Cyprus’ adoption of the 15 per cent minimum tax for multinationals entails both challenges and opportunities, according to Stelios Violaris, Tax Advisory Services Partner at PwC Cyprus.
Violaris also highlighted the fact that approving the new law is beneficial to Cyprus’ image, helping to attract new multinational groups, while also generating more tax revenue for the state.
The new law was finally passed by the House on December 12, implementing the OECD’s Pillar Two framework, introducing a global minimum tax rate of 15 per cent for large multinational and domestic groups.
Violaris explained that the new tax rules, rooted in the OECD’s Base Erosion and Profit Shifting (BEPS) initiative, are part of two main actions known as Pillar One and Pillar Two.
Pillar Two focuses on ensuring a minimum level of taxation for multinational enterprises and is described as an “unprecedentedly complex” legal framework.
“The Pillar Two rules span approximately 70 pages, supplemented by explanatory guidelines exceeding 300 pages, and introduce a level of complexity never seen before,” Violaris mentioned.
Moreover, the EU directive implementing Pillar Two closely mirrors the OECD guidelines but includes adjustments to align with European legal principles.
The law applies to multinational and large domestic groups with annual consolidated revenues exceeding €750 million.
These entities will face additional taxation if their effective tax rate in any jurisdiction falls below the 15 per cent threshold, calculated based on adjusted accounting profits.
“Such groups will pay a supplementary tax in cases where their effective tax rate is lower than 15 per cent in any specific jurisdiction,” Violaris stated.
Pillar Two operates through two interconnected mechanisms, the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR).
Effective from 2024, the IIR requires the ultimate parent entity of a group to calculate and pay any shortfall in tax rates for jurisdictions where the effective tax rate is below 15 per cent.
“The IIR is the main rule under Pillar Two and takes priority over the UTPR,” Violaris said.
UTPR, meanwhile, comes into effect in 2025. It acts as a fallback measure, redistributing unpaid taxes among countries based on specific criteria when the IIR is insufficient.
“The UTPR allows states flexibility in ensuring minimum taxation, whether through supplementary taxes or restricting certain tax deductions,” Violaris added.
In addition to these rules, Cyprus has introduced a Domestic Top-Up Tax (DTT), effective from 2025.
Unlike the ‘approved’ DTTs of other countries, Cyprus’ version allows for the allocation of taxes under Controlled Foreign Company (CFC) rules.
“The DTT is consciously and strategically designed to allow flexibility, ensuring Cyprus remains competitive while attracting new multinationals,” said Violaris.
The passage of the law faced delays due to lobbying by stakeholders who argued for a one-year postponement, citing insufficient readiness among affected taxpayers.
However, Violaris emphasised that further delays would have had severe consequences.
“Such a postponement would have made Cyprus the only EU member state to be in breach of the mandatory directive, with all the consequences that would entail,” he said.
“It would also have meant the loss of millions in tax revenues, which these companies would simply have paid to other countries,” he added.
He also commended the Finance Ministry and its policy department officials, as well as the Tax Department, “for the speed, efficiency, and thoroughness they demonstrated in drafting the law over the past two years and more, as well as the foresight they exhibited regarding the implementation of the Domestic Top-Up Tax (DTT)”.
“I expect the DTT will not only preserve Cyprus’ competitiveness but also serve as an attraction for new multinational groups to relocate their operations to our country in the near future,” Violaris said.
He added that the “approach and stance of the Finance Ministry, the Tax Department, and the House of Representatives were exemplary in meeting our obligations to the EU, enhancing our credibility, and strengthening the state’s coffers”.
While the adoption of Pillar Two is a significant achievement, Violaris stressed the need for Cyprus to remain proactive in a competitive global environment.
“Undoubtedly, further actions are needed to remain competitive compared to many other countries, which have already implemented or are considering countermeasures,” he stated.
“Nothing is static,” Violaris continued. “We must act immediately and introduce our own countermeasures in a timely manner before we find ourselves—perhaps sooner than expected—spectators rather than key players on the global business stage”.
