April 2021: International Tax Planning Review

April 2021: International Tax Planning Review

Cyprus is planning to introduce withholding tax and amend corporate tax residency rules

Two bills have been submitted to the Cyprus Parliament to amend the legislation on income tax and prevent tax avoidance and tax evasion.

The bills, which are scheduled to come into force this year, provide for the following.

For payments from Cyprus to companies that are tax residents in jurisdictions included in the EU blacklist, it is proposed to establish a withholding tax, which will be withheld in Cyprus at the following rates:

  • for dividend payments – 17%;
  • for interest payments – 30%;
  • for royalty payments – 10%.

Another bill proposes to adjust the criterion of tax residency of legal entities. Currently, the residence of Cyprus companies is determined on the basis of “management and control”. It is proposed to supplement it with the incorporation criterion. According to it, a company registered in Cyprus and not having a confirmed tax residency in any other country will be considered a tax resident of Cyprus.

UAE strengthens practical measures to combat money laundering

From 1 May 2021, the Ministry of Economy of the United Arab Emirates will initiate a series of inspections of companies for compliance with the registration procedures provided for by local anti-money laundering legislation (AML).

The primary AML law was first passed in the UAE in 2018. In February 2021, to ensure compliance with the international standards, there was established the Executive Office to Combat Money Laundering and Terrorist Financing, which was entrusted with the practical implementation of the AML law. Earlier, in November 2020, specialized courts were also created in several emirates to consider criminal cases of this type.

The inspection campaign targets brokers, real estate agents, auditors, corporate service providers and other regulated entities. The fines prescribed for offenders range from AED 50,000 to AED 5 million (approximately USD 1,360,000). Major violations may result in revocation of license and termination of business.

Twelve no or only nominal tax jurisdictions started information exchange regarding “economic substance”

According to the OECD portal, twelve no or only nominal tax jurisdictions began their first tax information exchanges under the Forum on Harmful Tax Practice’s (FHTP) global standard on substantial activities.

These jurisdictions include Anguilla, Bahamas, Bahrain, Barbados, Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Isle of Man, Jersey, Turks and Caicos Islands, United Arab Emirates.

The standard provides for the annual transfer of information about companies located in tax-free or low-tax jurisdictions, which do not carry out core business functions in their countries of incorporation (do not have an “economic substance” in them) but only accumulate income. Besides the companies without the “economic substance”, the exchange also covers the companies engaged in intellectual property and other high-risk activities.

The said information is to be transferred to tax authorities of the countries where parent companies or beneficiaries of the offshore structures without economic substance are resident. The information on companies from no or only nominal tax jurisdictions includes their identity, activities and ownership chains.     

The information obtained will allow tax authorities to assess the risks related to the relevant taxpayers and, depending on the situation, apply the required tools to them – the rules on controlled foreign companies, transfer pricing and other methods of countering base erosion and profit shifting.

The European Commission intends to limit the takeover of European companies by foreign firms with state support

The European Commission intends to strengthen control over acquisitions in the EU internal market, which are backed by foreign governments. For example, Chinese and Indian companies are actively expanding their economic presence in the EU by acquiring European companies and using for that purpose various government support measures in their countries.

According to the European Commission, this may lead to unfair competition and undermine the integrity of the EU’s single market. In this regard, it was proposed to authorize the Commission to investigate state support schemes applied by non-EU countries and aimed at supporting companies operating in the EU.

If such an analysis reveals a distortion of competition, the Commission, according to the draft, will be able to take various corrective measures at its discretion, in particular, repayment of the foreign subsidy, the divestment of selected assets or the reduction of market presence. Companies that fail to notify EU authorities of the foreign subsidies may be subject to fines of up to 10 percent of their annual turnover.

Along with the so-called “traditional” investors (USA, Switzerland, Canada, Australia, Japan), the materials of the Commission also mention the growing share of takeovers by state-owned companies from countries such as China, Russia and the UAE.

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