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Cyprus’ GDP could be affected by between 1.5-2% during 2022 if Cypriot airspace remains closed to Russia for the entirety of 2022, rating agency DBRS Morningstar reported yesterday.

“DBRS Morningstar estimates that Cyprus could lose 1.5-2% of Gross Domestic Product (GDP) in 2022 if the airspace closure is maintained for the whole year,” the report said, noting that “the impact will be much smaller if the restrictions are lifted before the summer season or if Russian tourists find alternative routes to Cyprus.”

DBRS, the world’s 4^th largest credit ratings agency, also noted that despite the negative impact, the war in Ukraine will not derail the medium-term prospects of the Cypriot economy.

In its report, DBRS said that the sanctions against Russia after its invasion of Ukraine, as well as the counter-sanctions imposed by Russia in retaliation, “have increased the negative risks to the otherwise strong medium-term economic prospects of Cyprus”, with the risks primarily linked to declining tourism revenues and higher energy prices.

Recalling that the Russian market is the 2^nd largest for Cyprus, the agency added that the ban on flights could reduce tourist arrivals by approximately 20-25% in 2022, although it believes that the Cypriot tourism industry will partially make up for it with tourists from other markets, including the United Kingdom.

The report also points out that even if the sanctions on flights are short-lived, the arrivals of Russian tourists in Cyprus are expected to be seriously affected by the large impact of the sanctions on the Russian currency and economy.

“It is clear that the tourism industry may face short-term pressures due to the setback in Russia, however, the comparative advantage of Cyprus, in terms of its attractiveness of tourists, will remain positive this year,” it added.

DBRS Morningstar takes the view that the benefits stemming from the improving situation in relation to the coronavirus pandemic in Europe, as well as the stimulus measures provided by the EU, will mitigate the risks and continue to support Cyprus’ economic recovery.

“DBRS Morningstar continues to believe that the medium-term prospects of Cyprus remain solid and the country is in a good position to manage and adapt to the situation, depending on the duration and depth of the crisis,” the report stated.

At the same time, DBRS notes that “the European Commission’s forecast for a growth rate of 4.1 per cent in 2022 now looks optimistic.” According to data of the World Travel & Tourism Council the tourism sector contributed 13.8% to the Cypriot GDP in 2019.

In addition to the potential impact on tourism from Russia, the rapid and significant increase in oil and gas prices would raise energy costs for the private sector.

The agency said that petroleum products accounted for 90% of total available energy in Cyprus in 2019, adding that “the main risk is associated with higher prices, rather than supply disruption, as Cyprus imports about 1 per cent of its energy needs from Russia.”

Furthermore, while Cyprus’ dependence on Russian energy is very low, households and businesses face significantly higher energy costs, which burden real incomes, while war-related uncertainty is likely to affect confidence and delay business decisions.

Finally, the agency notes that exports of financial services from Cyprus to Russia have increased in recent years and amounted to about 7% of GDP in 2020.

Representing the Cyprus VAT Association (CYVA), our own Alexis Tsielepis will present the latest efforts to harmonise VAT rates in the European Union at the 5^th Cyprus International Tax Conference in Nicosia on 15 March 2022.

Tsielepis’ presentation, titled “Flexibility on VAT rates in the European Union: A welcome change with a sting in the tail” will be delivered in the afternoon of the full day event, which is excepted to attract senior professionals from the law, audit, accounting, corporate, banking and investment fields from all over Cyprus.

Tsielepis, Vice-Chairman of CYVA and the Managing Director of Chelco VAT Ltd, will analyse to his fellow professionals the current efforts by the EU Council to harmonize VAT rates across member states and to promote lower VAT rates for green and digital transitions and the protection of public health.

“Governments may welcome these measures albeit with a hint of hesitation, for good reasons!” Tsielepis commented, setting the tone for his presentation.

Other featured topics at the conference include tax reforms and the Cypriot reality, the EU tax perspective and forthcoming actions, the Pillar Two agreement and the implications for Cyprus, DAC6, green tax reform and Cyprus an international business centre and a technology hub.

The 5th Cyprus International Tax Conference will be held at the Hilton Nicosia Hotel and is considered one of the most important gatherings for tax professionals in Cyprus.

The latest and most critical tax developments will come under the spotlight, both at a European and international level with distinguished speakers from the private and public sectors and policymakers sharing insights on recent tax decisions and updates.

More information on the Tax Conference can be found here.

Limassol – Chelco VAT Ltd has just released its all-new website at www.chelcoVAT.com.

The Chelco VAT website was redesigned, rebranded and rewritten from the ground up.

It features an all-new E-Library, making searching and finding information easier, faster and more intuitive. It also features a brand new page for the Chelco VAT International Academy, a sort of website within a website, with information on the Academy’s various educational programs, including the recently launched Diploma in VAT Excellence (DiVE), as well as an interactive calendar of past, present and future events.

The website is also easier to navigate, it’s more search engine friendly and is fully integrated with the company’s social media.

The all-new website incorporates the latest website technologies, securities and safeguards and is fully compatible with mobile devices, including mobile phones and tablets.

Come on in!

Nicosia – Cyprus will proceed with a tax reform next year, including the increase of corporate income tax and the introduction of green taxation with a view to achieve its environmental targets, Finance Minister, Constantinos Petrides, said this week.

Speaking before the Parliament’s plenary ahead of the debate for the 2022 state budget on Thursday, Petrides said the tax reform will be “more fair, fiscally neutral” and will be finalised in 2022.

Petrides noted that the global agreement over 15% taxation on global multinational companies “provides the Republic of Cyprus an opportunity to improve its national taxation framework through the reduction of administrative burden with a reduction of the taxation burden for businesses securing a neutral reform.”

“In our estimates, increasing corporate tax in Cyprus from 12.5% to 15% will not affect foreign investments in Cyprus by a substantial extent,” he said, adding that “as an investment destination Cyprus has comparative advantages that offset this minor corporate tax hike.”

He noted that in the context of the discussion, Cyprus, apart from the increase in corporate taxation, will consider issues such as reducing extraordinary contribution on deemed or real distribution of dividends, reducing contribution on interest income and the reduction or abolition of the €350 annual company levy.

The reform, he added, also includes the introduction of carbon taxation, the gradual increase of taxation on fossil fuels and the introduction of environmental levies “with a view to attaining our environmental targets and the overhaul of the VAT rates on the basis of the recent Ecofin decision for products associated with public health and green and digital transition.”

Moreover, Petrides stressed the importance of absorbing EU funds and especially from the EU Recovery and Resilience Fund.

“The utilisation of this tool is particularly important due to the reforms we committed to implement through the national Recovery and Resilience Plan,” he said, calling for the collaboration of the government with the legislature “with a view to supporting this ambitious reform effort to the benefit of our country.”

He called on the MPs to approve the budget, stating that this budget aims at “sustainable development and social cohesion.”

However, he also called MPs to refrain from submitting draft bills for increased state spending without proposing offsetting measures. “Fiscal sustainability the importance of which has been proven as never before during the crisis is not something we must jeopardise,” he said, adding that public finances are still vulnerable to a new potential wave of the Covid pandemic.

Brussels – The European Union’s Economic Financial and Affairs Council (ECOFIN) reached an agreement today on a proposal to update EU rules on rates of Value Added Tax (VAT).

The new rules reflect member states’ current needs and the EU’s present policy objectives, which have changed considerably since the old rules were put in place. The updates ensure member states are treated equally and give them more flexibility to apply reduced and zero VAT rates. The rules will also phase out preferential treatments for environmentally harmful goods.

“Today, we agreed on the proposal for a Council directive on rates of value added tax. This file has been discussed in the Council for a long while, and I’m glad that we have found a way to bring it to conclusion,” Andrej Šircelj, Slovenian Minister for Finance, said.

The Council updated and modernised the list of goods and services for which reduced VAT rates are allowed (Annex III of the VAT directive), taking into account the digital transformation of the economy. The update of the list was driven by a number of principles, such as the benefit of the final consumer and the general interest. However, to prevent a proliferation of reduced rates, the Council decided to limit the number of items to which reduced rates could be applied.

The list includes such goods and services as foodstuffs, pharmaceuticals and medical equipment, passenger transport, books, newspapers and periodicals, admission to entertainment venues such as theatres, museums and amusement parks, and much more.

The Council also decided to ensure that all member states are treated equally. To achieve this, existing derogations that allowed some member states to apply preferential rates for certain products were opened to all member states, provided that they are compatible with the agreed principles.

A new provision in the VAT directive was also added to address possible future crises and to enable member states to respond swiftly to exceptional circumstances, like pandemics, humanitarian crises or natural disasters.

The Council agreed to phase out reduced VAT rates or exemptions on fossil fuels and other goods with a similar impact on greenhouse gas emissions, by 1 January 2030. Reduced rates and exemptions for chemical fertilizers and chemical pesticides will end by 1 January 2032, to give small-scale farmers more time to adapt. In addition, the Council introduced environmentally-friendly goods and services in the list for which reduced rates are allowed, such as solar panels, electric bicycles and waste recycling services.

Background and next steps

The Commission issued its proposal to amend a Council directive on the common system of value added tax as regards rates of value added tax on 18 January 2018.

Once the Parliament has issued its opinion on the proposal, the Council will formally adopt the directive.

Limassol – The last chance for companies in Cyprus to report DAC6 relevant information to the Authorities is the end of this month.

Failure to comply with DAC6 by 30 November 2021 will result in the imposition of administrative fines for late submission. It could also mean facing significant sanctions under local law in EU countries and reputational risks for businesses, individuals, and intermediaries.

The Directive on Administrative Cooperation (DAC), is an EU-level initiative the purpose of which is to enhance transparency in the field of taxation and fight against aggressive tax planning. It applies to cross-border tax arrangements, which meet one or more specified characteristics (hallmarks), and which concern either more than one EU country or an EU country and a non-EU country. It mandates a reporting obligation for these tax arrangements if in scope, no matter whether the arrangement is justified according to national law.

The relevant Directive (EU) 2018/822 represents the 6th modification of DAC, thus it is called DAC6.

DAC6 has been transposed into Cyprus law through the amendment of the Law on Administrative Cooperation in the Field of Taxation of 2012, enacted on 31 March 2021.

On 29 October 2021, the Cyprus tax authorities also released a new publication, which implements the EU directives on reportable cross-border arrangements. The guidance (only available in GR) can be downloaded here.

What is included in the updated guidance?

The guidance introduces details on the definition of what is included on cross border transactions and who are the intermediaries.
New information about when the Cyprus Tax Department considers a transaction to be sufficiently finalized for reporting purposes.
Detail on what due diligence intermediaries are required to carry out before reporting.
In September 2021, the Tax Department announced that there would be no imposition of administrative fines for overdue submission of DAC6 information that will be submitted until the 30 November 2021, in the following cases:

Reportable cross-border arrangements that have been made between 25 June 2018 and 30 June 2020 and had to be submitted by 28 February 2021.
Reportable cross-border arrangements that had been made between 1 July 2020 and 31 December 2020 and had to be submitted by 31 January 2021.
Reportable cross-border  arrangements  made  between  1  January  2021  and  31 October 2021, that had to be submitted within 30 days from the date they were made available for implementation or were ready for implementation or the first step in the implementation has been made, whichever occurred first.
Reportable cross-border arrangements for which secondary intermediaries provided aid,  assistance  or  advice,  between  1  January  2021  and  31  October 2021  and  had  to  submit  information  within  30  days  beginning  on  the  day  after they provided aid, assistance or advice.
The first periodic report for marketable arrangements that had to be submitted by 30 April 2021.
According to the Cyprus Tax Department, the rationale behind DAC6 is the following:

“Member States find it increasingly difficult to protect their national tax bases from erosion as tax-planning structures have evolved to be particularly sophisticated. Such structures commonly consist of arrangements, which are developed across various jurisdictions and move taxable profits towards more beneficial tax regimes or have the effect of reducing the taxpayer’s overall tax bill.

As a result, Member States often experience considerable reductions in their tax revenues, which hinder them from applying growth-friendly tax policies. It is therefore critical that Member States’ tax authorities obtain comprehensive and relevant information about potentially aggressive tax arrangements.

Such information would enable those authorities to react promptly against harmful tax practices and to close loopholes by enacting legislation or by undertaking adequate risk assessments and carrying out tax audits. However, the fact that tax authorities do not react to a reported arrangement should not imply acceptance of the validity or tax treatment of that arrangement.

For this reason, the Council of the European Union has adopted the Directive 2018/822 for amending the Directive 2011/16/EU with regard to the mandatory automatic exchange of information in the field of taxation.”

Nicosia – The ERGANI Information System entered into force on 13 September 2021, with the aim of combating illegal and undeclared work in Cyprus.

The new online system obliges employers to register themselves and their employees with Social Insurance Services electronically, at least one day before the start of employment.

Specifically, the application for registration of an employer is submitted no later than one (1) day prior to the date the applicant is expected to become an employer. Also, every employer must register with the Social Insurance Services each employee not later than one (1) day prior to recruitment.

Also, each employer must keep, through the system, a recruitment register, in which they must enter, in order of recruitment date, the personal data for each employee (employee number, name, ID card number, Social Security number, date of recruitment and date of commencement of employment).

The registration of new recruitments will be done electronically through ERGANI, which can be accessed via the website https://ergani.mlsi.gov.cy.

It is noted that as of 13 September 2021, the issuance and use of the “Certificate of Employment” (in hard copy) is abolished.

Relevant information on the operation and Terms of Use of the System are available on the ERGANI website. In addition, the Ministry of Labour, Welfare and Social Insurance has appointed Communication Officers at each District Social Insurance Office for further information and assistance.

Following the transposition of the 5^th European Anti-Money Laundering Directive at a national level, Cyprus has introduced a central Register of Beneficial Owners, which will be kept by the Department of the Registrar of Companies and Official Receiver.

All natural persons who ultimately own or control, either directly or indirectly, more than 25% in a company which is incorporated and/or registered under the Cyprus Companies Law Cap. 113 must be entered in the Register.

The Register will contain information such as the name, surname, date of birth, nationality and residential address of the beneficial owner(s), the nature and extent of the beneficial interest held, details of an identification document and its country of issue, as well as the date on which the natural person was entered on the Register.

All Cyprus companies and their officers (directors and company secretary) have 12 months from 13 March 2021 to enter the relevant information on the Register.

The Register of Beneficial Owners will be accessible as follows:

1. Competent Supervisory Authorities, the Financial Intelligence Unit, the Customs Department, the Tax Department and the Police will have access to all information contained in the Register.
2. Obliged entities for the purpose of conducting due diligence and identification for their clients will have access to the name, date of birth, nationality and country of residence of the beneficial owners, as well as the nature and extent of the beneficial interest held, on payment of a fee of €3.50.
3. Members of the general public will have access to the name, date of birth, nationality and country of residence of the beneficial owners, as well as the nature and extent of the beneficial interest held, on payment of a fee of €3.50.

For the interim 12-month period (13 March 2021 – 12 March 2022) access will be granted only to Competent Supervisory Authorities, the Financial Intelligence Unit, the Customs Department, the Tax Department and the Police.

The Company as well as its officers (directors and company secretary) are subject to the following penalties in case of non-compliance with their reporting obligations:

• €200 fixed fee plus €100 per additional day of non-compliance, subject to a maximum cap of €20.000.

No penalties will be imposed during the 12-month interim period ending on 12 March 2022.

In cases where trusts, foundations or other similar legal arrangements, or listed companies on a regulated market, own or control more than 25% in a company, only the following information needs to be entered on the Register: The name of the trust/foundation or similar arrangement/listed company, the registration number (if any), the country of jurisdiction and, except for trusts, the business address.

A separate Register of trusts, foundations or other similar legal arrangements will also be created and kept by the Cyprus Securities and Exchange Commission (CySEC), which will include details such as settlor, trustees or foundation council members, protector (if any) and beneficiaries. Although it is not expected that the information provided on this Register will be publicly accessible, we will provide more information on this in due course and once the relevant details are released.

Limassol – Managing Director of Chelco VAT Ltd, Alexis Tsielepis offers his assessment on what lies ahead in Value Added Tax (VAT) in an article in the Financial pages of Greek-language Phileleftheros newspaper on Sunday, 4 July 2021.

Titled ‘VAT: Urgent and Important’, Tsielepis outlines in the article the many challenges VAT currently poses and will pose in the near future on businesses and consumers alike, calling for an immediate, better and more drastic understanding of this ever-so-important indirect tax.

Tsielepis is considered one of the foremost experts in VAT on the island. Recently, he launched a first-of-its-kind in Cyprus expert diploma in VAT called The Diploma in VAT Excellence (DiVE), with classes starting in September 2021.

DiVE is a high-level course spanning a period of 10-months, with emphasis on the Cyprus VAT legislation.

Nicosia – The Cyprus Securities and Exchange Commission (CySEC) issued last week a directive in relation to the registration of Crypto-Asset Service Providers (CASPs) on the island.

In the context of the implementation of pan-EU requirements including CASPs under the 5th AML Directive, Cyprus recently updated its definition of obliged entities under the Prevention and Suppression of Money Laundering Law 2007 to bring CASPs into its scope. Moreover, Cyprus authorities have also decided that Cyprus CASPs should become approved and registered with CySEC.

CySEC issued the relevant directive on 25 June 2021, which includes details outlining the process of registration. According to directive, CySEC shall publish, on its website, the CASPs’ register.  The register must be publicly accessible and must include information such as the commercial name, the legal form and the legal entity identifier of the CASP, its address and its services.

On condition that, the applicant pursuing registration provides all requested information and documents, and also ensures that persons holding management positions with the applicant are honest and competent, CySEC will approve registration in the CASPs’ register.

It is also important to note that in the case of the Board of Directors of the applicant, this must consist of at least four persons, of which two must manage the business activities of the CASP and two must be independent members.

As far as capital is concerned, CASP must comply at all times with capital adequacy requirements. As a minimum, CASPs offering only investment services must comply with the requirements of Common Equity Tier 1 capital as included in arts 26 to 30 of the 575/2013 Capital Requirements Regulation (CRR).