Important Notice: Pillar II Tax Regulations Now in Effect

On 12 December 2024, the Parliament in Cyprus passed the global minimum tax of Multinational Enterprise Groups (MNE) and large-scale domestic groups law, transposing into local legislation the Council Directive on Global Minimum Tax. The Pillar Two Directive introduces a 15% minimum effective tax rate for ΜΝΕ groups and large-scale domestic groups with consolidated annual revenues exceeding €750m. The law was published in the Official Gazette on 18 December 2024.

The law came into effect for financial years commencing on or after 31 December 2023 with respect to the Income Inclusion Rule (IIR), and for financial years beginning on or after 31 December 2024 in relation to the Undertaxed Profits Rule and the Domestic Top-Up Tax (DMTT).

Cyprus has consented to all safe harbors, including the Transitional Country by Country Reporting (CBCR) Safe Harbor as well as a Transitional UTPR Safe Harbor.

The Law includes all the provisions of the Pillar Two Directive and is enhanced with additional guidelines from the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). It also covers administrative provisions to help clarify how the Law should be understood.

The Law also mandates that its interpretation follow any guidance issued by the OECD/G20 Inclusive Framework on BEPS, as long as it is consistent with the Law, including any future guidance.

The Law does not amend Cyprus' Corporate Income Tax (CIT) framework. Instead, it introduces additional tax provisions that operate alongside the CIT rules, specifically targeting groups that meet the relevant criteria.

Income Inclusion Rule (IIR): Effective from 31 December 2023, the IIR requires parent entities of Multinational Enterprise (MNE) groups or large domestic groups to pay a top-up tax on their low-taxed income and that of their subsidiaries, ensuring an overall minimum tax rate of 15%.

Domestic Minimum Top-up Tax (DMTT): Starting from 31 December 2024, the DMTT imposes a top-up tax on low-tax income within Cyprus. It allows for the pushdown of foreign taxes and adheres to safe harbors, such as the Transitional Country-by-Country Reporting (CbCR) safe harbor.

Undertaxed Profits Rule (UTPR): Also effective from 31 December 2024, the UTPR serves as a backstop to the IIR. It applies to MNE groups with low-taxed income in jurisdictions where no top-up tax has been collected through a Qualified IIR, allocating the top-up tax to other jurisdictions based on a formula to meet the 15% minimum tax rate.

Notification Requirement: All Cyprus entities and joint ventures within in-scope groups must notify the Cyprus Tax Authorities (CTA) no later than 15 months after the end of the relevant fiscal year. For the transition year (first year being in scope), the deadline extends to 18 months. For example, the deadline for 2024 would be 30 June 2026.

In the event where the GloBe Information Return (GIR) is filed by a foreign Constituent Entity, a notification must be made to the local authorities of the identity of the Entity that is filing the GIR and the jurisdiction in which it is located.

Top-up Tax Filing and Payment: In addition to the GloBE Information Return, in-scope Cyprus entities must submit an annual local self-assessment filing and make any necessary payments within 30 days of the GloBE Information Return submission deadline, as set by the Law.

Penalties: The Law specifies penalties for late submissions, delayed payments, and other violations. These penalties are consistent with those outlined in the Cyprus Assessment and Collection Laws for notifications and returns, as well as those related to Country-by-Country Reporting.  However, for fiscal years starting on or before 31 December 2026, and ending no later than 30  June  2028, no administrative fines or penalties will be imposed if the Cyprus Tax Authority (CTA) is satisfied that the relevant MNE or large domestic group has taken all required steps to comply with the Law. Penalties for non-compliance can vary depending on the nature of the issue, with fines ranging from EUR 1.500 to EUR 20.000.

With the Cyprus IIR having taken effect in 2024 and the upcoming implementation of the Cyprus UTPR and DMTT, it is essential for in-scope groups to act promptly. Groups should evaluate the potential impact and implications of the Law and ensure their current data, systems, technology, and processes are sufficient to meet the requirements for full compliance.

Our expertise enables us to effectively guide you through the complexities of Pillar II, ensuring compliance while identifying potential risks and opportunities. We can support you with:

• Assessing whether Pillar II applies to your group and analysing its impact, including identifying high-risk subsidiaries based on their location.
• Conducting safe harbour testing using Country-by-Country Reporting (CbCR) data.
• Performing a high-level impact assessment and calculating any top-up tax due.
• Providing insights on available elections and their implications.
• Evaluating the potential for substance-based income exclusions, which could reduce taxable income based on tangible assets and payroll.
• Assisting with scenario planning and tax restructurings to optimise your group’s tax position.

With our guidance, you can confidently navigate Pillar II and make informed decisions for your business.

Should you like to further discuss the content and potential impact of the above to your business, please contact one of our trusted advisors from the Tax Department at KPMG in Cyprus.

George Markides
Board Member
Head of Tax Services
KPMG Limited

Costas Markides
Board Member
International Tax Services
KPMG Limited

Katia Papanicolaou
Board Member     
Direct Tax Services        
KPMG Limited    

Michael Halios
Board Member
International Tax Services
KPMG Limited

Stelios Stylianou
Board Member
Direct Tax Services
KPMG Limited

Marios Chrysanthou
Principal
Direct Tax Services
KPMG Limited

Michalis Loizides
Board Member
Tax Services
KPMG Limited

Panagiota Pourgoury
Manager 
Direct Tax Services
KPMG Limited