The Tax Impact of the CRS

Several Cypriot tax resident individuals have recently received tax assessments in relation to passive income earned from overseas bank accounts.

It is therefore important for Cypriot taxpayers to understand the significance of the Automatic Exchange of Information (AEOI) as mandated by the Common Reporting Standard (CRS) and the Foreign Account Tax Compliance Act (FATCA).

Both CRS and FATCA are global initiatives, facilitating the automatic exchange of financial information between Cyprus and other jurisdictions, allowing the Cyprus tax authorities to identify and address offshore tax evasion.

This automatic exchange of information under CRS and FATCA serves as an additional tool for the Cyprus Tax Department, ensuring that individuals report their income and assets accurately. This fosters tax compliance and fairness, strengthening the integrity of the tax system and contributing to financial transparency.

Understanding CRS and FATCA

By way of background, FATCA and CRS require Cyprus Financial Institutions (FIs) to implement due diligence procedures to identify, document and report information on reportable accounts. These accounts include those held by account holders who are tax residents of other participating jurisdictions for CRS, and American taxpayers for FATCA purposes.

Currently, the exchanged information includes financial account balances, interest, dividends, and insurance compensations and other relevant data. However, it is anticipated that additional financial assets such as crypto assets will be subject to automatic exchange of information under FATCA and CRS.

Impact on Cyprus tax resident individuals from the implementation of FACTA and CRS

• The automatic exchange of information through CRS and FATCA affects Cyprus tax resident individuals , leading to increased compliance costs, privacy concerns, and changes in financial behavior. More specifically,
Individuals with complex financial arrangements, face significant paperwork and administrative costs to ensure compliance with CRS and FATCA requirements.

• CRS and FATCA allow tax authorities to scrutinize individuals' offshore financial activities more efficiently. Non-compliance or discrepancies in reported information may lead to investigations and potential penalties.

• The automatic exchange of financial information raises privacy concerns for some individuals. While information exchange should be performed securely and in accordance with privacy regulations, individuals may still have concerns about sharing their personal financial data.

• The implementation of FATCA and CRS led individuals, holding overseas financial accounts, to consider various options for minimizing the adverse implications and for being compliant with FATCA and CRS with the minimum administration burden, such as assets relocation, change in citizenships and tax residencies.

Usage of the information exchanged under CRS and FATCA by the Cyprus Tax Department

From the automatic exchange of information under FATCA and CRS, the Cyprus Tax Department has obtained information for the existence of a huge number of financial accounts held outside Cyprus, in different countries, in and outside EU, by Cyprus tax resident individuals.

The Cyprus Tax Department uses the information received in the context of the individuals tax affairs examination for checking and confirming that the income derived from holding of the financial accounts were correctly declared by them.

In case where the information received under the automatic exchange of information by the Cyprus Tax Department is not aligned with information declared on the individuals submitted income tax returns, the Cyprus Tax Department tend to issue assessments claiming additional taxes from the individuals.

The role of tax advisor

In this respect, it is recommended that individuals, holding financial assets outside Cyprus, to seek assistance from professional tax advisors with experiences on FATCA and CRS implementation and in international tax planning. This ensures compliance and minimizes the risk of challenges that may lead to the payment of additional taxes.

At Deloitte, we recognize the importance of staying informed about regulatory changes and compliance obligations. We are committed to providing our clients with expert advice and guidance to navigate the complexities of tax regulations in Cyprus.