Tag: lawyers

The Sale of Land (Specific Performance) (Amending) Law of 2023 – Purchaser protection when the immovable property is encumbered by a pre-existing mortgage

Posted on | by Paschalis Paschali

This article is also available in Greek

On 12.12.2023, the Sale of Land (Specific Performance) (Amending) Law of 2023 (L. 132(I) of 2023) (hereinafter the “Amending Law of 2023”) was published in the Official Gazette of the Republic of Cyprus.

The Amending Law of 2023 is read together with the Sale of Land (Specific Performance) Laws of 2011 to 2020 (hereinafter the “Main Law”), with the Amending Law of 2023 and the Main Law being referred to together as the “Sale of Land (Specific Performance) Laws of 2011 to 2023”.

This article briefly analyses a completely new procedure implemented by the Amending Law of 2023, which aims to provide preemptive protection with regards to the rights and interests of purchasers of immovable property, in cases where the immovable property happens to be encumbered by a pre-existing mortgage.

Formalities Necessary for the Lodging of a Contract in Cases where the Immovable Property Happens to be Encumbered by a Pre-Existing Mortgage

A key change introduced by the Amending Law of 2023 relates to the requirements that must be met for the lodging of a contract with the District Lands Office (“DLO”), in cases where the contract concerns immovable property encumbered solely by a pre-existing mortgage or contract and the registered owner of such is not subject to any restriction/prohibition.

In addition to the already existing requirements that have to be met for the lodging of a contract with the DLO to be accepted, as these are set out in sub-paragraphs (a), (b) and (c) of subsection (1) of section 3 of the Main Law, the lodging of a contract, in cases where the circumstances described above apply, now necessitates the inclusion of specific written declarations.

The Amending Law of 2023 specifies that the lodging of the contract will be accepted only if it is accompanied by the written declaration of each mortgagee and seller, in relation to which the purchaser confirms knowledge (according to Form A of the Annex), or the written declaration of the purchaser (according to Form C of the Annex).

Form A of the Annex

By means of Form A, the mortgagee and the seller undertake in writing that, if 95% of the contract amount, including any advance payment already received by the seller, is deposited by the seller and/or purchaser into a specific bank account (deposit account) maintained in the name of the seller, then a relevant payment certificate will be issued to the Purchaser immediately (in accordance with Form B of the Annex).

Form A records a commitment on the part of the mortgagee in that, upon payment of the aforementioned amount and issuance of Form B, it shall release or alleviate the immovable property from the encumbering mortgage, but also that, in case of failure on its part to do so, the purchaser shall have the ability to submit Form B with the Department of Lands and Surveys, duly signed and stamped by the mortgagee. In such an instance, the Director (Department of Lands and Surveys) shall proceed to transfer the immovable property into the name of the purchaser.

The purchaser, by signing Form A, certifies that they have received knowledge of the above commitments.

Furthermore, with relevant additions to Sections 5, 6 and 7 of the Main Law, the Amending Law of 2023 explains the practical implementation of the procedure arising from Form A, the consequences that the mortgagee will face in case of non-compliance with its commitment and how the Director (Department of Lands and Surveys) can proceed to transfer the immovable property into the name of the purchaser upon being presented with a duly completed, signed and stamped Form B.

The introduction of Form A and the related procedure seeks to bring about the preemptive protection and safeguarding of interests. These new introductions act as a safeguard for the benefit of all parties involved and especially the purchaser, setting out precisely the actions that must be carried out by the seller and/or the purchaser for the mortgagee to comply with its simultaneously granted commitment to alleviate the property from the encumbering mortgage, as well as the procedures/consequences that may be implemented in case that the mortgagee fails to honour its commitment.

The procedure arising from Forms A and B ensures that the mortgaged property will be transferred freely to the purchaser, once the purchaser has fulfilled its contractual obligations towards the seller.

Form C of the Annex

Alternatively, the Amending Law of 2023 allows the lodging of a contract by including Form C, through which the purchaser essentially acknowledges the existence of an encumbering mortgage affecting the immovable property and assures that it wishes to proceed with the lodging of the contract without it being accompanied by Form A of the Annex.

Form C does not seek to safeguard purchaser rights to the same extent as Form A. In fact, Form C circumvents the whole procedure set out by Form A.

However, it cannot be overlooked that Form C also contributes to the advance safeguarding of purchaser interests by enabling a purchaser to become aware of the existence of an encumbering mortgage affecting the property in question, but also to confirm its willingness to proceed with the lodging of a contract without the use of Form A.

The introduction of Forms A, B and C of the Annex is undoubtedly a positive development, since it implements a new practice that seeks to safeguard the procedures related to purchasing and transferring of immovable property. In order to solve a serious problem that has arisen in recent years, Forms A, B and C aim to better inform and safeguard in advance the interests of a purchaser, who, despite having fulfilled its obligations towards a seller, ends up dealing with a seller who is unable to transfer the immovable property due to the existence of a mortgage.

Greater awareness of the parties involved and completion of real estate transactions without complications contribute to the strengthening of the real estate market, whilst at the same time inspire more confidence on the part of purchasers in relation to the legislative framework that governs the whole process in cases where the property for sale is encumbered by a mortgage.

Apart from the positive elements deriving from the introduction of Forms A, B and C of the Annex, we consider it appropriate to conclude with the following comments, which potentially reveal a need or improvement of the phrasing contained in the aforementioned Forms and clarification of the new procedure implemented by the Amending Law of 2023:

(i) The additional formalities introduced by the Amending Law of 2023 are not exclusive to cases where the property is only encumbered by a pre-existing mortgage. In fact, the Amending Law of 2023 expressly states that the additional formalities also apply to cases where the property is only encumbered by a pre-existing contract. Nonetheless, this does not seem to be reflected by the phrasing contained in Forms A, B and C, which deals exclusively with the case of a pre-existing mortgage, without containing any reference whatsoever in relation to a pre-existing contract.

(ii) Forms A, B and C refer only to seller and purchaser. This implies that these Forms apply only in cases involving the sale and purchase of immovable property. However, such an approach is incompatible with Article 2 of the Main Law and specifically with the definition of the term “contract”, which includes various types of contracts such as assignment, distribution, and exchange contracts.

(iii) Forms A, B and C require for the description of the purchased unit that has been erected and/or will be erected on the property to be recorded. Such phrasing does not seem to be consistent with cases where the contract does not relate to the purchasing of a unit but instead concerns the purchasing of a field or plot.

(iv) The mortgagee’s commitment provided through Forms A and B is conditional on the payment of 95% of the contract value to a predetermined deposit account. This means, however, that the mortgagee is not obliged to extinguish the mortgage, despite the whole value of the mortgage having been deposited, unless 95% of the contract value is first deposited in that account, an amount which may exceed the total value of the mortgage.

(v) Forms A, B and C refer to cases where the immovable property forming the object of the contract is affected by a pre-existing mortgage. Nevertheless, this wording is not consistent with cases where the object of a contract is only part of an immovable property, which part has no connection whatsoever with a pre-existing mortgage that happens to exist in relation to another part of the immovable property which is not for sale and belongs to another co-owner.

The issues raised through the above commentary are expected to be clarified and addressed over time. The Amending Law of 2023 is very recent and, therefore, the practical implementation and application of the procedure arising from Forms A, B and C cannot yet be properly evaluated.

According to information we have received from the Department of Lands and Surveys, it is expected that the officers of the District Land Registry Offices will be continuously provided with guidance and informative circulars, so as to be in a better position to provide information to the public with regards to the new procedures introduced through Forms A, B and C and their proper implementation, aiming to achieve the objectives of the Amending Law of 2023.

Also available in GREEK here

Ο περί Πώλησης Ακινήτων (Ειδική Εκτέλεση) (Τροποποιητικός) Νόμος του 2023 – Προστασία αγοραστών σε περίπτωση ήδη κατατεθειμένης υποθήκης

Posted on | by Paschalis Paschali

This article is also available in English

Στις 12.12.2023 δημοσιεύτηκε στην Επίσημη Εφημερίδα της Κυπριακής Δημοκρατίας ο περί Πώλησης Ακινήτων (Ειδική Εκτέλεση) (Τροποποιητικός) Νόμος του 2023 (Αριθμός 132(Ι) του 2023) (στο εξής ο «Τροποποιητικός Νόμος του 2023»).

Ο Τροποιητικός Νόμος του 2023 διαβάζεται μαζί με τους περί Πώλησης Ακινήτων (Ειδική Εκτέλεση) Νόμους του 2011 έως 2020 (στο εξής ο «Βασικός Νόμος»), με τον Τροποποιητικό Νόμο του 2023 και τον Βασικό Νόμο να αναφέρονται μαζί ως οι περί Πώλησης Ακινήτων (Ειδική Εκτέλεση) Νόμοι του 2011 έως 2023.

Το παρόν άρθρο αναλύει συνοπτικά μια εντελώς καινούρια διαδικασία που θέτει σε εφαρμογή ο Τροποποιητικός Νόμος του 2023, η οποία αποσκοπεί στην εκ των προτέρων καλύτερη διασφάλιση των συμφερόντων και δικαιωμάτων των αγοραστών ακινήτων, σε περιπτώσεις όπου το προς πώληση ακίνητο επιβαρύνεται από ήδη κατατεθειμένη υποθήκη.

Διατυπώσεις αναγκαίες για την κατάθεση σύμβασης στην περίπτωση που ακίνητη ιδιοκτησία βαρύνεται ήδη με κατατεθειμένη υποθήκη ή σύμβαση:

Μια βασική αλλαγή που εισάγει ο Τροποιητικός Νόμος του 2023 αφορά τις προϋποθέσεις που πρέπει να πληρούνται για σκοπούς κατάθεσης σύμβασης, στην περίπτωση που αυτή αφορά ακίνητη ιδιοκτησία η οποία βαρύνεται μόνο με ήδη κατατεθειμένη υποθήκη ή σύμβαση και ο εγγεγραμμένος ιδιοκτήτης αυτής δεν τελεί υπό απαγόρευση.

Πέραν από τις ήδη γνωστές αναγκαίες διατυπώσεις για την κατάθεση σύμβασης, ως αυτές καταγράφονται επί των παραγράφων (α), (β) και (γ) του εδαφίου (1) του άρθρου 3 του Βασικού Νόμου, η κατάθεση σύμβασης, σε περίπτωση που ισχύουν οι περιστάσεις που περιγράφονται πιο πάνω, πλέον προαπαιτεί την συμπερίληψη συγκεκριμένων έγγραφων δηλώσεων.

Ο Τροποιητικός Νόμος του 2023 διευκρινίζει ότι η κατάθεση της σύμβασης θα γίνει αποδεκτή μόνο εάν αυτή συνοδεύεται από τις έγγραφες δηλώσεις εκάστου ενυπόθηκου δανειστή και πωλητή για την οποία ο αγοραστής ενυπογράφως έλαβε γνώση (κατά τον Τύπο Α του Παραρτήματος) ή του αγοραστή (κατά τον Τύπο Γ του Παραρτήματος).

Τύπος Α του Παραρτήματος:

Διά του Τύπου Α, ο ενυπόθηκος δανειστής και ο πωλητής δεσμεύονται εγγράφως ότι, εφόσον το ενενήντα πέντε τοις εκατό (95%) του ποσού της σύμβασης, περιλαμβανομένης τυχόν προκαταβολής η οποία λήφθηκε ήδη από τον πωλητή, κατατεθεί από τον πωλητή και/ή τον αγοραστή σε συγκεκριμένο τραπεζικό λογαριασμό (καταθετικό λογαριασμό) που τηρείται στο όνομα του πωλητή, τότε θα εκδοθεί άμεσα προς τον αγοραστή σχετική βεβαίωση πληρωμής (κατά τον Τύπο Β του Παραρτήματος).
Ο Τύπος Α καταγράφει δέσμευση από μέρους του ενυπόθηκου δανειστή ως προς το ότι, με την καταβολή του προαναφερόμενου ποσού και την έκδοση του Τύπου Β, θα απαλλάξει ή εξαλείψει το ακίνητο από την επιβαρυντική υποθήκη, αλλά και ότι σε περίπτωση παράλειψης από μέρους του να το πράξει τούτο, τότε ο αγοραστής έχει την δυνατότητα να προσκομίσει στο Τμήμα Κτηματολογίου και Χωρομετρίας τον Τύπο Β, δεόντως υπογραμμένο και σφραγισμένο από τον ενυπόθηκο δανειστή, με τον Διευθυντή του Τμήματος Κτηματολογίου και Χωρομετρίας να μεταβιβάζει το ακίνητο επ’ ονόματι του αγοραστή.

Ο δε αγοραστής, με την υπογραφή του Τύπου Α, βεβαιώνει ότι έχει λάβει γνώση των πιο πάνω δεσμεύσεων.

Περαιτέρω, με σχετικές προσθήκες επί των άρθρων 5, 6 και 7 του Βασικού Νόμου, ο Τροποιητικός Νόμος του 2023 καταγράφει την πρακτική εφαρμογή της διαδικασίας που απορρέει από τον Τύπο Α, τις συνέπειες που θα υποστεί ο ενυπόθηκος δανειστής σε περίπτωση μη συμμόρφωσης με την δέσμευση του, καθώς επίσης και την εξουσία που αποδίδεται στον Διευθυντή του Τμήματος Κτηματολογίου και Χωρομετρίας για να προχωρήσει στη μεταβίβαση του ακινήτου επ’ ονόματι του αγοραστή κατά την προσκόμιση δεόντως συμπληρωμένου, υπογεγραμμένου και σφραγισμένου Τύπου Β.

Η εισαγωγή του Τύπου Α και της σχετικής προς τούτο διαδικασίας επιδιώκει να επιφέρει την εκ των προτέρων διασφάλιση και προστασία συμφερόντων. Τα όσα έχουν εισαχθεί λειτουργούν ως ασφαλιστική δικλείδα προς όφελος όλων των εμπλεκόμενων μερών και κυρίως του αγοραστή, καταγράφοντας ακριβώς τις ενέργειες που απαιτούνται από πλευράς πωλητή και/ή αγοραστή για σκοπούς τήρησης της παράλληλης δέσμευσης του ενυπόθηκου δανειστή για εξάλειψη της επιβαρυντικής υποθήκης, καθώς και τις διαδικασίες/συνέπειες που μπορούν να τύχουν εφαρμογής σε περίπτωση παράλειψης του ενυπόθηκου δανειστή να τηρήσει την δέσμευση του.

Η πρακτική που απορρέει από τους Τύπους Α και Β διασφαλίζει ότι η ελεύθερη μεταβίβαση υποθηκευμένου ακινήτου σε αγοραστή θα εκτελείται μόλις αυτός εκπληρώσει τις συμβατικές του υποχρεώσεις έναντι του πωλητή.

Τύπος Γ του Παραρτήματος:

Εναλλακτικά, ο Τροποποιητικός Νόμος του 2023 επιτρέπει την κατάθεση σύμβασης διά της συμπερίληψης του Τύπου Γ, μέσω του οποίου ο Αγοραστής ουσιαστικά αναγνωρίζει την ύπαρξη επιβαρυντικής υποθήκης που επηρεάζει το προς πώληση ακίνητο και διαβεβαιώνει ότι επιθυμεί να προχωρήσει στην κατάθεση της σύμβασης χωρίς αυτή να συνοδεύεται από τον Τύπο Α του Παραρτήματος.

Ο Τύπος Γ δεν επιδιώκει να διασφαλίσει τα δικαιώματα του αγοραστή στον ίδιο βαθμό που επιδιώκει ο Τύπος Α. Κατ’ ακρίβεια, ο Τύπος Γ παρακάμπτει την όλη διαδικασία και πρακτική που απορρέει από τον Τύπο Α.

Παρά ταύτα, δεν μπορεί να παραγνωριστεί ότι ο Τύπος Γ επίσης συνεισφέρει προς την εκ των προτέρων διαφύλαξη των συμφερόντων του αγοραστή, παρέχοντας την δυνατότητα σε αυτόν να λάβει έγκαιρα γνώση για την ύπαρξη επιβαρυντικής υποθήκης που επηρεάζει το προς πώληση ακίνητο, αλλά και να επιβεβαιώσει ότι είναι πρόθυμος να προχωρήσει στην κατάθεση σύμβασης χωρίς τη χρήση του Τύπου Α.

Η εισαγωγή των Τύπων Α, Β και Γ του Παραρτήματος αναμφίβολα συνιστά θετική εξέλιξη αφού θέτει σε εφαρμογή μια καινούργια πρακτική που επιδιώκει να διασφαλίσει τη διαδικασία αγοράς και μεταβίβασης ακίνητης ιδιοκτησίας. Με στόχο την επίλυση ενός σοβαρού προβλήματος που παρουσιάζεται τα τελευταία χρόνια, οι Τύποι Α, Β και Γ στοχεύουν στην εκ των προτέρων καλύτερη ενημέρωση και διασφάλιση των συμφερόντων του αγοραστή, ο οποίος, ενώ έχει εκπληρώσει πλήρως τις συμβατικές τους υποχρεώσεις έναντι του πωλητή, έχει απέναντι του ένα πωλητή ο οποίος αδυνατεί να μεταβιβάσει λόγω της ύπαρξης εμπράγματου βάρους.

Η καλύτερη ενημέρωση των εμπλεκόμενων μερών και η χωρίς περιπλοκές ολοκλήρωση κτηματικών συναλλαγών προσφέρει στην ενδυνάμωση της αγοράς ακινήτων, ενώ παράλληλα εμπνέει περισσότερη εμπιστοσύνη σε σχέση με το νομοθετικό πλαίσιο που διέπει την όλη διαδικασία σε περιπτώσεις που το προς πώληση ακίνητο επιβαρύνεται με υποθήκη.

Πέραν, όμως, από τα θετικά στοιχεία που απορρέουν από την εισαγωγή των Τύπων Α, Β και Γ του Παραρτήματος, κρίνουμε σκόπιμο όπως παραθέσουμε τα ακόλουθα σχόλια, τα οποία ίσως να αποκαλύπτουν την ανάγκη για καλύτερη διατύπωση των προαναφερθέντων Τύπων και διευκρίνηση της όλης αυτής νέας διαδικασίας που θέτει σε εφαρμογή ο Τροποιητικός Νόμος του 2023:

(i) Οι πρόσθετες διατυπώσεις που εισάγονται διά του Τροποποιητικού Νόμου του 2023 δεν αφορούν αποκλειστικά τις περιπτώσεις που το ακίνητο βαρύνεται μόνο με ήδη κατατεθειμένη υποθήκη. Κατ’ ακρίβεια, ο Τροποποιητικός Νόμος του 2023 προνοεί ρητά ότι οι εν λόγω πρόσθετες διατυπώσεις αφορούν επίσης περιπτώσεις που το ακίνητο βαρύνεται μόνο και με ήδη κατατεθειμένη σύμβαση. Αυτό, όμως, δεν φαίνεται να αντικατοπτρίζεται από το λεκτικό των Τύπων Α, Β και Γ, οι οποίοι ασχολούνται αποκλειστικά με την περίπτωση ήδη κατατεθειμένης υποθήκης, χωρίς να περιέχουν οποιαδήποτε απολύτως αναφορά σε σχέση με ήδη κατατεθειμένη σύμβαση.

(ii) Οι Τύποι Α, Β και Γ αναφέρονται μόνο σε πωλητή και αγοραστή. Αυτό συνεπάγεται ότι οι συγκεκριμένοι Τύποι τυγχάνουν εφαρμογής μόνο σε περιπτώσεις που αφορούν αγοραπωλησία ακίνητης ιδιοκτησίας. Τέτοια προσέγγιση, όμως, δεν συνάδει με το άρθρο 2 του Βασικού Νόμου και συγκεκριμένα την ερμηνεία του όρου «σύμβαση» η οποία συμπεριλαμβάνει διαφόρων ειδών συμβάσεις, όπως για παράδειγμα συμβάσεις εκχώρησης, διανομής και ανταλλαγής.

(iii) Οι Τύποι Α, Β και Γ ζητούν να καταγραφεί η περιγραφή της αγορασθείσας μονάδας που ανεγέρθηκε και/ή θα ανεγερθεί επί του Ακινήτου. Η διατύπωση των εν λόγω Τύπων δεν φαίνεται να συνάδει με περιπτώσεις που η σύμβαση δεν αφορά την αγορά κάποιας μονάδας, αλλά την αγορά ενός χωραφιού ή οικοπέδου.

(iv) H δέσμευση του ενυπόθηκου δανειστή που παρέχεται διά των Τύπων Α και Β παρέχεται υπό την αίρεση καταβολής 95% της αξίας του συμβολαίου σε προκαθορισμένο καταθετικό λογαριασμό. Αυτό, όμως, σημαίνει ότι ο ενυπόθηκος δανειστής δεν υποχρεούται να εξαλείψει την υποθήκη, έστω και αν ολόκληρη η αξία αυτής έχει κατατεθεί στον ενδεδειγμένο καταθετικό λογαριασμό, εκτός και αν πρώτα κατατεθεί το 95% της αξίας του συμβολαίου στον εν λόγω λογαριασμό, ποσό το οποίο μπορεί και να υπερβαίνει την όλη αξία της υποθήκης.

(v) Οι Τύποι Α, Β και Γ αφορούν περιπτώσεις που η ακίνητη ιδιοκτησία, η οποία αποτελεί αντικείμενο της σύμβασης, επηρεάζεται από ήδη κατατεθειμένη υποθήκη. Τέτοια διατύπωση, όμως, δεν συνάδει με περιπτώσεις που το αντικείμενο προς πώληση είναι τμήμα ακινήτου, το οποίο τμήμα δεν σχετίζεται με ήδη υπάρχουσα υποθήκη η οποία αφορά άλλο συνιδιοκτήτη και συγκεκριμένα άλλο τμήμα του ακινήτου που δεν αποτελεί αντικείμενο της πώλησης.

Τα ζητήματα που εγείρονται διά των πιο πάνω σχολιασμών αναμένεται ότι θα διευκρινιστούν και θα τύχουν αντιμετώπισης με την πάροδο του χρόνου. Ο Τροποποιητικός Νόμος του 2023 είναι πολύ πρόσφατος, με την πρακτική εφαρμογή και χρήση της όλης διαδικασίας που αφορά τους Τύπους Α, Β και Γ να μην μπορεί να αξιολογηθεί δεόντως στο παρόν στάδιο.

Σύμφωνα με ενημέρωση που έχουμε λάβει από το Τμήμα Κτηματολογίου και Χωρομετρίας, αναμένεται ότι οι λειτουργοί των Επαρχιακών Κτηματολογικών Γραφείων θα εφοδιάζονται συνεχώς με καθοδηγητικές οδηγίες και εγκυκλίους, με σκοπό την καλύτερη ενημέρωση του κοινού ως προς τις νέες πρακτικές που έχουν εισαχθεί διά των Τύπων Α, Β και Γ, καθώς και την ορθή εφαρμογή αυτών, με σκοπό την επίτευξη των στόχων που προάγει ο Τροποποιητικός Νόμος του 2023.

Also available in ENGLISH here

A Testament to Seamless Cooperation in Cross Border Litigation

Posted on | by Paschalis Paschali

Two of our litigation partners Andrew Demetriou and Theo Demetriou working with the legal and technical teams of our clients the Electricity Authority of Cyprus and our colleagues from France (initially Quinn Emmanuel and latterly White & Case), Kami Haeri and Alexandre Kiabski were successful in reversing an injunction issued ex parte against the cashing of a bank guarantee before the Paris Commercial Court. The matter required seamless and efficient cooperation between our client, ourselves and our French colleagues in order to achieve this excellent result.

Images of Paris skyline


The initial and possibly most important aspect was to pick the right colleagues in France to work with. This was done by using our previous experience in such cases and researching the experience of the law firms involved in the particular type of litigation. Once the lawyers were selected and conflicts were cleared quick and effective communication and action ensured that our client’s achieved their commercial and strategic objectives.

Recent EU Corporate Tax Proposals and their possible impact on the Cyprus Tax System

Posted on | by Paschalis Paschali

In the last few years, the European Commission has been very active in the corporate tax field, producing a number of legislative proposals. The most important one was, arguably, the Directive on Minimum Effective Tax Rate, which was approved in Council in December 2022. Member States were given until the 31 December 2023 to incorporate the provisions of the new Directive into domestic law. The provisions of this Directive were analysed in a previous newsletter.

In this newsletter, we examine the legislative tax proposals which are still in the pipelines. These are the proposed Unshell Directive, the proposed Directive on Faster and Safer Relief of Excess Withholding Taxes, the proposed BEFIT Directive (Business in Europe: Framework for Income Taxation), the proposed Transfer Pricing Directive and the proposed Directive on Head Office Tax.

THE UNSHELL PROPOSAL

The Unshell proposal was first published as a draft Directive in December 2021. The aim of this proposal was to establish transparency standards around the use of shell entities to enable tax authorities to detect abuse more easily. There is a filtering system (gateways) comprising of several substance indicators. Undertakings will need to show that they satisfy the substance indicators, otherwise they will be presumed to be “shells”. Such a finding could lead to penalties, a denial of a tax residency certificate and unavailability of exemptions under the Parent-Subsidiary and Interest and Royalties Directive.

If adopted as proposed, the Unshell proposal will introduce a heavy compliance burden of reporting, preparation of rebuttals and appeals, not just for MNEs but also for smaller undertakings involved in cross-border transactions. Although the European Commission was expected to publish a revised version of this draft Directive in 2023 to meet the concerns of some stakeholders, this has not happened.

If this proposal is adopted, Cyprus and other traditional holding company jurisdictions are likely to be affected. Of course, much would depend on the gateways and substance indicators that are eventually approved. In any case, advisors would need to assess which undertakings may come within the scope of the rules, whether they can benefit from any carve-outs and how they can ensure they remain low-risk in order to be exempt. If reporting of minimum substance is inevitable, then diligent preparation of documentary evidence will be crucial to ensure the rebuttal of the presumption of a shell.

THE FASTER DIRECTIVE

The Directive on Faster and Safer Relief of Excess Withholding Taxes (FASTER Directive) was proposed by the Commission in June 2023. This proposed Directive is aimed at streamlining the withholding tax reimbursement process making withholding tax procedures in the EU more efficient and secure for investors, financial intermediaries and tax administrations. The Directive also seeks to remove obstacles to cross-border investment and to curb certain abuses.

Three options are set out in the Commission’s proposal.

Under the first option, Member States would continue to apply their current systems (i.e. relief at source and/or refund procedures) but would introduce a common digital tax residence certificate (eTRC) with a common content and format which would be issued/verified in a digital way by all Member States. There would also be a common reporting standard to increase transparency as every financial intermediary throughout the financial chain would report a defined set of information to the source Member State. It would be accompanied by standardised due diligence procedures, liability rules and common refund forms to be filed on behalf of clients/taxpayers using automation.

This second option builds on the elements included in the first option but makes it compulsory for Member States to establish a system of relief at source at the moment of payment that allows for the application of reduced rates under a tax treaty or domestic rules. Under this option, tax administrations would have to monitor the taxes due after the payment takes place.

The third option also builds on the first option, with the added requirement that Member States applying a refund system should ensure that the refund is handled within a pre-defined timeframe, through the Quick Refund System. Member States can introduce or continue to implement a relief at source system.

Of all the options, the third option is considered (by the Commission) to be the preferred option. While the second option would lead to even higher cost savings for investors, the third option enables Member States to retain an ex-ante control over refund requests. This is likely to be more politically feasible in all Member States.

Even though Cyprus does not, in general, levy withholding taxes other than on certain outbound payments if the recipient is a company resident in a jurisdiction featured in the EU’s list of non-cooperative jurisdictions, the proposed Directive is likely to have an impact on the Cyprus tax system. The development of a harmonised digital certificate of residence will help speed up the procedures for relief of excess withholding taxes from other jurisdictions.

Of course, Member State tax administrations will need to be equipped with tools to deal with the relief/refund procedures in a secure and timely manner and to train the relevant staff supervising such tools.

BEFIT

In September 2023, the Commission published the much-awaited BEFIT Directive (Business in Europe: Framework for Income Taxation). This proposal replaces the previously proposed Common Consolidated Corporate Tax Base but the overall aim is the same: to set out a new framework of tax rules to help all companies in a group to determine their tax base on the basis of common rules. The new rules will be mandatory for groups operating in the EU with an annual combined revenue of at least €750 million. Smaller groups may choose to opt in.

All members of the same group (the ‘BEFIT group’) will calculate their tax base in accordance with a common set of rules applied to their already prepared financial accounting statements. The tax bases of all members of the group will then be aggregated into one single tax base, with losses automatically set off against cross-border profits.

Tax returns will be filed both at the level of the filing entity and each group member. Member State authority representatives (the ‘BEFIT team’) will assess and agree on the content and treatment of the BEFIT Information Return. Each Member State where the multinational group is present will be allocated a percentage of the aggregated tax base under a transitional formula. Very importantly also, each Member State can then adjust their allocated tax base according to their own national rules, calculate the profits, and tax at their national corporate tax rate.

BEFIT is expected to reduce tax compliance costs for large businesses. However, a close reading of the proposal suggests that there are some differences with Pillar 2 (and the Directive on Minimum Effective Tax Rate) which is likely to increase the compliance burden of in-scope groups.

In addition, although the BEFIT’s procedural rules were meant to provide a one-stop shop for corporate taxation of MNEs, quite the opposite, they seem to lead to a two-tier compliance mechanism. There is the double filing of returns, but also the possibility of parallel operation of double (and multiple) audits in the Member States involved. (See the IBFD Taskforce’s assessment of the BEFIT.) This is highly unsatisfactory.

Furthermore, the ability to make national adjustments to the allocated part is likely to give rise to tax (base) competition, which to an extent, defeats the objective of having a common tax base.

Whilst there are likely to be very few (if any) Cypriot in-scope groups, nevertheless, the existence of an additional tax base could be attractive to smaller groups that might choose to opt in. Therefore, if the BEFIT Directive is adopted, advisors should assess whether the new tax base is more beneficial than the Cyprus tax base for any Cypriot group with non-resident subsidiaries, and whether a transition to the new system should be encouraged.

TRANSFER PRICING DIRECTIVE

The draft Transfer Pricing Directive was proposed at the same time as the BEFIT proposal, in September 2023. This Directive aims to harmonize transfer pricing rules within the EU, in order to ensure a common approach to transfer pricing problems. As stated in the preamble (page 2), the “proposal aims at simplifying tax rules through increasing tax certainty for businesses in the EU, thereby reducing the risk of litigation and double taxation and the corresponding compliance costs and thus improve competitiveness and efficiency of the Single Market”.

This objective is achieved by incorporating the arm’s length principle into EU law, harmonizing the key transfer pricing rules, clarifying the role and status of the OECD Transfer Pricing Guidelines and creating the possibility to establish common binding rules on specific transfer pricing issues.

The draft Directive contains a common definition of associated enterprises (and therefore the transactions covered). It encompasses a person (legal or natural) who is related to another person in any of the following ways:

  • significant influence on their management;
  • a holding of over 25% of their voting rights;
  • a direct or indirect ownership of over 25% of their capital; or
  • a right to over 25% of their profits.

It is clarified that a permanent establishment is an associated enterprise. This is not always the case under national tax laws.  

The draft Directive also adopts key elements of the OECD Transfer Pricing Guidelines such as the accurate delineation of transactions undertaken, comparability analysis and the five recognised OECD Transfer Pricing methods.

Very importantly, the draft Directive provides for mechanisms to enable corresponding and compensating adjustments. There is a process for applying corresponding adjustments on cross-border transactions within the EU that aims at resolving, within 180 days, any double taxation that follows from transfer pricing adjustments made by an EU Member State. A framework is also introduced for compensating adjustments, which must be recognised by Member States.

In order to ensure a common application of the arm’s length principle it is expressly stated that the latest version of the OECD Transfer Pricing Guidelines will be binding when applying the arm’s length principle in Member States.

Broadly, the common definition of associated enterprises is very welcome, as this concept is not harmonised across Member States. However, the 25% threshold is different from the criteria set out in the BEFIT Directive and the Directive on Minimum Effective Tax Rate. This is likely to cause difficulties in coordinating the various rules.

In addition, the 180 days fast-track process is very attractive, as it will help speed up the resolution of disputes. The framework introduced for compensating adjustments is also very important as not all Member States accept compensating adjustments which can lead to double taxation.

If adopted, this Directive will have an impact on Cyprus transfer pricing rules, mostly in the context of streamlining corresponding adjustments. From a literal reading of Art 33(1) and (5) of Cyprus’ Income Tax Law, it would seem that only upwards compensating adjustments are accepted by the Cyprus tax authorities – unless of course there is a tax treaty in place which provides for upwards and downwards adjustments. The current practice suggests that the Cyprus tax authorities are unwilling to allow downwards adjustments. Also, the law is silent on compensating adjustments, but again it would seem that on the basis of a literal reading of Art 33(1) and (5), only if the compensating adjustments would result in an upward adjustment will they be accepted by the Cyprus tax authorities. If the Directive is adopted, these practices will have to change.

As for the other provisions of the Transfer Pricing Directive, whilst Cyprus now broadly follows the OECD’s Transfer Pricing Guidelines, its transfer pricing regime is a rather new regime. Therefore, a harmonised EU regime will likely have spillover effects as regards the interpretation and application of the newly adopted concepts.

HEAD OFFICE TAXATION DIRECTIVE

Under the new Head Office Taxation Directive (HOT Directive), qualifying SMEs with permanent establishments in other Member States will be able to calculate their tax liability based only on the tax rules of the Member State of their head office.

There are a number of conditions determining eligibility of SMEs, which are scattered in the proposal. Broadly, the proposed regime will only be open to EU tax resident companies (of a form listed in the Annex) with EU permanent establishments. Non-EU permanent establishments are excluded from the scope of the Directive.

There are also size-related requirements. In order for companies to be eligible, they must not exceed at least two of the following three criteria, on a yearly basis: (i) total balance sheet of EUR 20 million; (ii) net turnover of EUR 40 million; (iii) average number of employees of 250.

The draft Directive excludes from the scope of the regime SMEs which are part of a consolidated group for financial accounting purposes in accordance with Directive 2013/34/EU and constitute an autonomous enterprise. There is some uncertainty in this eligibility condition, which is likely to be addressed in a revised draft.

SMEs would only file one single tax return with the head office Member State. This return would then be shared with other Member States where the permanent establishments are located. Collection will take place at the Member State of the head office, but revenues will be shared with the tax authorities of each permanent establishment.

Audits, appeals and dispute resolution procedures will remain domestic and in accordance with the procedural rules of the respective Member State. Joint audits may also be requested by tax authorities. The proposed Directive will amend the Directive on Administrative Cooperation (the DAC) to enable the exchange of information between Member States for the proper functioning of the Head Office Tax Directive.

If a qualifying SME opts into this regime, then it must apply the rules for a period of five fiscal years, which can be renewed. The regime would cease to apply before the expiration of the five-year term if either (i) the SME transfers its tax residence out of the head office Member State or (ii) the joint turnover of its PEs exceeded an amount equal to triple the turnover of the head office for the last two fiscal years.

Broadly, the proposed Directive will create a one-stop-shop regime whereby the tax filing, tax assessments and collections for permanent establishments will be dealt with through the tax authority in the Member State of the head office.

The fact that the tax base of permanent establishments will be calculated according to the tax rules of the head office might generate tax competition. Cyprus and other Member States will strive to have attractive head office tax provisions in order to attract qualifying SMEs. Of course, this will also lead to an increase in the workload of the Cyprus tax authorities, as they would act as a one-stop-shop, dealing with the tax filing and assessment of the various components of the SME, as well as the collection and payment of revenues to other tax authorities. Therefore, adequate resources will need to be devoted to the Cyprus tax authorities, in order to be able to perform their role in the context of this proposed Directive.   

It should be pointed out that the proposed Directive does not directly impact Cyprus’ transfer pricing rules. The proposed rules will simply enable permanent establishments of qualifying SMEs to have their profits calculated according to the tax rules of the Member State of the head office. Therefore, assuming we have a qualifying Cyprus head office with Greek permanent establishments, the Cyprus tax rules will apply to determine how the profits of the Greek permanent establishments will be taxed. Those taxable profits will be subject to the Greek tax rates. However, the prior question of what profits will be attributed to the Greek permanent establishments (which will then be subject to the Cyprus tax rules) is most likely to be determined by Greek tax rules on profit attribution to permanent establishments. Unfortunately, this important point is not clear in the proposed Directive and is likely to give rise to disputes.

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

THE IMPACT OF EU LAW ON THE CYPRUS CORPORATE TAX SYSTEM

Posted on | by Paschalis Paschali

Distinguishing the Concepts from the Misconceptions

For an effective tax planning strategy, businesses in Cyprus need to be fully aware of the concepts of taxation on a European level and how they affect Cyprus at present and how they may affect it going forward. This article aims to give an informed overview as a first step to gaining such an understanding.

There is often a misconception that the EU dictates all Cyprus tax laws. Whilst this is true as regards indirect taxes such as VAT, customs and excise which are largely harmonized, technically, the power to levy direct taxes, including corporate taxes, remains within the exclusive powers of Member States.

However, these powers must be exercised consistently with general EU law, that is, the EU’s fundamental freedoms, the Charter of Fundamental Rights, and the state aid prohibition. This obligation is derived from the supremacy of EU law over domestic law. In terms of tax law this general EU law and the various Directives are considered as “hard law”.

Cyprus’ corporate tax laws are primarily set out in the Income Tax Law (Law 118(I)/2002, as amended) and the Special Contribution for Defence Law (Law 117 (I)/2002, as amended). There are also important provisions in some of Cyprus’ pre-accession general tax instruments: the Capital Gains Tax Legislation of 1980 (Law 52/1980, as amended) and the Assessment and Collection of Taxes Legislation of 1978 (Law 4/1978)

Since Cyprus acceded to the EU, there have been few changes to its corporate tax system which were necessary as a result of EU legislation (usually, Directives).  This was because in anticipation to join the EU in 2004, Cyprus had already overhauled its tax system, including its corporate tax system, to ensure compatibility with the acquis Communautaire.

Accordingly, at the time of accession to the EU, Cyprus had already incorporated in its domestic law the then existing EU corporate tax law concepts: namely, the Parent-Subsidiary Directive, the Interest and Royalties Directive, the Merger Directive, and the Mutual Assistance Directives dealing with recovery of taxes and exchange of information.

Furthermore, pre-accession, Cyprus legislation was assessed under the Code of Conduct on Business Taxation, which is considered as “soft law”. Within the context of taxation although soft law is not, technically speaking, legally binding, nevertheless, it carries important political weight and must be followed. Numerous potential harmful tax measures were therefore identified and repealed at the beginning of 2003.

However, as we all know, law in general, and specifically EU law is not static. Since Cyprus’ accession to the EU, several incorporated Directives have been amended. Obviously, the amendments had to be again incorporated in Cyprus laws, as under EU law, directives (and their subsequent amendments) must be adopted by Member States within the time frame provided, otherwise, they become directly effective.

For example, when the Parent-Subsidiary Directive was amended in order to withdraw the exemption of dividends received when these were deductible in the country of the paying company, this amendment was incorporated into Cyprus tax laws (Art 8(20) of Income Tax legislation). Similarly, when the 1977 Directive on Mutual Assistance (Directive 77/799/EEC) was replaced with the 2011 Directive on Administrative Cooperation (Directive 2011/16/EU), the changes had to be incorporated in Cyprus tax law. In fact, this Directive has been amended several times since 2011 and each time, Cyprus has had to amend its tax laws to ensure compliance with the Directive.

Furthermore, since Cyprus’ accession, new Directives have been adopted – for example, the infamous Anti-Tax Avoidance Directive (ATAD I & II) and the Tax Dispute Resolution Mechanisms Directive. The provisions of ATAD I & II were subsequently incorporated in Cyprus Income Tax Law (Arts 11A, 11B, 11C, Art 11(16)(a), Art 33B and Art 36A as amended by Law 3 of 80(I)/2020). The Tax Dispute Resolution Mechanisms Directive was incorporated in Art 36B, 36C and 36D of the Income Tax Law (as amended by Law 151(I)/2019).

Cyprus is now gearing up to adopt the Directive on Minimum Effective Tax Rate, which was approved in Council in December 2022. Member States were given until the 31 December 2023 to incorporate the provisions of the new Directive into domestic law.

There are also a number of other legislative tax proposals in the pipelines, which have not yet been approved in Council: for example, the proposed “Unshell” Directive, the proposed Directive on Faster and Safer Relief of Excess Withholding Taxes and the (not yet proposed) SAFE Directive which will look at the activity of tax enablers.

Recently, the Commission has also  proposed three very important Directives: the BEFIT Directive (Business in Europe: Framework for Income Taxation), the Transfer Pricing Directive and the Directive on Head Office Tax.

In addition to EU legislative instruments that must be incorporated into domestic legislation, like all Member States, Cyprus needs to closely follow the jurisprudence and the precedents emanating from tax litigation at the Court of Justice. This is necessary so as to ensure that Cyprus domestic law remains compatible with EU primary law (i.e. the fundamental freedoms, the Charter of Fundamental Rights, the state aid prohibition etc). For example, if the tax legislation of another Member State is found to be in breach of freedom of establishment and Cyprus contains similar tax rules, these must be amended. Similarly, if a tax provision or administrative practice of the tax department of another Member State is investigated by the Commission and found to be in breach of the state aid prohibition, if Cyprus has a similar tax provision or administrative practice, this must be repealed.

Failure to do so could lead to an infringement procedure by the Commission. Furthermore, affected taxpayers could also sue the Cyprus government in domestic courts on the basis of the Francovich principle of state liability.

Apart from legislative amendments, Cyprus has had to follow closely the work of the Code of Conduct Group, to ensure compatibility with the Code of Conduct on Business taxation. Although this is soft law, as explained above, it has significant political force. In fact, since 2004, Cyprus’ tax system was formally investigated twice by the Code of Conduct Group.

The first investigation focused on the Cyprus Intellectual Property Regime which provided for a deductible expense for corporate income tax purposes, calculated as 80% of the qualifying profits (Art 9(1)(e) of Income Tax Law). The effective rate on the profits qualifying for the CIPR was 2.5%. This regime was found not to be harmful.

The second investigation focused on the Notional Interest Deduction rule (Art 9B of Income Tax Law). The amended version of the legislation was found in 2020 not to be harmful.

Furthermore, following the Code of Conduct Group’s Guidance on defensive measures in the tax area towards non-cooperative jurisdictions, Cyprus’ has had to introduce withholding taxes to payments of dividends, interest and royalties flowing to countries included in the EU’s list of non-cooperative jurisdictions. In the latest update to this list, Russia was added.

Moreover, there have been important changes as a result of the international tax community’s initiatives. For example, even though Cyprus is not an OECD member country nor included in the Inclusive Framework due to Turkey blocking its membership, nevertheless, Cyprus has been following closely the work of the OECD/G20 and its recommendations. Cyprus has signed up to the Multilateral Instrument. It also updated its Transfer Pricing Regime in light of the OECD’s Transfer Pricing Guidelines.

Whilst Cyprus has been broadly compliant with EU (hard law and soft law) obligations and OECD/G20 standards, it is currently being asked by the EU to revamp aspects of its corporate tax system which are perceived to be facilitating aggressive tax planning. Other Member States such as Luxembourg and Malta have also been asked to amend their tax systems to curb aggressive tax planning.

In the Council’s 2020 country specific recommendations for Cyprus, in paragraph 26 it was reiterated that tackling aggressive tax planning was key to improving the efficiency and fairness of tax systems. Furthermore, in the Cyprus Recovery and Resilience Plan, there is a reform objective to increase the effectiveness, efficiency and fairness of the tax system by combatting tax evasion and aggressive tax planning practices by multinational enterprises (MNEs) by June 2026 (Reform 10 of component 3.5).

In the more recent Commission 2023 Annual Report on Taxation, it is stated that under the Recovery and Resilience Facility “several Member States have committed to address aspects of their tax systems that facilitate [aggressive tax planning], with key milestones (including the establishment of withholding taxes on outbound payments or a similar defensive measure) expected to be completed by the end of 2023 (e.g. HU) and in 2024 (e.g. CY, IE)”. It is expressly stated that country specific recommendations have been put on hold for some Member States, including Cyprus, in order to take account of the progress made in the context of the Recovery and Resilience Facility.

Going forward it should be noted that Cyprus’ corporate tax laws are currently being evaluated and legislative changes are expected in some areas. Broadly, although EU hard law has had a rather limited impact on the Cyprus corporate tax system after the country’s accession to the EU, it would seem that lately, many of the significant constraints or drivers for reform are derived from EU soft law. This is likely to change if the legislative initiatives that are in the pipeline, especially BEFIT, are eventually approved in Council and adopted.

For any information on any of the issues raised in this newsletter in the context of your business strategy and longer term tax planning please get in touch with us.