arrangement reportable;
c) a summary of the content of the reportable cross-border arrangement, including a reference to the name by which it is commonly known, if any, and a description in abstract terms of the relevant business activities or arrangements, without leading to the disclosure of a commercial, industrial or professional secret or of a commercial process, or of information the disclosure of which would be contrary to public policy;
d) the date on which the first step in implementing the reportable cross-border arrangement has been made or will be made;
e) details of the national provisions that form the basis of the reportable cross-border arrangement;
f) the value of the reportable cross-border arrangement;
g) the identification of the Member State of the Relevant Taxpayer(s) and any other Member States which are likely to be concerned by the reportable cross-border arrangement;
h) the identification of any other person in a Member State likely to be affected by the reportable cross-border arrangement, indicating to which Member States such person is linked.
The reportable information should be provided to Tax Authorities within 30 days beginning:
a) on the day after the reportable cross-border arrangement is made available for implementation; or
b) on the day after the reportable cross-border arrangement is ready for implementation; or
c) when the first step in the implementation of the reportable cross-border arrangement has been made, whichever occurs first.
The Intermediaries that, having regard to the relevant facts, circumstances and expertise, know or could be reasonably expected to know that they have undertaken to provide, directly or by means of other persons, aid, assistance or advice with respect to designing, marketing, organising, making available for implementation or managing the implementation of a reportable cross-border arrangement, shall also be required to file information within 30 days beginning on the day after they provided, directly or by means of other persons, aid, assistance or advice.
The Tax Department has released an announcement informing the public that there will be no imposition of administrative fines for overdue submission of DAC6 information that will be submitted until the 30th of September 2021, in the following cases:
a) Reportable cross-border arrangements that have been made between 25 June 2018 and 30 June 2020 and had to be submitted by 28 February 2021.
b) Reportable cross-border arrangements that had been made between 1 July 2020 and 31 December 2020 and had to be submitted by 31 January 2021.
c) Reportable cross-border arrangements made between 1 January 2021 and 31 August 2021, that had to be submitted within 30 days from the date they were made available for implementation or were ready for implementation or the first step in the implementation has been made, whichever occurred first.
d) Reportable cross-border arrangements for which secondary Intermediaries provided aid, assistance or advice, between 1 January 2021 and 31 August 2021 and had to submit information within 30 days beginning on the day after they provided aid, assistance or advice.
It is commonly understood that everyone should pay their taxes as they come due and the relevant competent authorities in each member state should be allowed to take all necessary measures against any person that neglects to settle such legally applicable taxes. For the purpose of avoiding tax evasion by individuals that move in other countries within the European Union or that dispose assets from one country to another, the EU has adopted a directive that enhances the cooperation between member states for recovery of taxes and other ancillary matters as explained below.
The applicable law in Cyprus for the provision of mutual assistance on matters of tax recovery is the Mutual Assistance for the Recovery of Claims Relating with Taxes, Duties and other Measures of 2004, that has implemented the European Directive 2010/24 (the “Directive”).
Scope of Directive:
The Directive applies to claims relating to the following:
a) All taxes and duties of any kind;
b) Refunds, interventions and other measures forming part of the system of total or partial financing of the European Agriculture Guarantee Fund (EAGF) and the European Agricultural Fund for Rural Development (EAFRD);
c) Levies and other duties provided for under the common organisation of the market for the sugar sector.
The scope of the Directive includes:
a) administrative penalties, fines, fees and surcharges relating to the claims for which mutual assistance may be requested;
b) fees for certificates and similar documents issued in connection with administrative procedures related to taxes and duties;
c) interest and costs relating to the claims for which mutual assistance may be requested.
The Directive does not apply to:
a) compulsory social security contributions;
b) dues of a contractual nature, such as consideration for public utilities;
c) criminal penalties imposed on the basis of a public prosecution or other criminal penalties not covered by the scope of the Directive as mentioned above.
Main features of Directive:
The Directive establishes an efficient assistance system, enabling member states to cooperate on the below matters:
a) Exchange of information that is foreseeably relevant to a member state in the recovery of its claims;
b) Direct participation of a member state’s officials in administrative enquiries that take place in another member state;
c) Assistance for notification of documents relating to tax claims or to their recovery that include documents of a judicial nature;
d) Request for recovery of tax claims by taking enforcement measures pursuant to the law of the country that receives the request for assistance;
e) Request for precautionary measures to ensure recovery when the claim is contested in the member state that requests the assistance or when the claim is not yet the subject of the instrument permitting enforcement in the said member state.
Interpretation by CJEU:
The European Court of Justice and the Advocate General have been given the opportunity to assess certain aspects of the Directive and some of the conclusions drawn are the following:
a) The Directive does not preclude an authority of a member state that receives an assistance request, from applying Article 47 of the Charter of Fundamental Rights of the European Union (rights to effective judicial protection) in order to refuse to enforce a recovery request (Case C-34/17, 26 April 2018). The above reinforces the established norm, that when interpreting a provision of EU law, it is necessary to consider not only its wording but also the context in which it occurs and the objectives pursued by the said rules.
b) Although under the provisions of the Directive, the member state that received the request for assistance is -for the purposes of recovery of a claim forming the subject matter of such a request- required to treat that request in the same way as its own claims, that does not mean that the claim of the requesting member state has been assigned to the requested member state. Such claim remains, from a substantive perspective, a claim of the requesting member state, distinct from those of the requested member state (Case C-19/19, 14 January 2020)
Effect and way forward:
The European Commission has issued a report, dated 18 December 2017, on the operation of the arrangement established by the Directive (the “Report”), whereby the impact of the Directive was assessed through consultations, questionnaires by members states and the evaluation of requests.
The Report’s conclusion was that the overall impact of the Directive is positive and that it has been successful in making assistance between member states efficient, effective and straightforward; however, it was found that member states do not take advantage of its full potential, since the use of the option for direct participation in proceedings is scarcely used.
In addition, some member states have indicated the weaknesses of the assistance framework, which are mainly related with the lack of resources available to the relevant competent authorities in order to address the requests for assistance efficiently and the lack of efforts by some authorities, which is connected with the weaknesses of their recovery system.
The above observations are particularly relevant in Cyprus, as it was among the countries with the lowest recovery assistance rates. The Commission committed to provide its support for improving the recovery performance of these countries, so it is expected that within the next years the internal tax recovery systems will be strengthened and the national authorities will be encouraged to deploy sufficient resources for the purpose of increasing the recovery assistance rates.
On the basis of sections 104 and 105 of the Municipalities Law 111/1985 the Municipalities are imposing an annual professional tax on legal entities having a registered office and/or having their work performed and/or managed by law firms and/or accounting/audit firms and/or offices providing secretarial services, within their municipal boundaries.
On this, the Limassol Municipality announced on the 04th of December 2019 that following the City Council’s decision dated 26 September 2019, has implemented the provisions of the Municipalities Law 111/1985 pursuant to sections 104 and 105 and has decided to impose annual trade license fees on legal entities having a registered office and/or having their work performed and/or managed by law firms and/or accounting/audit firms and/or offices providing secretarial services to be payable by 31 March 2020, as follows:
- For legal entities working independently, an annual fee of €150,00.
- For legal entities in a group of companies, an annual fee of €85,00 per legal entity.
- For inactive legal entities (dormant companies), an annual fee of €50,00.
Following the announcement of the Municipality of Limassol (as described above), the Union of Cyprus Municipalities (the “Union”), for the purpose of achieving uniformity in the imposition of the professional tax, decided a uniform policy to be adopted by all municipalities in Cyprus. For this purpose, the Union has classified the legal entities into the following categories:
- Active legal entities that are part of a group of companies.
- Active legal entities working independently.
- Dormant legal entities – notwithstanding if they are part of a group of companies or not (for the purpose of being sold for an immediate activation).
1. THE MUNICIPALITES LAW
The Municipalities in Cyprus are regulated by the Municipalities Law of 1985 (111/1985) (as amended) (the “Law”) and in the basis of this Law the local Municipalities levy municipal taxes, fees and duties (i.e. professional tax, immovable property tax, hotel accommodation tax, fees for issuing permits and licenses, fees for refuse collection, fines etc.). Such taxes, fees and duties are the main sources of the Municipalities’ revenue.
The power to impose professional tax on legal entities is provided by section 104 of the Law which states that that the municipal council imposes professional tax on legal persons operating any business, industry, artisanship, work, trade or profession within its municipal boundaries.
Following an investigation conducted by the Audit Office in 2015 it was found that the Municipalities did not impose professional tax on a large number of legal entities having a registered office and /or having their work performed and/ or managed by law firms and/ or accounting/audit firms and/or offices providing secretarial services.
The Audit Office, taking into consideration that (a) thousands of legal entities have as their registered office the offices of law firms and/or accounting/audit firms and/or offices providing secretarial services and that their operations are managed by those offices (b) the then condition of the public finances and (c) the financial difficulties of the municipalities, whose liquidity and/or sustainability depends, to a large extent, on state sponsorship, is of the opinion that the Municipalities, for the purposes of sound administration and fiscal equality of companies operating within their municipal boundaries, are obliged, according to the relevant legislation, to impose professional tax, based on the categories and amount specified in the Law.
Taking into consideration the findings of the Audit Office (described above) as well as the recent decision of the Administrative Court in the case Bolinov Consultancy Limited v Δήμου Λευκωσίας 170/2015, the Municipalities proceeded, with the imposition of professional tax to the legal entities that have their registered office with law firms, accounting or audit firms or with firms providing administrative/secretarial services.
In the Bolinov case, the applicant filed a recourse to the Administrative Court, under Article 146 of the Constitution, against the decision of the Municipality of Nicosia to impose professional tax to them. By this recourse the applicants sought the annulment of the decision of the Municipality of Nicosia on the basis that the applicants do not operate any professional activities in Cyprus, apart from the holding of assets of foreign entities, they do not maintain professional establishment or premises in Cyprus nor employ any personnel.
Following the arguments of the applicant and the responded, the Court dismissed the applicant’s arguments and held that the holding, by the applicant, of shares in other companies constitutes operation of business activity and therefore the applicant’s case falls within the scope of the provisions of section 104 of the Law.
Taking into consideration that the Administrative Court has exclusive jurisdiction to adjudicate on first instance on a recourse made to it under Article 146 of the Constitution, its decisions can be appealed to the Supreme Court (on points of law only).
Even though the Law does not contain such provision, the right to address and submit written objection to the competent public authorities is safeguarded by Article 29(1) of the Constitution which states that:
“Every person has the right individually or jointly with others to address written requests or complaints to any competent public authority and to have them attended to and decided expeditiously; an immediate notice of any such decision taken duly reasoned shall be given to the person making the request or complaint and in any event within a period not exceeding thirty days.”
An objection to the decision of a Municipality to impose professional tax on a legal entity can be submitted in writing to such Municipality, within a timeframe set by the latter (that is usually any date before the payment date of the invoice).
Any person who objects to the imposition of the professional tax, has the right to file a recourse to the Administrative Court of the Republic of Cyprus under Article 146.
Paragraph 3 of Article 146 of the Constitution provides that a recourse shall be made within 75 days of the date when the decision or act was published or, if not published and in the case of an omission, when it came to the knowledge of the person making the recourse.
The content of this article is intended to provide a general guide to the subject matter. Every case is different and specialist advice should be sought about your specific circumstances.
Acquisition of a property in Cyprus is subject to VAT (Value Added Tax) and the current VAT rate is 19%.
As from 1st of October 2011 a reduced rate of VAT (5%) shall be applied to dwellings used or intended to be used by a beneficiary as the principal and permanent place of residence, once a responsible declaration submitted by the beneficiary is approved by the VAT Office, according the amending law N. 129(I)/2011 of the VAT Law of 2000 (N.95(I)/2000).
Furthermore, as of 8th of June 2012, the reduced rate of VAT shall be extended to dwellings used or intended to be used by a beneficiary, as a principal and permanent residence in the Republic and to citizens of countries other than EU Member States.
- Individuals who have completed their 18th year of age on the date of applying.
- Acquire the Property for use as their principal and permanent residence in Cyprus.
Basic Conditions and Criteria:
- The planning permit or the building permit (where a planning permit is not required), must be submitted to the VAT department after the 01/05/2004, which means that the property is subjected to VAT.
- The total area of the property must not exceed 275m2. It should be borne in mind that the reduced 5% VAT applies only to the first 200m2 of the property. In cases of large families (minimum of four (4) children) the total area of the property increased by 15m2 per each addition children.
- It is important to emphasize that in cases where the reduced VAT rate is approved, the property must be used as the applicant’s principal and permanent residence in Cyprus for a period of ten (10) years. It is not permitted to generate any income such rents, or to utilize the property as an investment or any other type of business.
- Deadline for submitting the application, if the property is under construction the reduced VAT rate application can be submitted at any time during the construction. In cases of purchasing new-build properties the application must be submitted before the eligible person taking possession of the property.
- In cases where the reduced VAT rate (5%) is approved, the residential dwelling must be used as the applicant’s principal and permanent residence in Cyprus for a period of ten (10) years. If the eligible person ceases to use the dwelling as a principal place of residence earlier than ten (10) years he shall, within 30 days from the date he ceases to use it as a place of residence, has to notify the Commissioner and pay the difference between the amount of tax resulting from the application of the reduced rate (5%) and the standard rate as applicable on the date supply or construction of the property, which accounts for the period he has not used the property for the purposes of residency, except in case of death of the beneficiary or in case of transfer by the beneficiary to any adult children.
On 27 December 2018, the TAX Authority has released an interpretative circular relating to the application of the amending Act with number 39(I) of 2018 which has come into force on 1 January 2019 and relates to the VAT treatment on the effective transfer of the right to use an immovable property.
From 1/1/2019, the long-term leasing of immovable property which transfers to the lessee the right to dispose the immovable property as owner or dispose the immovable property, is defined as the supply of good rather than the provision of services, and is subject to the VAT rate of 19% or 5% when the lessee is going to use the property as his main and primary place of residence.
The lease agreement not only gives possession of the apartment, but also provides additional rights which in fact mark the lessee as being the owner instead of the tenant. One of the said rights is to be able to transfer its right to another person without the lessor’s consent.
I. VAT Rate – Time of Transaction
The amount of the tax will be determined according to the time of the transaction
- If the lease agreement is to be agreed upon before January 1/1/2019 and X deposit is paid up and the possession is given after 1/1/2019, then the transaction time is considered to have happened before 1/1/19. This means that neither the deposit nor the subsequent occupation is subject to VAT.
- If the construction of a property in which 10 apartments were erected, commenced after 1/1/19 and completed after 1/1/19, then the time of the transaction is detected after 1/1/2019, since both the agreement and the deposit follow the date of alteration. This implies that the proportional VAT rate (5% or 19%) must be attributed, firstly, to the deposit and then when the possession is given, irrespective of whether the remaining amount of € X is paid.
II. Leasing of Second-Hand Properties
The long-term leasing of immovable property, for which the right to dispose the immovable property as owner or dispose the immovable property is transferred to the lessee, is still exempt from VAT when it is transferred after the first use of the property.
III. Interpretation of the ‘effective transfer of the right to dispose immovable property’
The TAX Authority has clarified that the term ‘effective transfer of right’ includes, except of the free ownership of the immovable property, other rights that are equate to substantial and effective ownership like:
(a) Rights that equate to free ownership as determined in the Law of Immovable Property, (e.g. persons that have a long-term interest on the property for 99 or 999 years),
(b) Provision of long-term leasing when there is a lump sum payment equal to the current market value of the property, together with the annual payment of a very low rent,
(c) Provision of long-term leasing when, at the beginning of the lease, the present value of the minimum lease instalments (without taking into account the cost of any possible services provided during the lease term) covers substantially the fair value of the leased asset (e.g. 90% of the market value).