On 5 April 2019, the Cyprus House of Representatives passed a law that addresses certain provisions of the EU anti-tax avoidance directive (ATAD 1) particularly the interest limitation rule, a general anti-avoidance rule (GAAR) and controlled foreign company (CFC) rules.

Under the interest restriction rule, the deduction of net interest expense (borrowing costs) is limited to 30% of EBITDA or a EUR 3 million safe harbor. Where the company is a member of a Cypriot group, the interest limitation rule is applied at the group level, as defined in the Income Tax Law (i.e. a 75% participation group), including permanent establishments (PEs) in Cyprus. Excess interest expense and unused interest capacity may be carried forward up to a maximum of five years.

A foreign company or permanent establishment whose profits are not subject to tax or are exempt from tax in Cyprus will be considered a CFC following conditions are met;

1. A Cyprus tax resident company, by itself or together with its associated enterprises, holds directly or indirectly more than 50% of the voting rights or capital of the nonresident company or is entitled to receive more than 50% of the profits of that company; and
2. The actual corporate tax paid on the profits of the nonresident company or PE is lower than 50% of the tax that would be paid in Cyprus. However, a PE of a CFC that is not subject to tax or is exempt from tax in the jurisdiction of the CFC will not be taken into account.

The CFC Rules will not apply if the Company or the foreign PE has earn profits of no more than € 750,000 and non-trading income of no more than € 75,000 or accounting profits of no more than 10% of its operating costs for the tax period.

The new GAAR provides that an agreement or set of agreements may be ignored if they have been made for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the tax law, and not for valid commercial reasons that reflect economic reality (not genuine).

The law will be applicable from 1 January 2019 if it is published in the Official Gazette to come into force.