Tag: Europe

Cyprus New Pre-Action Protocols: A mere formality or a substantive change of mentality?

Posted on | by Paschalis Paschali

In an attempt to modernize and expediate the legal procedures in our country, new Civil Procedure Rules have come into force since the 1st of September 2023, thus changing drastically our legal system. The just and proportionate as to costs handling of the cases, is placed at the heart of the reforms, as reflected in the overriding objective codified in Part 1 of the new Rules. In fact, the new Rules require the Court to handle all cases proactively by encouraging the parties to cooperate with each other, to identify the issues of dispute at an early stage and to facilitate the use of alternative dispute resolution procedures if necessary. To this end, the new Rules introduce certain Pre-Action Protocols that the parties are expected to follow before the initiation of legal proceedings before the Court.

It is worth noting that up to date, parties in litigation were not obliged to engage to any kind of pre-action conduct, apart from very limited circumstances such as in instances where a creditor of a company was obliged to send a 21-days’ notice of demand before filing a winding-up petition against the debtor company (see Art. 211 and 212, Cap. 113). The establishment therefore, of a formal mechanism which promotes the cooperation of the parties at a pre-action stage is certainly innovative.

The new Pre-Action Protocols aim at enhancing the pre-action communication and exchange of information between the parties, while the ultimate purpose they serve is the effective settlement rather than the adjudication of claim. The parties shall comply with the said protocols in a substantive way. Non- substantive adherence with the protocols’ requirements e.g. by omitting to disclose to the other party adequate information or evidence required by the protocol, may be considered as breach of the same and the Court may impose sanctions to the party in breach. In instances, for example, where, to the judgment of the Court, the non-adherence with the pre-action protocols has led to the initiation of an action, the claim of which could have been settled, the Court may order the party in breach to pay the total or part of the amount of the costs incurred. It is therefore evident that, through the imposition of sanctions, a more pragmatic approach as to the compliance of the protocols is adopted rather than merely a theoretical one.

Certain kinds of claims, such as personal injury claims, require the use of a specific Pre-Action Protocol as provided by the new Rules. It is however remarkable that even for claims for which no specific type of Pre-Action Protocol is required to be used, the Rules provide that the parties must act reasonably regarding the exchange of evidence and information and in a way so as to avoid the filing of an action before the Court. Parties are discharged from the obligation to engage in any sort of pre-action conduct only in instances where their claims are considered to be urgent, in instances where the claim is close to become time-barred or in instances where there are sufficient reasons not to engage to pre-action conduct. In such instances the reasons for the non-engagement must be outlined in the statement of claim.

In light of the above, it is obvious that from 1st September 2023 onwards, parties will be obliged to adhere to some kind of pre-action conduct. Potential omission from their part to do so will have to be accompanied with reasons for their non-compliance, while non-compliance for no good reasons may lead to them being penalized in relation to the legal costs incurred. It is therefore evident, that the new Rules attempt to introduce a  new mechanism which will encourage potential litigation parties to settle their claim in an effective and cooperative way prior to submitting their action before the Court.

This, is believed to be achieved through the exchange of evidence and information at an early stage, contrary to what used to be the case until today where proceedings initiated with the exchange of pleadings, which by default did not include evidence. As a result, parties were unable to assess the strength of their case and therefore, settlement could not easily be reached.

Consequently, the new reforms seem to “push” towards a more settlement-based legal system rather than a more adversarial one. A system that would perhaps place litigation at the top of the pyramid of our legal system and that would render it as a solution of a last resort when it comes to the resolution of a dispute.

What is certainly inarguable is that the application of the new Civil Procedural Rules must be accompanied with a change of culture, mindset and philosophy by all legal representatives who will definitely need to embrace and uphold this freshly-introduced mentality.

State Aid and Taxation

Posted on | by Paschalis Paschali

Fiscal state aid is a hot topic right now, with a number of high-profile cases going through the European courts.

Under EU law, Member States are prohibited from giving an advantage in any form whatsoever to undertakings on a selective basis, unless it is justified by reasons of general economic development. 

The test is set out in Art 107 of the Treaty on the Functioning of the European Union (TFEU):

“[…] any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.”

The concept of state aid is wider than that of a subsidy, embracing not only positive benefits, such as subsidies, but ‘also interventions which, in various forms, mitigate the charges which are normally included in the budget of an undertaking and which, without therefore being subsidies in the strict meaning of the word, are similar in character and have the same effect’.

An aid could include subsidies, interest-free or low-interest loans or interest rate subsidies, guarantees on preferential terms, supply of goods or services on preferential terms, capital injections on preferential terms etc.

In order to fall under the scope of Art 107 TFEU, the aid must be granted by a Member State or through Member State resources. This encompasses regional or local authorities and public bodies. There must be a burden on state resources, not just an incidental benefit given without a financial burden.

Very importantly, the aid must favour certain undertakings or the production of certain goods (the ‘selectivity’ principle), which distort or threaten to distort competition, and must be capable of affecting trade between Member States.

The salient question is whether the recipient of the advantage is receiving a benefit that it would not have otherwise received under normal market conditions. The benefit should improve the undertaking’s financial position or reduce the costs that it would have had to bear.

The Commission does not need to prove that trade will be affected. It is sufficient to show that the measure threatens competition, i.e. that intra-EU trade may be affected and not necessarily permanently. For general guidance, see the Commission’s 2016 Notice.

Under Art 107(2) TFEU, certain types of aid such as aid of a social character or aid to help in case of a natural disaster are deemed to be compatible with EU law. Furthermore, aid may be compatible with the internal market if it falls within any of the six derogations laid down in Art 107(3) TFEU. These derogations have been construed strictly, though some of these proved essential in the context of past financial crises and the COVID-19 era.

Whether or not a measure is state aid for the purposes of this provision is a question that the courts both at European and national level have competence to decide. However, whether such state aid is compatible with the common market (i.e. whether it is lawful), is a question that the national courts do not have legal competence to deal with – only the European Commission at first instance.

The Commission has a pivotal role in the application of the state aid prohibition. It keeps constant review of existing aids offered by Member States. Furthermore, Member States are required to notify the Commission as to any plans to grant or alter state aid. The Commission may also ask the Court of Justice to order a Member State to recover illegal state aid.

Companies themselves may trigger investigations by lodging complaints with the Commission. In fact, during an investigation (or even prior to it), the Commission often invites interested parties to submit comments. A company may be affected by the state aid prohibition whether it is the recipient of aid or the competitor of the recipient. Recently, a direct action against a Commission decision brought by competitors of the beneficiaries of a state aid measure was allowed in the Scuola Elementare Maria Montessori case.

Aid given to a company must be repaid if it is unlawful or has not been properly notified or approved by the Commission. If repayment is demanded, within a period of four months, the taxpayer must reimburse the full amount of the financial benefit conferred, including interest, for up to a maximum of ten years prior to the start of an investigation. No recovery is necessary when the unlawful aid was given more than ten years before the Commission’s decision.

The state aid prohibition has become very high profile in the tax field. Tax measures that relieve the recipients of charges that are normally borne from their budgets such as reductions in the tax base, total or partial reduction in the amount of tax (exemption of tax credit), deferment, cancellation or even special rescheduling of tax debt are examples of fiscal state aid. Such tax measures are thought to be granted by the state or through state resources. This is because a tax exemption mitigates the charge that would normally be recoverable from the undertaking. Therefore, the state loses tax revenue. This loss of tax revenue is equivalent to consumption of state resources in the form of fiscal expenditure.

Recent state aid investigations have centred around tax rulings or advance pricing agreements given by Member State tax authorities to various multinationals. What was objectionable to the Commission in each of these cases was that the tax rulings given by Member States allowed the MNE beneficiaries to depart from market conditions in setting the commercial conditions of intra-group transactions, which led to significant tax reductions and very low effective tax rates.

Questioning discretionary practices of tax administrations is not something new in the area of state aid. As noted in the 1998 Commission state aid notice on business taxation, treating economic agents on a discretionary basis may mean that the individual application of a general measure takes on the features of a selective measure, in particular where exercise of the discretionary power goes beyond the simple management of tax revenue by reference to objective criteria.

In the last few months, decisions of the European Court of Justice on some of these cases have come out but we are still waiting for many more. What seems to be emerging from the Fiat and Starbucks appeals is that a tax ruling which does not seem to follow the OECD’s arm’s length principle does not necessarily mean that it falls within the scope of the EU’s state aid prohibition. It is important to assess the reference system of the investigated Member State in order to determine whether the tax ruling is an exception to that system and not whether it deviates from a general abstract arm’s length principle.

Of course as the arm’s length principle as well as the OECD’s Transfer Pricing Guidelines are now incorporated or closely followed by most Member States, including Cyprus, a tax ruling or advance pricing agreement given by the tax administration which allows a tax treatment incompatible with the arm’s length principle is very likely to fall foul of the state aid prohibition. Therefore, special caution should be taken by tax authorities in giving tax rulings, to ensure that the rulings are aligned with the OECD Transfer Pricing Guidelines. Furthermore, undertakings receiving beneficial tax treatment – whether through a ruling or advance pricing agreement or other mitigating measure – should bear in mind that if it is too good to be true, it is probably state aid and will need to be reimbursed at some point.

For more information on any of the issues raised in this newsletter, please get in touch with us.

Digital nomads, international remote working and tax implications

Posted on | by Paschalis Paschali

Digital nomad arrangements are becoming very popular. Although there is no single definition of a digital nomad, the concept tends to encompass remote workers who regularly travel while working. These could be employees or self-employed people who use digital telecommunications technology to carry out their work. Traditionally, digital nomads were mostly self-employed people but since the start of the COVID-19 pandemic, the number of digital nomads who are employees has increased exponentially.

There is a wide range of digital nomads. Some could live completely nomadic lives with no permanent home base, moving from one jurisdiction to another. Others might only work remotely for short periods of time, or during workcations. The rise of digital nomads means that the workplace is no longer geographically restricted, with flexible location-independent working arrangements on the rise. A working environment with remote work is now the rule rather than the exception. However, complete freedom for international remote work is still rare due to a number of obstacles such as local immigration rules, employment, tax, social security etc.

Although many digital nomads might rely on tourist visas to work from a jurisdiction, working on a tourist visa for extended periods might be against local law. Getting a work permit or work visa each time a nomad goes to a new jurisdiction might also be too cumbersome. In order to cut down on red tape and boost the economy through tourism, many countries now give out digital nomad visas. The conditions of such visas vary and could include a minimum earnings threshold, private health insurance, proof of employment, police background checks etc. Cyprus also has a digital nomad visa scheme and in March 2022 increased the number of available visas from 100 to 500.

Taxation is one of the biggest obstacles to international remote work.

Depending on each country’s tax residency rules, a digital nomad might be found to be tax resident in the jurisdiction they are working from. This could lead to double taxation if the jurisdiction of his employment continues to tax him/her as resident. Sometimes, double taxation is eliminated through tax treaty mechanisms or agreements between tax authorities, but this is not always the case.

Even if the digital nomad is not found to be tax resident in the jurisdiction they are working from, or if they are found tax resident, double taxation is avoided, a travelling employee could trigger taxation for the employer in the form of a permanent establishment. Generally, countries can tax non-resident companies or individuals if they have a permanent establishment in another jurisdiction. Therefore, the foreign employer could be taxable in the jurisdiction where the employee is working from if under local rules, the activities and overall working arrangements of the employee give rise to a permanent establishment.

Although each jurisdiction might have its own rules in determining when a permanent establishment is established, there are several common triggers derived from the OECD Model Tax Convention, which jurisdictions tend to follow. An employee who has an office or fixed place of business in another jurisdiction could trigger a permanent establishment for their employer. This can include a co-working space, hotels, Airbnb spaces, if they are paid and chosen by the employer and especially if they are used repeatedly by the same employee or other employees of the same firm. In some jurisdiction, a home office might also be considered as a giving rise to a permanent establishment.  

A permanent establishment might also be triggered by having someone locally who has the authority to sign contracts on the employer’s behalf, or who has an executive or senior management role, or who provides core business services or undertakes sales activities.

If a permanent establishment is established in the jurisdiction where the remote work is taking place, then profits of the employer/company might be allocated (and taxed) by that jurisdiction. This could have serious cost implications, especially if the remote worker is in a senior management position. Let us not forget that prolonged presence of a director of a company in another jurisdiction could affect that tax residence of the company.

Apart from the taxes that may be due (which could be negligible), an employer who has a permanent establishment abroad might need to register the permanent establishment according to local rules. This can be a significant burden especially for partnerships. The employer might also have to run a local payroll and undertake transfer pricing analyses to show the allocation of profits to the permanent establishment. This is likely to be costly, especially if the employer has no foreign presence elsewhere.

EU nationals who wish to work remotely within the EU obviously do not need a digital nomad visa, as they benefit from the EU’s freedom of establishment and the free movement of workers. Nevertheless, EU nationals face the same tax issues, as far as the possible change of tax residency, or creation of a permanent establishment. It is up to Member States to decide whether a remote worker is tax resident in their jurisdiction, or generates a permanent establishment of their employer. EU law and the fundamental freedoms are not triggered, unless there is discrimination (i.e. different treatment of a foreign remote worker with a resident remote worker).

In order to mitigate the tax risks, companies/employers need to assess and approve requests for travel on a case-by-case basis, as the threshold for triggering a permanent establishment might vary under local rules. So far, tax rulings in this area have gone in all directions. We will be reviewing these and the situation in Cyprus in the next instalment of this newsletter.

The New Cyprus Commercial Court: An “Internationalisation” of Cyprus Civil Justice?

Posted on | by techlink

On 2nd June 2022 the Cypriot parliament passed law 69(I)/2022 for the establishment of a Commercial Court and an Admiralty Court (“the Law”).

Introduction

Many readers will be aware that Cyprus is an island in the eastern Mediterranean and the eastern most outpost of the European Union. Its geographical location being at the crossroads of Asia, Europe and the Middle East has shaped its history. Previously seen as a strategic location for would be conquerors of which there were many, the location of Cyprus, its Common Law background, large number of Double Tax Treaties, business friendly climate and highly effective and efficient services sector have been key drivers in making Cyprus a favoured business destination for many Europeans especially Dutch, for Canadians, nationals of the states of the former Soviet Union and latterly Chinese and Israeli investors. This has established Cyprus as a major international business hub which has a reach that belies its size.

The growth of Cyprus as a business centre has placed great pressure on its civil courts, resulting in delays that are amongst the worst in the European Union. The reasoning behind the establishment of the Commercial Court is the creation of a specialist Court where the judges will specialise in commercial disputes in the same manner and with the same efficiency as specialist courts such as commercial courts, construction and technology courts operate in other jurisdictions.

Characteristics of the Commercial Court

One unique aspect of the Commercial Court which demonstrates the desire of the legislature to ease the administration of justice in international commercial disputes is the permissibility of using the English language. This mirrors recent initiatives in some EU jurisdictions, most notably Holland which have established similar international commercial courts to cater for the foreign business community that conducts business in or through these jurisdictions.

Jurisdiction of the Commercial Court

The Commercial Court will hear commercial disputes which are defined in the law as disputes relating to:

(a) Business documents or contracts.

(b) Purchase, sale, import and export of goods.

(c) The carriage of goods by land, air or pipeline.

(d) The exploitation of oil, natural gas or other natural resources.

(e) Insurance and reinsurance.

(f) The functioning of markets or the exchange of shares, stock or other monetary credit or investment vehicles or goods (which is clarified to mean every kind of moveable property save for choses in action and money and includes bonds and shares.

(g) The provision of services excluding medical, quasi medical, dentistry services or services that are provided within an employment contract.

(h) Manufacture of vehicles.

(i) Commercial representations.

(j) The application of the provisions of the law relating to Compensation for Breaches of competition law.

(k) Disputes between shareholders in entities that are regulated by any regulatory authority within the Republic of Cyprus.

(l) Matters relating to copyright and related rights within the ambit of the law for the Protection of Copyright and Related Rights law and the Certificates of Inventions law.

(m) Arbitration Issues.

Minimum Monetary Value of Disputes

The Law sets the minimum value of disputes that will be heard by the Commercial Court at €2 million excluding interest claimed. In the event of a dispute as to the value of the dispute, and by extension the jurisdiction of the court the objecting party may apply to the court of a determination.

In the event that the court determines that the value of the commercial dispute is below €2 million the Law allows the Commercial Court to refer the dispute to the District Court.

Geographical Jurisdiction

(a) The cause of action arises in whole or in part in the district where the Court has jurisdiction.

(b) The defendant or any one of the defendants at the time of the filing of the action resides, carries on business, or in the case of a legal person has its registered office in the district where the court has jurisdiction.

(c) The parties jointly agree between themselves by written agreement to refer the commercial dispute to the Commercial Court, in such a case if any one of the parties resides outside Cyprus, or carries on business outside Cyprus, or in the case of a legal person has its registered office outside Cyprus. In such a case the Commercial Court sitting in Nicosia shall have jurisdiction

(d) The jurisdiction of the Commercial Court derives from community law, international treaty or any rule of private international law. In such a case the Commercial Court sitting in Nicosia shall have jurisdiction.

Transfer of Cases from the District Court to the Commercial Court

Any party may apply to either the Commercial Court or to the District Court for a case that is before the District Court to be transferred to the Commercial Court provided that the hearing of the case has not commenced.

Transfer of Cases from the Commercial Court to the District Court

A judge of the Commercial Court may transfer a case to the District Court where:

(a) the Commercial Court lacks jurisdiction, or

(b) where upon the application of any party that it is appropriate for the case to be tried before the District Court.

Sittings of the Commercial Court

The Commercial Court shall sit in the district capitals of each administrative in buildings that will be specifically prescribed and published in the Official Gazette. Given that there are four administrative districts one can assume that two judges will sit in Nicosia one in Limassol, one in the Larnaca-Famagusta District and one in Pafos.

The Commercial Court will have its own separate registry and registrars.

Judges of the Commercial Court

The Commercial Court will be manned by five judges to be appointed by the Supreme Legal Council.

As the Law prescribes that the number of judges shall be five. This number will effectively and for all intents and purposes be limited to five as a change of law is required for the increase in the number of judges.

The judges of the Commercial Court shall have the standing and shall have the same powers as those of a President of the District Court. (Hitherto the highest tier of judges of first instance in the civil justice system of Cyprus).

The powers derive from the Courts of Justice Law and the Civil Procedure Law.

Procedure Before the Commercial Court

The Courts of Justice Law applies to the following extent:

  • Section 29 relating to the law to be applied (the Constitution, Statute law, Common Law and Equity, Vakouf (Turkish Cypriot trusts and immoveable property) law;
  • Part 4 – relating to the powers of the Court;
  • Part 5 – relating to the witnesses and evidence;
  • Part 7 – relating to the transfer of cases from a court to another court having jurisdiction by order signed by the President of the Supreme Court*.

Procedure before the Commercial Court shall be regulated by procedural regulations specially formulated for the requirements of the Commercial Court. For this purpose, the Supreme Court* has power within the Law to issue a procedural order for the better implementation of the Law and for the regulation of any matter capable of regulation by way of procedural rules.

Use of English Language

A judge of the Commercial Court may where the interests of justice demand allow for the hearing of the case and the filing of pleadings to be in the English language following an application of one of the parties. In such a case the court prescribes that the English language as the language in which the procedure shall be carried out and shall issue its judgment in English.

Appeals from the Commercial Court

Each judgment or order of the Commercial Court is subject to appeal before the Supreme Court.

A decision of the Commercial Court for the pre-trial referral of a question to the ECJ or a decision of the Commercial Court dismissing an application for the pre-trial referral of a question to the ECJ shall not be subject to appeal.

As with other courts in Cyprus the Law establishing the Commercial Court does not contain any provisions for leave to appeal or any restrictions as to the grounds of appeal.

In the case of an appeal, the Law states that the Supreme Court* shall not be bound by any findings of fact made by the Commercial Court and shall where the circumstances so demand shall have power to review and re-examine evidence and reach its own conclusions and shall further be entitled examine further evidence and to rehear witnesses and to issue any order of judgment that is justified under the circumstances including an order the rehearing of the case by the Commercial Court or other court having jurisdiction to hear the case.

Conclusions

The establishment of the Commercial Court is a reaction to commercial pressure for a quicker and more specialist trial court for larger commercial disputes many of which run into hundreds of millions and indeed some into billions of Euros.

Specialist commercial judges will in time gain the experience and specialised knowledge so as to be able to deal with complex commercial cases effectively and speedily.

The ability of the court to conduct proceedings in English will expand and enhance cooperation with foreign lawyers and make justice more accessible to a large number of potential litigants who conduct their commercial businesses within and through Cyprus.

The wide jurisdiction given to the Supreme Court* may appear daunting at first. It is however to be seen as an attempt to give finality to the proceedings at the level of the appeal. This should eliminate the need for retrials in all but the most unavoidable circumstances.

On the whole, the legal and commercial community of Cyprus has greeted the creation of the commercial court with an open mind and a cautious optimism. 

Andrew Demetriou

Ioannides Demetriou LLC  

*It should be noted that the current Supreme Court will be re-organised into an Appeals Court and a Constitutional Court. The appeal from the Commercial Court will be to the civil division of the Appeals Court.