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Minimum tax rate of 15% an EU reality

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On 15 December, the European Commission announced the official adoption of the minimum tax rate across its territory, effective as of 1 January 2024, less than one year from now.

The relevant European Directive must be transposed into law by all Member States without exception, including, of course, Cyprus.

At international level, around 140 OECD member countries had already reached an agreement in October 2021.

It was, therefore, only a matter of time before the Member States of the EU would unanimously agree to adopt the Directive, despite the reservations expressed initially by Poland and later on by Hungary.

Based on their consolidated financial statements, this new reality affects only multinational and domestic groups with a total annual turnover of at least €750 million.

Groups of such size will pay this additional tax if the effective tax rate on their accounting profit in each jurisdiction they have a presence in is below 15%.

The impact of imposing this additional tax of up to 15% on the accounting instead of the taxable profit is huge.

In many jurisdictions, accounting profit is much higher than taxable profit due to the many and varied tax exemptions and deductions they offer.

Cyprus is, of course, one such jurisdiction.

Therefore companies based in our country and belonging to such groups, whether their ultimate parent company is here or abroad (in the EU or third countries), are inevitably subject to this increased tax on their accounting profits.

According to the general rule, the additional tax is imposed on the ultimate parent company, which pays it to its tax authority for all its subsidiaries wherever they are located worldwide.

However, under the European Directive that has just been adopted and to safeguard the sovereignty of EU Member States, each Member State may choose to apply the Directive at the domestic level for companies established in its jurisdiction and therefore collect this additional tax itself instead of leaving it to the jurisdiction of the parent entity.

The question that naturally arises is how Cyprus may be affected by this new reality and whether we actually have such companies that ultimately belong to giant global conglomerates here.

We at PwC Cyprus conducted our internal study.

Our findings have revealed that the number of such companies based in Cyprus is indeed significant.

Moreover, the amount of annual taxes these companies pay to the Republic of Cyprus is quite substantial in relation to the total corporate income taxes the government collects.

The impact of applying these new rules must therefore be assessed in a responsible, thorough, and prompt manner.

The challenge for us as an international business centre is to fully comply with the European Directive while somehow remaining competitive.

Our goal should not be limited to finding ways to retain the foreign corporate investors who have trusted Cyprus so far but also to turn this new challenge into an opportunity to attract an even greater number of such global foreign investors.

These substantial taxes currently collected by the government could more than double but, at the same time, could very well be lost altogether if we cannot strike the right balance.

It is therefore critical, in our view, to react as soon as possible and certainly earlier than the other Member States and third countries with a profile similar to ours.

By Stelios A. Violaris, Partner – International Tax Services Leader, PwC Cyprus

This content is for general information purposes only and should not be used as a substitute for consultation with professional advisors.