Key provisions of the Draft Bill

• QIIR 

The Draft Bill introduces QIIR as provided for in the Directive, effective in 2024.  

Observation: The Directive provides for application of the QIIR by a local parent on its own results as well as on the results of its local subsidiaries. This broader application is not required by the Model Rules, although it is permitted. The Directive, however, requires this broader application in order to accommodate EU law considerations.  

• QUTPR 

The Draft Bill specifies that the UTPR will be applied as an additional top-up tax, rather than charged under CIT via a denial of deduction mechanism. The Draft Bill would introduce a QUTPR, effective in 2025. 

Observation: The Directive grants Member States certain discretion on how they implement the QUTPR (i.e., in the form of an additional top-up tax or as denial of deduction), with the Draft Bill following the additional top-up tax route. 

• Cyprus domestic minimum top-up tax 

In the same manner as the QIIR and the QUTPR, the Draft Bill includes provisions for the push-down of Controlled Foreign Company (CFC) taxation for the Cyprus domestic minimum top-up tax. The Draft Bill would introduce a Cyprus domestic minimum top-up tax, effective in 2025.  

Observation: These Cyprus domestic minimum top-up tax mechanics likely will be further addressed with issuance of a Ministerial Decree as provided for in the Draft Bill. Additionally, the Ministerial Decree likely will provide that the Cyprus domestic minimum top-up tax will respect the transitional safe harbour provisions and the initial phase of the international activities exemption, where relevant. Aligning the introduction of the Cyprus domestic minimum top-up tax regime with the QUTPR would result in a one-year delay from the introduction of the QIIR. 

• International shipping income 

The Directive provides for the exclusion of international shipping income from the top-up taxes, under certain conditions. The Draft Bill expands the scope of the exclusion to also exclude any other activity falling under alternative or supplementary tax regimes (e.g., tonnage tax). 

Observation: The Directive, Model Rules, and AG issued to date do not provide for this particular exclusion expansion. Accordingly, this expansion may not be included in the final version of the enacted law. 

• General Anti-Abuse Rules (GAAR)

The Draft Bill does not feature a GAAR.  

Observation: This is in line with the Directive/Model Rules, which also do not explicitly provide for a GAAR.  Some countries may choose to apply a GAAR in relation to the application of the Directive/Model Rules in their domestic Pillar Two legislation since it is not explicitly prohibited. Since the Draft Bill is a separate tax law with its own administration provisions, rather than part of any existing Cyprus tax laws, the GAARs in the existing Cyprus tax laws do not automatically apply to the Draft Bill.

• OECD/G20 Inclusive Framework on BEPS Administrative Guidance (AG) 

The Draft Bill includes certain elements of the AG issued to date, including, simplification for short-term portfolio shareholdings and excess negative carryforward. 

Observation:  The remaining portions of the AG issued to date likely will be incorporated through Ministerial Decrees at a later date. 

• Safe harbours 

The Draft Bill requires Cyprus to respect safe harbours in cases where all EU Member States have consented to the relevant safe harbour. To date this includes the Transitional CbCR Safe Harbour. 

Observation: Cyprus likely will soon consent to the other two safe harbours that have been recently released by the OECD/Inclusive Framework: the Transitional UTPR Safe Harbour and the QDMTT (Qualified Domestic Minimum Top-up Tax) Safe Harbour. Once Cyprus consents to these two safe harbours, all EU Member States will have consented and, per the Draft Bill, they should also apply under their conditions. Where a safe harbour’s conditions are met, the top-up tax under Pillar Two is deemed to be nil. The Draft Bill provides that a Ministerial Decree may be issued to further regulate the matter of safe harbours. 

• Administrative provisions 

Notification of being in scope: All Cyprus constituent entities have an obligation to notify the Cyprus tax authorities (CTA) no later than 15 months after the last day of the relevant fiscal year, or 18 months in case of the transition year.  

Top-up tax local return filing and payment: All Cyprus constituent entities must annually submit their local self -assessment filing and make any payments due within 30 days of the due date for the submission of the GloBE Information Return (GIR). Per the Draft Bill, the GIR is due no later than 15 months after the last day of the relevant fiscal year, or 18 months in case of the transition year. 

Penalties: The Draft Bill outlines penalties for late filings, delayed payments, delayed submissions, and other infringements. These penalty amounts are in line with those imposed by the Cyprus Assessment and Collection Laws for notification and returns as well as those related to country-by-country reporting. With respect to the transitional period of administrative fines and penalties (i.e., fiscal years that begin on or before December 31, 2026, but does not include any tax year that ends after June 30, 2028), no administrative fines and penalties shall be imposed in relation to the submission of top-up tax local return filings, provided that the CTA is satisfied that the relevant MNE Group has taken all necessary actions to comply with the provisions of the law.  The CTA shall consider an MNE Group to have taken all necessary actions if it can evidence that it acted in good faith aiming to understand and apply the provisions of the law.