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Cyprus consents to Pillar Two Transitional CbCR Safe Harbour Rules, enhances tax deduction for R&D costs
October 2023
In brief
Cyprus has consented to the Pillar Two Transitional CbCR Safe Harbour. In addition, the Cyprus Parliament recently voted to amend Article 9(1)(d) of the Cyprus Income Tax (IT) Law, which grants a tax deduction for expenditures incurred for scientific research and R&D. Finally, Cyprus Ministry of Finance announced that the Cyprus-Netherlands tax treaty will be effective January 1, 2024.
Actions to consider: By consenting to the Pillar Two Transitional CbCR Safe Harbour, new and existing Cyprus companies of Pillar Two-eligible US multinational enterprises (MNEs) may not be impacted by the Pillar Two rules until after 2026. Also, eligible Cyprus intangible property (IP) companies should consider the 120% R&D ‘super-deduction,’ as this provision can apply to any type of IP developed via a cost sharing agreement. Finally, Cyprus taxpayers with existing and prospective Dutch entities in their structures should analyze the provisions of the soon-to-be-effective Cyprus-Netherlands tax treaty.
Cyprus consents to the Pillar Two Transitional CbCR Safe Harbour
The Cyprus Ministry of Finance announced on June 26 its consent to the Pillar Two Transitional CbCR Safe Harbour as agreed by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) on December 15, 2022.
The announcement reads as follows:
“The Republic of Cyprus, even though is not a member of the OECD for political reasons and is not able to partake to the relevant consultations at the OECD level, has always been supportive of the OECD/G20 BEPS actions and the work undertaken so far by the OECD/G20 and the Inclusive Framework on BEPS in the international tax field.”
“In particular the rules as prescribed in the OECD/G20 Inclusive Framework on BEPS statement of October 2021 providing the fundamentals for developing the modalities of Pillar 1 and 2, were welcomed by the Ministry of Finance in a ministerial press release statement, issued beginning of October 2021.”
“Article 32 of the EU Council Directive 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union, also known as “Pillar 2”, which provides for safe harbour rules, is not applicable if any one EU member state has not, as at the date of enforcement of the Directive, consented to the relevant qualifying international agreement on safe harbours, meaning the Pillar Two Transitional CbCR Safe Harbour as agreed by the OECD/G20 Inclusive Framework on BEPS on 15 December 2022.”
“Therefore, since Cyprus did not de facto have the opportunity to consent to the Pillar Two Transitional CbCR Safe Harbour, in order to enable Article 32 of the Pillar 2 Directive to come into effect, we hereby provide full assurance that Cyprus consents to the said rules.”
Enhancement of tax deduction for R&D costs
The Cyprus Parliament recently voted to amend Article 9(1)(d) of the IT Law. The Council of Ministers originally approved such amendments in October 202, approved them in mid 2022, and the Cyprus State aid Commissioner ultimately cleared them. Some of the key changes include:
- Article 9(1)(d) stipulates that an expenditure for scientific research and for R&D (as recognized by international accounting standards) incurred by any-size person (i.e., legal entities and individuals) that carries on a business, and has the economic ownership of the intangible asset that arises, or that could possibly arise, from incurring such expenditure, is deducted for IT Law purposes. Prior to the amendment, any R&D expenditure was allowed only if incurred by small and medium-sized innovative enterprises.
- Any such expenditure which is of a capital nature is tax amortised, in a reasonable manner, over its useful economic life (as per accepted accounting principles). The maximum period is 20 years, and the taxpayer may elect each tax year how much of this allowance to deduct, i.e., the deduction method is as per Article 9(1)(l) of the IT Law. Prior to the amendment, such capital-nature expenditure was tax amortised over a six-year period (i.e., the year in which it was incurred and the five subsequent years).
- No deduction shall be allowed for any such expenditure incurred for the acquisition of plant, equipment, or buildings, for which a deduction already is available under Article 10 of the IT Law. For any such expenditure incurred during 2022, 2023, and 2024 – including any such expenditure of a capital nature which is tax amortised in the manner described above – an additional allowance is granted equal to 20% of the actual expenditure incurred (i.e., a 120% ‘super-deduction’ is granted). For this, a person may elect, for each tax year, to waive claiming (in whole or in part), but the new allowance cannot be claimed in parallel with the 80% allowance on net profit under the Cyprus nexus Intellectual Property regime (i.e., it cannot be claimed in parallel with Article 9(1)(k) of the IT Law). Prior to the amendment no such additional allowance was granted.
Observation: These amendments are part of a wider measure introduced by Cyprus to enable
the business growth and competitiveness of Cyprus innovative enterprises. The 120% super-deduction discussed above also may potentially apply to Cyprus IP companies that develop any type of IP (e.g., brands, trademarks, industrial designs) indirectly, that is, via a cost sharing agreement to which they belong.
Cyprus-Netherlands Tax Treaty: Entered into force on June 30, 2023
The treaty is based on the OECD Model Convention for the Elimination of Double Taxation on Income and on Capital and incorporates all the minimum standards of the Actions against BEPS concerning bilateral agreements. The treaty entered into force on June 30, 2023. Therefore, it will be effective January 1, 2024. The parties also agreed to a treaty Protocol.
Certain provisions of the Treaty relating to arbitration, i.e., Article 23, paragraph 5 (mutual agreement procedure ‘), and Article 24, paragraph 3 (exchange of information ), only will be applicable once Cyprus notifies the Netherlands through diplomatic channels of the date on which Cyprus introduces the necessary legal basis for these provisions.
Observation: The first-time treaty between Cyprus and the Netherlands is intended to contribute to further development of trade and economic relations between the two States.
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