Changes in EU tax jurisdiction list and their impact on Cyprus

The European Council recently announced changes to the EU list of non-cooperative countries for tax purposes, with several nations being removed and added to the list.

These updates will have an impact on payments from EU companies to the affected jurisdictions, as they may now be subject to withholding tax at the source.

The European Council on October 17 made the decision to include Belize, Seychelles, and Antigua & Barbuda on the EU list of non-cooperative countries for tax purposes.

At the same time, three other jurisdictions, namely the British Virgin Islands (BVI), Costa Rica, and the Marshall Islands, were removed from this list.

According to an official announcement, the BVI’s removal was attributed to its amendment of the framework for exchanging information upon request. It’s worth noting that the BVI was initially included on the list on February 14, 2023.

Moreover, The Marshall Islands made significant advancements in implementing economic substance standards, leading to their delisting.

Meanwhile, Costa Rica’s removal was due to modifications to the detrimental aspects of its foreign source income exemption system.

As of October 17, 2023, the EU’s list of non-cooperative countries now includes American Samoa, Antigua and Barbuda, Anguilla, Bahamas, Belize, Fiji, Guam, Palau, Panama, Russia, Samoa, Seychelles, Trinidad and Tobago, Turks and Caicos Islands, US Virgin, Islands, and Vanuatu.

Naturally, this decision has implications that affect Cyprus. Marios Yenagrites, Tax Manager at Limassol-based service provider Totalserve, noted that while Cyprus does not generally impose withholding taxes on payments to non-Cypriot residents, certain payments to companies in jurisdictions included on the EU list of non-cooperative jurisdictions are subject to withholding tax.

These include 17 per cent on payments of dividends by non-quoted companies, 30 per cent on payments of interest (excluding payments by individuals) and 10 per cent on payments of royalties (excluding payments by individuals).

“The removal of certain jurisdictions from the list effectively means that payments of dividends, interest and royalties from companies in EU countries, including Cyprus, to these jurisdictions should now be effected without tax being withheld at source,” Yenagrites explained.

“On the other hand, such payments to any jurisdiction included on the EU ‘blacklist’ shall be subject to withholding tax at the aforementioned rates,” he added.

What is more, for cases that are adversely affected by this development, he noted that “it may be considered to either halt the actual payment (e.g. until there is a positive development) or to change the jurisdiction of the beneficial shareholder of the Cypriot company to an alternative jurisdiction, for example via re-domiciliation or via transfer of shares”.

Furthermore, the Totalserve tax specialist explained that the revision of the list may have DAC6 reporting implications, which covers the mandatory disclosure and automatic exchange of information among EU states in the field of taxation related to reportable cross-border arrangements.

In this context, Yenagrites said that the implication relates to the hallmark concerning deductible cross-border payments, where the recipient is a tax resident in a jurisdiction included on this EU list.

“Cypriot entities engaged in activities with any of the newly listed jurisdictions would be well-advised to consider potential DAC6 reporting implications,” Yenagrites concluded.