The Cyprus Parliament recently voted to transpose the European Union (EU) Anti-Tax Avoidance Directive (ATAD) exit taxation and hybrid mismatch rules. These provisions, which became law following publication in the Cyprus Gazette, are effective as of January 1, 2020 (except for certain reverse hybrid mismatch provisions that will become effective in 2022). This latest development completes Cyprus’ transposition of both ATAD I and ATAD II, which the EU adopted in 2016 and 2017, respectively.
This second Cyprus ATAD transposition law completes Cyprus’ compliance obligations toward the ‘post-BEPS’ international tax environment’s EU tax initiatives. The first Cyprus ATAD transposition law (including interest limitation, controlled foreign companies (CFCs), and the General Anti-Abuse Rule (GAAR)) has been effective in Cyprus since January 1, 2019.
The CTA is expected to issue clarifying interpretive circulars in the coming months in order to provide more specific guidance on this transposition law.
The new hybrid mismatch rules represent a large expansion of Cyprus’ rules in the hybridity area. Previous hybrid mismatch rules in Cyprus were limited to taxing dividends that are tax deductible in the dividend payor’s jurisdiction. Taxpayers should assess whether their arrangements will be impacted, as the new rules have a much wider scope..
However, the exit taxation provisions are limited in scope to the specific cases set out in the law, and even within these cases, the general Cyprus CIT rules may apply to exempt such transfers.