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The European Council has recently made significant changes to the EU list of non-cooperative countries for tax purposes, impacting payments from EU companies to the affected jurisdictions. These changes may result in withholding tax at the source for such payments.
The decision, announced on October 17, involves the inclusion of Belize, Seychelles, and Antigua & Barbuda on the EU list of non-cooperative countries for tax purposes. Simultaneously, the British Virgin Islands (BVI), Costa Rica, and the Marshall Islands have been removed from this list.
The removal of the BVI is credited to the amendment of its framework for exchanging information upon request, with the initial inclusion on the list in February 2023. The Marshall Islands made significant progress in implementing economic substance standards, leading to their delisting. Costa Rica's removal was due to modifications made to the detrimental aspects of its foreign source income exemption system.
As of October 17, 2023, the EU's list of non-cooperative countries 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.
The implications of this decision also extend to Cyprus. Marios Yenagrites, Tax Manager at the Limassol-based service provider Totalserve, highlighted that while Cyprus typically does not impose withholding taxes on payments to non-Cypriot residents, certain payments to companies in jurisdictions on the EU list of non-cooperative countries are subject to withholding tax.
These withholding tax rates include 17% on payments of dividends by non-quoted companies, 30% on payments of interest (excluding payments by individuals), and 10% on payments of royalties (excluding payments by individuals).
Yenagrites explained, "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 made without tax being withheld at the source." However, payments to any jurisdiction on the EU 'blacklist' will still be subject to withholding tax at the mentioned rates.
For businesses adversely affected by these changes, Yenagrites suggested options such as delaying payments until a positive development occurs or altering the jurisdiction of the beneficial shareholder of the Cypriot company through methods like re-domiciliation or share transfers.
Additionally, the revision of the list may have implications for DAC6 reporting, which encompasses the mandatory disclosure and automatic exchange of information among EU states related to reportable cross-border arrangements in taxation. Yenagrites noted that the implication pertains to cross-border payments where the recipient is a tax resident in a jurisdiction on the 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.
These changes in the EU list of non-cooperative countries for tax purposes underscore the ongoing efforts to enhance tax transparency and compliance on an international scale, affecting businesses and their cross-border financial transactions.
By fLEXI tEAM