Tax obligations for Cypriot companies that belong to large multinational enterprises

The international tax landscape has been changing at an unprecedented pace over the last few years, especially for companies that belong to multinational enterprise groups with total consolidated turnover in excess of €750 million per annum (“MNE groups”).  In this article, we briefly touch upon the obligations that are applicable to Cyprus companies that belong to such MNE groups.

Pillar Two and global minimum tax rules

The global minimum tax is the second pillar of the two-pillar solution developed by the OECD. Pillar Two aims to ensure that MNE groups, are taxed at a minimum effective tax rate of 15% irrespective of where they operate.

Cyprus has transposed the EU Directive, which harmonises the application of Pillar Two throughout Member States, into its domestic legislation.

The mechanism to enforce the collection of additional tax under Pillar Two, where the effective tax rate (“ETR”) in a jurisdiction is less than 15%, is underpinned by three interconnected rules.

The first rule, known as the Income Inclusion Rule (IIR), is effective from 1 January 2024. If, for example, the Ultimate Parent Entity (“UPE”) is a tax resident of Cyprus, then the minimum additional tax of 15% on profits earned in lower tax jurisdictions will be paid by the UPE to the Cyprus Tax Authorities (“CTA”).

The second rule, known as the Undertaxed Payment Rule, is effective from 1 January 2025. This is a backstop mechanism to ensure that Pillar Two tax is paid by other group entities, when the IIR does not result in the payment of the global minimum tax.

The third rule / component is the Qualified Domestic Minimum Top-up Tax (QDMTT), which was an optional measure for jurisdictions under the global rules. Cyprus has chosen to implement a Domestic Minimum Top-up Tax (DMTT), effective from 1 January 2025. This measure imposes a minimum tax on income generated within Cyprus, ensuring that companies meet the required minimum effective tax rate domestically. By doing so, Cyprus safeguards its tax base and aligns with Pillar Two objectives.

There are several compliance obligations which may apply with respect to the Cyprus Constituent Entities (“CEs”) of MNE groups subject to Pillar Two, including the submission of:

1. the GloBE Information Return (“GIR”) with the calculations of the applicable top up taxes,

2. the one-off notification with the basic information regarding the group and Cyprus CEs,

3. the annual GIR notification, where required, which intends to update the CTA of the group’s Constituent Entity (usually the UPE) that will be filing the GIR and its jurisdiction.

Cyprus Pillar Two Law provides for a central filing and dissemination approach, designed to enable an MNE group to file its annual GIR with a single tax authority, which then exchanges the relevant GIR information with all other relevant tax authorities based on the available activated exchange of information mechanisms (e.g., GIR Multilateral Competent Authority Agreement – “MCAA”, DAC9).

The deadline for the above compliance obligations is generally within 15 months from the end of the tax year. The deadline for FY2024 (being the first year when the rules are operative in Cyprus) was set as 18 months from the end of the tax year with a further extension allowed by the CTA until 30 September 2026.

Country-by-Country (“CbC”) Reporting

MNE groups must file a CbC Report providing information to tax authorities on a jurisdictional basis, such as where profits are recognised, where taxes are paid, and the number of employees and assets. Since 2016, when a UPE is resident in Cyprus, or under certain other circumstances when there is a Cypriot subsidiary of a foreign headed MNE group, the CbC Report must be filed in Cyprus. All Cypriot CEs of a large MNE group must also file CbC notifications in Cyprus.

The introduction of public CbC Reporting (“Public CbCR”) in Cyprus through the transposition of the relevant EU Directive into Cypriot law in December 2024, requires public disclosure of similar tax related information by MNE groups operating in the EU. Public CbCR applies not only to EU headed MNE groups who should report in the Member State in which their UPE is resident (e.g. in Cyprus if Cypriot resident), but also to non-EU headed groups that have subsidiaries or branches in the EU subject to local requirements and thresholds. Public CbCR facilitates public scrutiny and greater transparency of the tax practices of MNE groups, as the information will be readily accessible via an MNE’s website and the corporate registrar of the relevant EU jurisdiction. The Public CbCR rules apply for all accounting periods beginning on or after 22 June 2024, with deadlines for compliance with the rules falling within 12 months of the balance sheet date of the financial year for which the report is drawn up.

Thresholds

All three regimes described above use the same €750 million consolidated annual group revenue threshold. However, the way the threshold is tested and the consequences of meeting it differ across each regime.

- Pillar 2: applies to MNE groups with annual consolidated group revenue of EUR 750 million or more in at least two of the four fiscal years immediately preceding the tested fiscal year.

- CbC reporting: applies to MNE groups with annual consolidated group revenue of EUR 750 million or more in the preceding fiscal year.

- Public CbC reporting applies to large MNE groups with annual consolidated group revenue of EUR 750 million or more in each of the last two consecutive fiscal years.

Transfer Pricing Documentation

As from 1 January 2022, Cypriot companies which are the UPE or Surrogate Parent Entity of a large MNE group, are required to maintain a Master File, which includes an overview of global business operations, profit drivers, supply chain, as well as transfer pricing policies. This Master File complements the TP documentation in the form of Local Files, that are required to document related party transactions and compliance with the arm’s length principle.

The existing tax obligations of MNE groups, with respect to their global operations, have increased significantly over recent years and, in particular, in 2024 with the introduction of Pillar Two. Meeting these obligations and ensuring full compliance will benefit significantly from a collaborative effort with their tax advisors.