The Cyprus Parliament passed on 14 October 2016 amendments to the Cyprus Income Tax Law 118/2002, as amended, relating to foreign Permanent Establishments (PEs).

Treatment of foreign PEs before the amendment

Prior to amendment, profits from a PE abroad of a Cyprus tax resident person were exempt from corporation tax in Cyprus subject to specific anti-avoidance provisions. Under the anti-avoidance provisions, the foreign PE was engaged, directly or indirectly, in more than 50% in activities that lead to investment income; and the foreign tax burden on the profits of the PE was substantially lower than the Cyprus tax burden (in practice lower than 6,25%). Foreign PE tax losses could be used, but subject to recapture, against future foreign PE profits.

Treatment of foreign PEs after the amendment

Cyprus taxpayers have the option to elect to tax profits of foreign PEs and also be able to claim as credit any foreign taxes imposed on the foreign PE’s profits. If this option is not elected, the exemption method will remain at the default position.

Transitional rules also apply for the claiming of foreign tax credits for those taxpayers that previously had utilized foreign PE tax losses.