Cyprus Implements Global Minimum Tax for Multinational Enterprises and Large Domestic Groups

On 12 December 2024, the Cyprus House of Representatives approved the transposition of Council Directive (EU) 2022/2523 of 14 December 2022, referred to as the “Pillar Two Directive,” into domestic law.

Pillar Two Directive establishes global minimum taxation for multinational enterprises group (MNE) and large domestic groups in the EU.

Under pillar two, a global minimum corporate tax rate of 15% applies to companies with consolidated annual revenue above EUR 750 million.

The Pillar Two solution was agreed upon by 136 nations under the OECD/G20 Inclusive Framework on BEPS in October 2021 following years of intensive work and negotiations to bring the international tax rules into the 21st century to address the tax challenges arising from the digitalisation of the economy.

The new regime incorporates the mandatory taxation rules, including the Income Inclusion Rule (IIR) and the Under-Taxed Profits Rule (UTPR), into domestic law. Additionally, it introduces the domestic top-up tax, which aligns with the provisions of the relevant Directive and is enforced within national law.

IIR is effective for fiscal years starting from 31 December 2023. The IIR mandates that a parent entity of an MNE group or a large domestic group must pay a top-up tax on its low-taxed income, as well as on the low-taxed income of its subsidiaries. This ensures that the group’s total income is taxed at a minimum rate of 15%.

UTPR and domestic top-up tax are effective for financial years starting from 31 December 2024.

The UTPR acts as a safeguard to the IIR and is applied to MNE groups with low-tax income in jurisdictions where a top-up tax has not been collected through a Qualified IIR.

The Domestic Top-up Tax introduces a supplementary tax on the low-tax income of entities within multinational enterprises (MNE) or large domestic groups based in Cyprus. The Cypriot Domestic Top-up Tax rules permit the allocation of foreign taxes, such as those from a Controlled Foreign Company regime, to be considered. Furthermore, it adheres to all relevant safe harbour provisions, including the Transitional Country-by-Country Reporting (CbCR) safe harbour.

New compliance and filing rules have been established for the reporting and collecting of the top-up tax under the Domestic Top-up Tax, IIR, and UTPR. These rules require all Cypriot entities within the relevant groups to inform the Cypriot tax authorities within 15 months after the end of the financial year, or within 18 months for the first year of implementation.

The new law brings Cyprus in line with the EU regulations.

We repeat that the regime is only applicable to companies with consolidated annual revenue above EUR 750 million, thus it will only affect large multinationals, and it will not affect the majority of companies based in Cyprus. Cyprus still maintains its competitive tax advantages.

Expert legal advice is essential for businesses aiming to understand and adhere to these new regulations. We have a wealth of experience advising many local and multinational companies regarding compliance and tax matters. For any assistance please contact us via email at info@zambartaslegal.com or via telephone at 00357 22 262108.