European Commission sues Cyprus over failure to implement tax laws

The European Commission on Thursday announced that it had sued Cyprus over the country’s failure to implement European Union laws regarding corporate tax.

Cyprus has, according to the commission, failed to implement a European Union directive aimed at ensuring a global minimum level of taxation for multinational corporations and large-scale domestic entities.

The directive was issued by the commission in December 2022, with the EU’s member states then being given until the end of last year to transpose the directive into their own domestic law.

However, Cyprus and three other countries – Spain, Poland, and Portugal – failed to pass laws to comply with the directive by the end of the year and had still not made any steps towards passing such laws by May.

As such, the commission sent all four countries reasoned opinions in May.

However, with October having now arrived and Cyprus and the other three countries still not complying with the directive, the commission has now resorted to taking the Cypriot government and the governments of all three other countries to court.

It said it “acknowledges that significant efforts are being made by the authorities” to transpose the directives into national law, but did note that Cyprus and the other three countries “have not notified” the commission of any progress having been made.

Employers and industrialists’ federation (Oev) chairman Michalis Antoniou was keen to play down the potential impact of any forthcoming tax rise as a result of the court case.

He told the Cyprus Mail that given the fact that the directive specifically targets companies with combined financial revenues which exceed €750 million per year, “only a very small number of companies will be impacted” in Cyprus.

“We are talking about a single-digit number of companies. The directive does not state that the corporate tax rate must increase across the board, and thus in a country like Cyprus, this will not impact the majority of companies here,” he said.

He added that for this reason, if the directive is eventually transposed into Cypriot domestic law, “it will not have a very large impact”.

“For most of the companies which choose to be based in Cyprus, either because they want to be in Cyprus or because they want to use Cyprus as its tax domicile, they are choosing Cyprus for a multitude of reasons and not just because of the tax rate,” he said.

Additionally, he said, given that the directive is supposed to be implemented across the EU’s 27 member states, it will not cause Cyprus to become a less competitive destination for business.

“There will be no negative impact for Cyprus,” he said.

The directive had been expanded globally, with a total of 138 jurisdictions in the Organisation for Economic Cooperation and Development (OECD) having signed up to the planned reforms.

As such, the commission announced a “new era” for corporate taxation had begun in January.

The EU’s directive in effect provides for the creation of a minimum corporate tax for companies with combined financial revenues which exceed €750 million per year, with the laws designed to apply to any large company with a parent or subsidiary situated in an EU member state.

It also includes a common set of rules on how to calculate and apply a “top-up tax” in the event that any country’s effective corporate tax rate falls below 15 per cent, thus preventing companies from paying less tax if it operates in the EU but has a parent company which is situated outside the EU and has not signed up to the OECD agreement.

At the beginning of the year, European Commissioner for the Economy Paolo Gentiloni had said the implementation of the directive “marks a new dawn for the taxation of large multinationals.”

“The entry into force in Europe and in jurisdictions around the world of this historic reform marks a major step towards a fairer corporate taxation system. By lowering the incentive for businesses to shift profits to low-tax jurisdictions, the new rules will help curb the so-called ‘race to the bottom’ on corporate tax rates in the EU and globally,” he said.

Statutory corporate tax in Cyprus currently stands at 12.5 per cent – lower than the required minimum corporation tax set out in the EU’s directive.

This tax rate is markedly lower than many other countries across Europe, including France, where it is 25.8 per cent, Germany, where it is 29.9 per cent, Greece, where it is 22 per cent, and both the United Kingdom and Turkey, with the rate in both countries being 25 per cent exactly – double Cyprus’ corporate tax rate.

The Cyprus Mail contacted the Cypriot government for comment.