Anti Tax Avoidance Directive (ATAD) – Exit Taxation

On 19 June 2020 the Cyprus Parliament voted into law the remaining provisions of ATAD.

The measures which have been formed into law are the following:

Exit Taxation – Applicable from 1 January 2020

The exit taxation is designed to prevent tax payers from avoiding tax by transferring their tax residence or activities or assets out of the country in which economic value has been created.

This law gives the right to the Cyprus Tax Department to tax any unrealized gain which was created in Cyprus at the time of the exit.

The value of that gain should reflect the arm’s length principles (i.e. market value). As a result, the taxpayer shall be subject to corporate income tax (i.e. 12.5%) on an amount equal to the market value of the transferred assets at the time of exit less their value of tax purposes (i.e. cost). The amount will also be subject to the exemptions and deductions provided by the Income Tax Law.

The following circumstances shall be subject to exit taxation:

  • transfer of assets to the head office or to branch or permanent establishment in another country whereas Cyprus has no longer the right to tax the assets
  • transfer of tax residence (i.e. management and control) to another country, except for those assets which remain effectively connected with a permanent establishment in Cyprus and for which Cyprus has the right to impose tax
  • transfer of the business carried on in Cyprus in another country whereas Cyprus has no longer the right to tax the assets

Transfer of assets to Cyprus

In case the transfer of assets, tax residence or business is made from another EU member state into Cyprus, the starting value of the assets for tax purposes shall be the value established by the EU member state at the point of exit, unless this does not reflect the market value.

Assets revert to Cyprus

In case the assets will revert to Cyprus within a period of 12 months, the above provisions shall not apply to:

  • asset transfers related to the financing of securities
  • assets posted as collateral
  • where the asset transfer takes place to meet capital requirements
  • where the asset transfer is made for the purpose of liquidity management

Under certain circumstances, the exit taxation might be deferred to be paid in instalments over a 5 year period.