Tag: legal services

The abolition of the UK’s non-dom regime – Should UK non-doms consider relocation to Cyprus?

Posted on | by Paschalis Paschali

The abolition of the UK non-domiciled (or non-dom) status in the last UK budget marks the end of an era for the UK’s tax system. It might also be a game-changer in global mobility as many UK resident non-domiciled individuals might seek to relocate to other jurisdictions in order to shield their overseas earnings from taxation. One such jurisdiction could be Cyprus.

What are the UK’s non-dom rules?

Broadly, non-doms are individuals who are resident in the UK, but who claim that their domicile, being the centre of their personal and financial interests, is outside of the UK. Crucially, hitherto, a non-domiciled individual who was UK tax resident was broadly taxed on income and gains on a remittance basis only by contrast to a UK tax resident and domiciled individual who was taxed on income and gains on a worldwide basis, irrespective of remittance. The UK rules changed a few years ago whereby the non-dom status became time limited and, in fact, after a number of years, a hefty remittance basis charge was levied in order to benefit from the exemption. Nevertheless, it still remained an attractive (optional) regime for high net worth individuals with foreign earnings.

Following last week’s UK budget, the non-dom regime will be abolished from 6 April 2025. In its place, the UK government has introduced a new residence-based regime taking effect from April 2025. What is crucial to note is that the new foreign income and gains regime will be relevant only as far as new tax residents are concerned. This is because under the new regime, individuals who have been non-UK tax resident for at least 10 consecutive years will, regardless of domicile status, be eligible to use the new regime for four years.

Very importantly, under the new regime, non-UK income and gains will not be taxable in the UK and can be brought (i.e. remitted) to the UK without UK taxation during an individual’s four-year eligibility period. From the fifth year of UK tax residence onwards, an individual will be chargeable to UK income tax and capital gains tax on worldwide basis.

It would appear that the new regime will apply to all individuals becoming tax resident in the UK after not being tax resident for 10 consecutive years, irrespective of whether they are UK domiciled. As such, this new regime is likely to be very attractive to (UK) expats who decide to return to the UK.

Although Cyprus has many UK expats, as explained in this newsletter, Cyprus also has a very attractive non-dom regime. Therefore, it is unlikely that UK expats living in Cyprus would relocate to the UK just to benefit from the new regime, as many of the benefits of this regime are essentially replicated in Cyprus’ non-dom regime and for 17 years as opposed to the four years provided for by the UK non-dom regime.

What is likely to happen now is a competition between countries with preferential regimes for high net worth individuals to attract UK non-doms who will no longer benefit from the UK tax regime.

Cyprus is such a jurisdiction with an attractive system overall, combined with special privileges to non-domiciled tax residents.

The concept of domicile in Cyprus law originates from the Wills and Succession Law (Cap 195), which is based on English law. This law provides that every person has a domicile of origin or a domicile of choice. An individual’s domicile of origin is that of his/her father’s domicile (at birth). A person acquires a domicile of choice by establishing his home at any place with the intention of permanent or indefinite residence therein. The domicile of origin prevails and is retained until a domicile of choice is in fact acquired. Under the Special Contribution for Defence Law, a non-domiciled individual may be deemed as domiciled in Cyprus if he/she has been a Cypriot tax resident for at least 17 out of the last 20 years prior to the relevant tax year. This means that Cyprus’ non-dom privileges are available for 17 years.

But what are these non-dom privileges?

The combined application of Cyprus’ tax laws (i.e the Income Tax Law and the Special Contribution for Defence Law) allows Cyprus tax resident individuals who are not domiciled in Cyprus to be exempt on their worldwide dividends and interest, whether remitted to Cyprus or not. It is noteworthy that the exemption applies even if the dividends and interest have a domestic source (i.e. they are derived from Cyprus). There is also an exemption from the special defense contribution tax for rental income (but income tax is payable).

In addition to these privileges, the Cyprus tax system has other advantageous features for tax residents in general, whether domiciled or not.

For example, under Cyprus’ Capital Gains Tax Law, capital gains tax is only imposed on the sale of immovable property situated in Cyprus, and for the sale of shares in companies in which the underlying asset is immovable property situated in Cyprus. There is no capital gains tax in Cyprus for any other disposals. This means that the disposal of any other securities (shares, bonds, tradable contracts etc.) are not subject to tax in Cyprus.

Τhere is also a special tax regime for foreign pension income, which is exempt from tax up to €3,420 per year and taxed at only 5% above that threshold.

Furthermore, Cyprus does not have any inheritance tax or gift tax. Again, these rules are applicable to all Cyprus tax residents – whether domiciled or not.

It should be pointed out that dividends and interest received and pensions are subject to 2.65% General Healthcare System Contributions (GESY). However, this is capped so that for every natural person, the total maximum annual amount on which contributions will be paid is €180,000. This means that the maximum annual amount of GESY contribution levied is €4,770.

Another important tax exemption available to all Cyprus tax residents (whether domiciled or not) is the exemption on income from services rendered outside of Cyprus for more than 90 days in a tax year. The services must be rendered to a non-Cypriot tax resident employer. This, combined with the 50% exemption rule for individuals taking up employment in Cyprus (subject to some other conditions) makes relocation to Cyprus a very attractive option for UK non-doms who wish to explore other jurisdictions.

Of course, in order to access these benefits, as a non-dom or not, it is a prerequisite to become tax resident in Cyprus. For an individual to become tax resident in Cyprus, he/she must be resident in Cyprus for 183 days in the relevant tax year and must not reside more than 183 days per year in another jurisdiction. There is also a quicker route to becoming tax resident in Cyprus under the 60-day rule. Under this rule, an individual must spend at least 60 days in Cyprus in the relevant tax year and must not spend more than 183 days in another jurisdiction. The individual must also maintain a permanent home in Cyprus (owned or rented) and must carry on a business in Cyprus or be employed in Cyprus or hold an office with a tax resident of Cyprus during the relevant tax year.

On the basis of the 60-day rule, it is relatively easy to establish tax residence in Cyprus and obtain the non-dom status, if the aim is to access the specific privileges attached to this status.

Whether or not the abolition of the UK’s non-dom regime will lead to an exodus of high net worth individuals from the UK remains to be seen.

It is worth pointing out however that even before the changes to the UK non-dom regime were abolished Cyprus has for a long time now offered an advantageous tax regime for individuals wishing to take the relatively simple steps required to relocate their residence/domicile to Cyprus.

For information on any of the issues raised in this newsletter, please get in touch with us and note that working closely with our associated corporate services provider Nobel Trust we are able provide the full range of advice and services for anybody wishing to be advised as to the benefits of considering Cyprus as a replacement for UK non-dom status.

The regulation of the content of B2C contracts under Cypriot contract law

Posted on | by Paschalis Paschali

Effective consumer protection is an area still in the earliest stages of its development in the Cypriot legal system. Prior to the adoption of Directive 93/13 which provided a substantive test of unfairness and which regulated the content of business contracts through ensuring that unfair terms not be considered binding to consumers, the Cypriot legal system did not provide for a level of consumer protection through statutory or case law. In essence, no measures existed aimed at protecting consumers against contract terms that had not been individually negotiated by consumers in advance and which in turn could grant a considerable advantage to businesses.


Such terms often come in the form of exclusion clauses which can exclude or restrict liability, make the liability or its enforcement subject to restrictive conditions, or exclude or restrict a person from pursuing a right or remedy. As the characteristic of an unfair term is one which increases the number or the difficulty of a party’s obligations, even a force majeure clause may come to be considered unfair if intentionally worded vaguely. If a seller can unilaterally determine a force majeure clause for example, then what is to prevent them from defining a reasonably foreseeable phenomenon as grounds for the removal of liability? Where standard form contracts were established to facilitate commercial transactions and better define the rights and obligations of the two parties, a unilateral approach to the definition of these terms by sellers would necessarily come at the cost of the consumer, who was faced with either accepting these terms or be deprived of the sought goods or services.


Prior to Directive 93/13, Cypriot consumers only had recourse to general principles of contract law and primarily procedural safeguards provided by the Contract Law, Cap. 149 i.e. the key law governing contracts in Cyprus. However and while generally sufficient, Cap. 149 was inadequate in providing the necessary tools in dealing with unfair contract terms, making the implementation of Directive 93/13 necessary for enhanced consumer protection.

Procedural Safeguards of Cap. 149


It could be argued that, in relation to regulating the use of unfair terms, the common law of contract is less concerned with the substance of the contract and more so with the procedure leading to its conclusion. If no illegality is found in what preceded the conclusion of the contract, which could in any way impact the will of the parties to be bound in contract, common law courts would hesitate in intervening since the determination of the substance of the contract remains, based on the principle of privity of contract, within the exclusive competence and autonomy of the parties.


As such, section 13 of Cap. 149, with its emphasis on the concurrence of wills, established that consent is considered a central concept of contract conclusion. If consent is considered to be given “freely”, then the contract is to be respected. With the intention to ensure this, section 14 of Cap. 149 codified a number of principles in order to safeguard that the parties’ consent is “free”, which include provisions on coercion, undue influence, fraud, misrepresentation and mistake.


Yet, beyond the rules established in section 14 emphasizing procedural fairness, Cap. 149 did not provide the necessary tools for examining the substantive unfairness of contract terms. Contrarily, while the Indian Contract Act introduced similar procedural rules, Indian courts also made use of the public policy exception under their section 23 (identical to section 23 of Cap. 149) to strike down contracts whose terms were labelled as contrary to public policy, thereby invoking the illegality of the contract’s object or consideration.


In conclusion, Cypriot law follows the general position of English contract law, where the latter has long taken the view that acceptance of the principles of freedom of contract, the binding force of contracts and the lack of a general principle of good faith and fair dealing precludes the review of the fairness of either the contract as whole or of its particular terms. This can most notably be seen in the instance of contract formation. While a promise could not be considered valid without the corresponding consideration, the acknowledgment of an inadequate or nominal consideration signifies that a substantive inequality of bargaining power is not seen as a ground for a vitiation of a contract.


As regards the fairness of particular contract terms, the common law approach can be illustrated most explicitly in its acceptance of the validity of exemption clauses. That is, when once agreed between the parties, knowingly or otherwise, these clauses can effectively exclude liability both in contract and in tort, severely impacting the balance of rights and obligations between the parties. However, beyond a favorable interpretation of the contract in favor of the weaker party in instances of inequality of bargaining power but also through the use of the contra preferentem principle in instances of ambiguity in interpretation of an exclusion clause, and save in instances of a fundamental breach of contract, the Cypriot contract law tools seemed inadequate in properly regulating the use of unfair terms.


Prior to the transposition of Directive 93/13, Cypriot courts had lacked the legal tools to confront the challenges that came with standard form contracts and in particular seemed unwilling to examine the parties’ initial allocation of risk, even if it was done unilaterally and in a standardized manner by one of the contracting parties. Instead of focusing on the pursuit of mutual assent, the courts were content with the finding of the external communication of intention by the parties through their signatures to the contract. Since both parties seemingly gave their consent to be bound by the contract, Cypriot courts appeared hesitant in interfering with its individual terms, beyond through the use of the above mentioned procedural safeguards in instances where the parties consent to be bound could be impacted. These legal circumstances are what justified the need for the implementation of Directive 93/13. It provided courts the ability to control unfair terms in consumer contracts, though the granting of discretionary power as to the interpretation of the substantive unfairness of contract terms through the control of their content. However, while there is still very limited Cypriot case law applying the Directive’s robust two-tiered unfairness test, it remains to be seen if future applications of this test by the Cypriot courts can promote effective consumer protection or if additional national legislation is required to this end.

–> Contact us here for any information on how we can assist you with the application of Directive 93/13 to your consumer contracts

Cyprus’ Path in the European Green Deal: Integrating the Just Transition Mechanism

Posted on | by Paschalis Paschali
the European Green Deal #EUGreenDeal

As the European Union (EU) embarks on a transformative journey towards a greener and more sustainable future through the European Green Deal (EGD), the question of ensuring that no one is left behind takes a central stage. This article aims to analyse the measures that the government of Cyprus is undertaking to achieve its 2030 and 2050 climate targets and to assess how the concept of social inclusion is endorsed along the way.

National Energy and Climate Plan (NECP)

Cyprus, like other EU nations, has embraced the ambitions of the EGD, aiming to tackle climate change and move towards sustainability. [1]  The NECP is a vital part of this, mandated by EU regulations from 2021 to 2030. Its main objective is to devise cost-effective policies to meet energy and climate goals, driving economic growth and addressing environmental challenges. [2] Approved by Cyprus’ Council of Ministers in January 2020, it outlines the energy sector’s current status, past policies, and future trajectory to achieve national goals by 2030. Its three key pillars focus on emission reductions, energy efficiency, and increasing renewable energy sources.

For emissions, Cyprus targets a 21% reduction in non-ETS sector emissions compared to 2005 levels. Strategies include promoting natural gas, boosting renewable energy, improving carbon sinks, enhancing energy efficiency across sectors, and reducing emissions in transport, agriculture, and waste. [3]

Regarding energy efficiency, Cyprus aims for a final energy consumption of 2.0 megatonne of oil equivalent (Mtoe) and a primary energy consumption of 2.4 Mtoe by 2030. The plan includes energy efficiency obligations for distributors, low-interest loans for efficiency projects, support programs for households and businesses, voluntary agreements with businesses, and various initiatives for efficient lighting, water, and transportation.

Lastly, Cyprus aims to increase the share of renewable energy sources (RES) in its energy consumption. Targets include RES constituting 23% of gross final energy consumption, 26% of gross final electricity consumption, 39% in heating and cooling, and 14% in transportation.

To achieve these targets, Cyprus has adopted a wide-ranging approach, including various support schemes for RES, incentives for electric vehicles, and integrating RES and energy efficiency into public buildings. Efforts also focus on enhancing RES utilisation in the transportation sector.

Solar water heater adoption rates are impressive, with over 90% of households and 50% of hotels utilising these systems. However, effective energy storage solutions are crucial to fully harness solar potential. [4] Initiatives like the experimental energy storage system in Nicosia and EU projects aim to develop policies for integrating energy storage effectively, boosting photovoltaic self-consumption in the Mediterranean.[5]

To address energy security, Cyprus is implementing Liquefied Natural Gas (LNG) imports through the “CyprusGas2EU” project, diversifying energy sources and reinforcing security. Support for projects like the “EuroAsia Interconnector” and “EastMed Pipeline” will further eliminate energy isolation. The EuroAsia Interconnector, connecting Cyprus’ electricity network to the EU continental network, will facilitate RES development, reduce CO2 emissions, and enhance Cyprus’ position in the regional energy sector. [6] This project will also pave the way for widespread adoption of solar energy and sustainable practices, promoting both environmental and economic sustainability. [7]

Future trajectory

Importantly, Cyprus has submitted an updated draft of its NECP to the European Commission for review and approval. This revision is prompted by institutional obligations, failure to meet existing targets, and changes in European energy and climate goals. The revised draft includes, inter alia, commitments to reduce GHG emissions by 32% by 2030 compared to 2005 levels, increase carbon dioxide removals from land use, achieve a 42.5% penetration of RES in gross final consumption by 2030, and contribute to the EU’s mandatory energy efficiency improvement target. [8]

Additionally, Cyprus aims to design policies to support low-emission growth, laying the groundwork for achieving zero emissions by 2050. The Long-Term Low GHG Development Strategy for 2050 aligns Cyprus with the European objective of transitioning to a climate-neutral economy by 2050, emphasising a commitment to a greener future.[9] This strategy complements the NECP and envisions a shift towards clean technologies, promoting innovation and new business models, mitigating climate change impacts, enhancing economic competitiveness, and addressing environmental challenges.

Nevertheless, transitioning to carbon neutrality and renewable energy adoption presents a series of social challenges that require proactive solutions. Therefore, as Cyprus embarks on its journey towards a greener future, the integration of the Just Transition Mechanism (JTM) takes a central role in ensuring that this transition is not only environmentally sound but also socially equitable.

Just Transition Mechanism

The JTM is a critical component of the EGD, acknowledging the socio-economic realities of member states.[10] It provides a framework for financial and policy support to facilitate the transition to cleaner and more sustainable economies while safeguarding livelihoods and communities.[11]Each member state’s unique circumstances further underscore the necessity of adaptable strategies to harmonise environmental and economic aspirations.[12]

In terms of Cyprus, it has recently received the approval for its Partnership Agreement and Just Transition Plan from the EU, entailing over €1 billion in funding from 2021 to 2027. This funding will support various initiatives aimed at promoting economic, social, and territorial cohesion, facilitating the green and digital transition, and fostering competitive, inclusive, and sustainable growth. [13]

One of the most important aspects of the Agreement is the ‘Thalia 2021-27’ Cohesion Policy operational program.[14] A multi-annual, multi-fund development initiative, the Thalia program outlines Cyprus’ strategic plan for utilising resources allocated through the Cohesion Policy Funds.[15]

Central to this initiative is the Just Transition Fund (JTF), which will support an array of vital interventions. The strategic goal is to reduce GHG emissions at the power station in Dekelia and of energy-intensive businesses in general.[16] Recognising the need for social inclusion, Cyprus plans to allocate a portion of the JTF budget to modernise labour market services and support vulnerable populations, women, and youth. Additionally, initiatives to address the shortage of qualified human resources through green education initiatives are emphasised. The program prioritises equal opportunities, non-exclusion, and non-discrimination, ensuring gender equality and compliance with fundamental rights.

In conclusion, Cyprus’ proactive approach aligns with the EGD, addressing climate change, promoting economic growth, and ensuring social inclusion. However, and despite the series of green measures and initiatives that are underway, the nation faces a substantial gap between its commitments and actual outcomes.[17] To improve results and make progress toward the 2030 and 2050 targets, the government of Cyprus must enhance its efficiency in the public sector and collaborate closely with the private sector to streamline not only the processes but also the procedures for implementing all its ambitious projects.

References and URLs:

[1] General Secretariat of European Affairs, ‘CY National Strategy for EU Affairs’ (November 2021)

[2] ‘National Energy and Climate Plans (NECPs)’ <https://energy.ec.europa.eu/topics/energy-strategy/national-energy-and-climate-plans-necps_en>

[3] ‘Cyprus’ Integrated National Energy and Climate Plan’ (January 2020)

[4] Theodoros Zachariadis, ‘Monitoring EU Energy Efficiency First Principle and Policy Implementation’ (Odyssee Mure, November 2021)

[5] ‘Invest Cyprus – CEO Interviews 2018’

[6] ‘Commission Participates in Launch of EuroAsia Electricity Interconnector’

[7] EuroAsia, ‘Significant Benefits for Cyprus from Construction of the EuroAsia Interconnector | EuroAsia Interconnector’ (26 July 2023)

[8] ‘PRELIMINARY DRAFT UPDATE CONSOLIDATED NATIONAL PLAN OF CYPRUS ON ENERGY AND CLIMATE OF CYPRUS 2023’ (27 July 2023)

[9] Department of Environment, Ministry of Agriculture, and Rural Development and Environment, ‘Cyprus’ Long-Term Low GHG Emission Development’ (September 2022)

[10] ‘The Just Transition Mechanism’

[11] Aliénor Cameron and others, ‘A Just Transition Fund – How the EU Budget Can Best Assist in the Necessary Transition from Fossil Fuels to Sustainable Energy’ [2020] Policy Department for Budgetary Affairs Directorate General for Internal Policies of the Union

[12] Sebastiano Sabato and Boris Fronteddu, ‘A Socially Just Transition through the European Green Deal?’ [2020] SSRN Electronic Journal

[13] ‘Partnership Agreement and Just Transition Plan for Cyprus’ (European Commission – European Commission)

[14] ‘ΘΑΛΕΙΑ 2021-2027- Θεμέλια Αλλαγής, Ευημερίας, Ισότητας Και Ανάπτυξης’ (2022)

[15] ‘Short Description – ΘΑλΕΙΑ 2021-2027’ (21 June 2022)

[16] Green Deal: Pioneering Proposals to Restore Europe’s Nature by 2050 and Halve Pesticide Use by 2030’

[17] European Commission, ‘2023 Country Report – Cyprus’, (2023), COM(2023) 613 final

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.

Expert Witnesses under the New Civil Procedure Rules

Posted on | by Paschalis Paschali

The new Civil Procedure Rules, which have entered into force on the 1st of September 2023, have brought about monumental changes in the way in which cases will be heard before the Cypriot Courts.

A very important change comes with Part 34 of the new Regulations, which concerns the evidence given to the Court by Experts. Part 34 has completely revised what was in force up until now in relation to Expert evidence. The ultimate purpose of this new Part 34 is to limit the testimony of Experts so as to resolve the dispute faster and with a reduced costs burden. If the Expert ignores his obligations towards the Court, there is a real risk that the Court will decide that this testimony cannot be taken into account.

The general principle that Experts must be objective and impartial, of course, still applies.  

One of the two very important changes brought about by Part 34 is that, whereas until recently (before the entry into force of the New Civil Procedure Rules) each party in Court proceedings, selected the Expert whose testimony it wished to adduce to the Court, without first being obliged to submit a request, this unfettered right will no longer exist.

The summoning of an Expert by the parties can now only be achieved by applying to the Court. A disputing party, which wishes to file a relevant Expert Report with the Court, may not do so without prior permission, and when such permission is requested, the issues to be dealt with by that Expert must, inter alia, be specified.

However, what must be borne in mind by both the parties to the dispute and the Court, is that the right of the Court to limit the testimony of the Expert cannot be exercised arbitrarily and must always be exercised in the light of the overriding objective of a achieving a fair trial. In addition, the facts of each case should be taken into account, as well as suggestions/positions of the parties and there should be no general instructions from the Court on these issues.

The second very important change brought about by Part 34, is that the Court is now given the power to order that the testimony be provided by a joint Expert if the disputing parties think it appropriate for an Expert witness to give evidence on a particular matter. However, in the event of disagreement between the parties as to the person of the joint Expert, the Court itself is invited to select such an Expert from a list drawn up by the parties (unless otherwise instructed). It should also be noted that, in accordance with the relevant (English) case-law on the subject, it has been held that, where a party agrees to the appointment of a joint Expert, this does not constitute an obstacle to requesting additional appointment of an Expert if there is good reason to contest the joint Expert’s Report.

Furthermore Part 34 places a raft of stringent requirements on the content of Expert Reports and requires Experts to state explicitly whether there are conflicting opinions on a particular matter and whether the Expert can opine on a particular matter with or without reservation. Furthermore, the Court now is afforded the power to investigate the precise instructions that were given the Expert by the party adducing the Expert evidence and the Expert must include in his Expert report a summary of his opinion so as to make it easier for the Court to understand his opinion and decide upon it. Finally, Expert Reports must now contain a Statement of Truth signed by the Expert. Understandably, these heightened requirements aim at ensuring that the Expert evidence adduced before the Court will be of the highest quality.

In conclusion, it is plainly evident that under Part 34 parties will now have to put particular care into choosing Experts, giving instructions to Experts and in readying the Expert Report so that it can be successfully adduced as evidence before the Court.   

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.

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.

BIM and the Cypriot construction industry, a construction lawyer’s perspective

Posted on | by Paschalis Paschali

What is BIM?

BIM, which is the acronym for Building Information Modelling is not new. In fact, BIM as a concept was first developed in the 1970s. The acronym BIM crept into existence sometime in the late 1980s and the protogenic BIM software, albeit quite limited in its  functions, was  first issued in the mid 1990s. Nowadays, the technology has progressed to such an efficiency that most developed construction markets, irrespective of location, have shifted to BIM.

Such is the level of growth and acceptance of BIM that in 2011, just 13% of industry professionals surveyed by UK construction software provider NBS were actively using BIM software, and 43% had yet to hear of the technology. A decade on, according to the annual NBS BIM Report, 73% of practices now use BIM, while just 1% remain unaware.

A very apposite yest easily comprehensible explanation of what BIM is and how it functions is that it is software which creates digital representations of the physical and functional characteristics of spaces. In short, it is software which is used to plan, design, construct, operate and maintain buildings.

In truth though, BIM is much more than mere computer software. It is a new construction process centred around the complete collaboration of all the parties involved in the construction process through the sharing of information throughout the planning and construction process in real time

BIM software allows for the creation of the 3D models of what is actually to be built so that the Employer, Architect, Contractor, Civil engineer, M&E engineer, QS and Interior Designer can use the model to control the design, cost and the construction process itself. Most significantly BIM is relied upon as a tool for quick and independent problem identification and remedial decision-making, from project inception to handover.   BIM is naturally most beneficial when implemented at the beginning of project so that  the planning and tendering process is done through BIM. Thereafter the model can be further developed as the project moves along its life cycle.

BIM model rendering
BIM model rendering

What does BIM do?

Simply put, everyone associated with the project works and in fact designs and builds using the same 3D model and all aspects of the planning and design are inputted into the BIM software. Any and all matters and/or issues relating to every aspect of the construction process are viewable to all and can be resolved so as to identify and eradicate any potential error before an error occurs or to deal with any necessary alteration of any aspect of the project.

BIM software flagging up a clash between the Architect’s plans and the M&E Engineer’s plans

A notable and, in terms of Cyprus, very relevant example of BIM operation is the instance of a variation. A variation, once decided upon will be inserted into the 3D BIM model by the Architect and is instantly and contemporaneously viewed by all other parties. In principle the cost of the variation can be calculated by the software itself since the software can be linked to the BOQ. Also, the software, which is linked to the planning and construction schedules can be used to develop the extension or saving of time calculation that the variation warrants. Then the Contractor and any other party whose work is affected by the variation proceeds with its execution, thereby minimising the potential or time wasting and costs involved in disputing or arguing about the implications in time and costs in relation to the variation.

BIM and Sustainability

We are all becoming aware of the need for sustainability. The BIM model can interact with specific sustainability software to carry out sustainability analysis so as to achieve optimum comfort and design optimisation as well as energy efficiency.

It is significant to note that one is able to track and attain Sustainability Certifications by the interlinking of BIM and sustainability software.

Finally, BIM software also allows for facility management as it may be integrated with computer-aided Facility Management Systems to ensure a smooth transition from the handover stage to the facility management stage once the project is completed and the Employer takes over its operation.

When BIM is utilised by a proficient Project team, the software allows for the archaic 2D modelling (i.e. plans on paper) construction process to move to 7D.

The 7 dimensions are as follows:

3D = Interactive plans

4D = Time calculation

5D= Cost calculation

6D= Sustainability

7D= Facility Management

Energy efficiency gauge on BIM model

How will BIM change the Cypriot construction industry?

Through BIM design, issues will be identified and resolved before they enter the critical path for construction. This means that parties will no longer be forced to argue about cost and extension of time claims since these factors will be calculated by the BIM software itself.

Projects will be planned and executed in the most cost effective and sustainable manner and budgets will be monitored much greater accuracy.

The adoption of BIM will effectively usher in a new era of construction in which most disputes associated with the construction process are resolved by the software itself. One can only imagine the decrease in cost to the public purse if government projects were tendered for and constructed with the use of BIM.

At the same time Contractors bidding for government projects will benefit from the increased certainty, transparency and objectivity that BIM will introduce. As a result the market will become much more competitive due to the renewed confidence in how the project will be run.

Most importantly BIM will promote greater confidence, cooperation and trust in the beleaguered construction industry of Cyprus due to the minimisation of disputes that lead to delays in payments and protracted and increasingly expensive legal disputes.

An Employer who uses the BIM model will benefit from more competitive prices due to the elimination of the uncertainties that BIM can achieve.

Even though constructing with the use of BIM has a cost, this cost is by no means restrictive in large development and public projects. In fact the opposite is the case. By using BIM the Employer, whether private or the government will end up saving money for the plethora of reasons outlined above.

BIM vs Lawyers

One could think that BIM could spell bad news for lawyers since the software eliminates many of the reasons for disputes that occur during the construction process. This is, however not the case. Recent case law in the United Kingdom and in the US has flagged up a plethora of BIM related legal disputes. After all, BIM works through human input. BIM has not yet reached the stage where it can eliminate human error. As shown above BIM can greatly reduce the effects of human errors as it can identify it and possibly aid in resolving the effects of it on site but the capacity for human error still remains a risk.

Recent disputes that have reached the courts have involved questions like:

Determining liability: Questions arise as to who bears responsibility for design errors and other human errors imputed into the BIM software. If numerous parties are sharing and using the same model then it becomes harder to ascertain who is at fault for the error once the error occurs.

Responsibility issues: A breakdown of communication can occur when not all parties on the project are using BIM (which sometimes is precisely the case). Sometimes the project might be both on BIM and on 2D plans which if not checked thoroughly might have discrepancies between them which can lead to errors which are then built into the project, and which will have to later me remedied.

Finally, ownership / title issues: Disputes as to who has ownership and/or copyright of the BIM software relating to a project are the most common form of dispute. This usually happens when there is a breakdown in relationship and the party most in control of the BIM pulls the plug and locks the other parties out of using it to finish the project.

With the above in mind, even though BIM will help prevent or resolve a large percentage of traditional disputes, it will not go as far as to eradicate disputes altogether. Even with BIM, disputes as to workmanship, design, cost and time will still occur, but simply to a lesser extent. Coupled with the BIM related disputes mentioned above there will still be ample ground for lawyers to “cross swords” in construction.  

Parties will therefore do well to look to lawyers with the relevant legal experience and expertise in understanding BIM, its implementation and the legal issues that arise through its use. Contract clauses will have to be drafted with BIM usage in mind and parties will need to incorporate the use of this technology in the actual terms of the contract itself, both in relation to the terms relating to the construction as well in relation to the clauses regulating the dispute resolution mechanisms of the contract. Simply put, lawyers will not be out of a job anytime soon but rather their scope of operations will evolve to include BIM.

Using BIM now

Readers operating in the Cypriot construction industry may be excused for thinking that BIM is years away from becoming a significant factor in the Cypriot construction industry. We are however confident that that is not the case and the situation will change rather rapidly.

One of the main reasons supporting this view is the commonly held belief that the current state of the construction industry in Cyprus is not sustainable. This is one of the few things that both Employers and Contractors agree upon.

The time is therefore ripe for the introduction of BIM into the construction market. In this context it is significant to note that BIM can be used on a project even if all parties to the process do not yet know how to use and/or do not yet have access to the relevant software. The fact of the matter is that if an Employer wishes it to be so, any Cypriot project can be run on BIM starting tomorrow.

We are currently working with construction professionals operating in Cyprus with long standing international experience working with BIM. They are very well placed to advise on and to provide BIM implementation by assisting clients in the construction and development of the models required for BIM to operate on a project and in setting out the necessary BIM process and procedures in relation to the project, irrespective of its stage of development or construction.

For any related queries and/or more information on how BIM can be put to use on your construction project please contact the Construction and Real Estate team at Ioannides Demetriou LLC.

All photos and model depictions used in this article are the property of and have been graciously provided by DG Jones and Partners (www.dgjones.com).

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.

Navigating EU sanctions – overview and predictions for 2023

Posted on | by Paschalis Paschali

European Commission President Ursula von der Leyen has recently announced that the EU is preparing a 10th package of sanctions on Russia and is planning to have it in place by 24 February 2023 – the 1 year anniversary of Russia’s actions in Ukraine. The new package is said to be focusing on technology that may be used by the military of Russia and in cutting sanctions circumvention. It may further include financial sanctions against four Russian banks. Overall, the EU has progressively imposed sanctions against Russia since 2014, in light of the annexation of Crimea and the non-implementation of the Minsk agreements.

EU sanctions do not apply extraterritorially. The Sanctions Regulation applies, inter alia, to any person inside or outside the territory of the Union who is a national of a Member State, and to any legal person, entity or body, inside or outside the territory of the Union, which is incorporated or constituted under the law of a Member State.

The measures forming part of the various sanctions packages as found and developed under the two main EU regulations, namely Council Regulation (EU) No 833/2014 (a.k.a. economic or sectoral sanctions) and Council Regulation (EU) No 269/2014 (a.k.a. individual or targeted sanctions) are complex and multi-layered, and understanding their full scope and compliance is becoming an increasingly challenging exercise for the stakeholders involved.

The EU economic sanctions regime imposes prohibitions and limitations via the targeting of specific sectors of the Russian economy as a whole including inter alia prohibitions on new investments in the energy sector; prohibitions on certain operations in the aviation sector; prohibitions on imports of iron and steel; prohibitions on the financing of the Russian government and Central Bank as well as banning all those transactions related to the management of the Central Bank’s reserves and assets; prohibitions on a range of financial interactions, financial rating services and transactions with Russia; prohibitions on accepting deposits; prohibitions on trust and a number of business-related services.

The EU individual sanctions regime imposes the freezing of assets belonging to, owned, held, or controlled by listed persons or entities: all their assets in the EU are frozen and EU persons and entities cannot make any funds available to those listed. Both Regulations have broad anti-circumvention provisions, pursuant to which it is prohibited to participate, knowingly and intentionally, in activities the object or effect of which is to circumvent prohibitions as found under the Regulations. Additionally, any person who facilitates the circumvention of sanctions by others, may now be included in the sanctions list himself – and this includes EU natural and legal persons.

The year ahead

It seems unlikely that developments in sanctions policy and regulations will be slowing down in 2023. On the contrary, we expect to see more packages but also enforcement actions as regulators and prosecutors come under increasing pressure to show more “teeth” rather than simply introducing and drafting new policies. The controversial idea of ceasing and not only freezing assets has also been increasingly under discussion.

On 28 November 2022, the European Council unanimously decided to add violations of EU sanctions to the list of “EU crimes”. On 2 December 2022, the European Commission introduced a proposal for an EU Directive which sets out minimum rules concerning the definition of criminal offences and penalties in respect of violating EU sanctions. The willingness to introduce such a Directive is reflective of the EU’s objective for stronger harmonization in the enforcement of sanctions by Member States and for dissuading circumvention at the EU level. Of course, for the Directive to take effect, Member States will have to incorporate it via the passing of national legislation. The Commission has also recently launched an EU whistle-blower tool enabling the anonymous reporting of possible sanctions violations, including circumvention.

Additionally, a Directive on asset recovery and confiscation has been proposed with the aim to tackle “the serious threat posed by organised crime” and provide the means to competent authorities to “effectively trace and identify, freeze, confiscate and manage the instrumentalities and proceeds of crime and property that stems from criminal activities.” Should such proposal solidify further, EU member states would be required to make substantial changes to their national laws and confiscation regimes for instance, the confiscation of unexplained wealth – enabling judicial authorities to confiscate property when they are convinced it derives from criminal activities, even if it cannot be linked to a specific crime. Such confiscation measures will inevitably be raising inter alia various property and human rights considerations, which will eventually have to be determined by the member state courts.

At the moment, while EU regulations set out the prohibitions and licensing grounds with respect to sanctions, it is implementing legislation at each Member state level which imposes the applicable penalties. Cyprus currently adopts The Implementation of the Provisions of the United Nations Security Council Resolutions or Decisions (Sanctions) and the European Union Council’s Decisions and Regulations (Restrictive Measures) Law (Law 58(I)/2016) which renders violation of any provisions of such sanctions/restrictive measures a criminal offence subject to imprisonment and/or penalties.

The above information and challenges make it even more important that businesses adopt their own robust and up-to-date sanctions compliance measures. It is the individual responsibility of each person and organisation to carefully examine risks potentially arising under the EU sanctions regime and verify whether any of the listed individuals or entities are part of their business relationships or whether their activities violate sanctions.

The contents do not constitute legal advice, are not intended to be a substitute for legal advice and should not be relied upon as such. It is recommended to seek independent legal advice when considering participating in activities or transactions which may give rise to sanctions-related matters. Engaging in thoughtful due diligence at the outset of any investment/transaction will help you to prevent pitfalls further down the line.