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November 4, 2021

Cyprus issues Ministerial Decree on DAC6 Guidelines

Executive summary

On 29 October 2021, the Cypriot Ministry of Finance (MoF) issued guidelines (Guidelines) in the form of a Ministerial decree (Decree N. 438/2021 or the "Decree") on the Cypriot Mandatory Disclosure Rules (MDR) Law (Law 41(I)/2021 of 31 March 2021, amending Law 205(I)/2012 on Administrative Cooperation in the Field of Taxation of 2012, hereinafter referred to as the Law).

The Guidelines provide clarity on the interpretation of key terms of the Law as analyzed below.

The below detailed comments are not exhaustive and do not cover all the elements of the Decree.

Detailed discussion


The Council of the European Union (EU) Directive 2018/822 of 25 May 2018 amending Directive 2011/16/EU regarding the mandatory automatic exchange of information in the field of taxation (the Directive or DAC6), entered into force on 25 June 2018.1

The Directive and the Law require intermediaries (including EU-based tax consultants, banks, asset managers, corporate administrative service providers, insurance companies and lawyers) and taxpayers to report certain cross-border arrangements (reportable arrangements) to the relevant EU Member State tax authority.

Scope of taxes covered

The scope of taxes covered under the Law is fully aligned with the Directive and applies to all taxes except value-added tax, customs duties, excise duties and compulsory social security contributions.

Reportable arrangements

Under the Cypriot MDR Law, an arrangement is reportable if it is cross-border and meets at least one of the hallmarks A-E specified in Annex IV of the Law and the main benefit test (MBT), where applicable.

The Guidelines clarify that the term "arrangement" includes all types of arrangements, transactions, payments, schemes and structures, whether legally enforceable, and includes oral agreements. It is also clarified that the term "arrangement" may include arrangements comprising more than one step or part and provides an example of a case involving the granting of a loan.

It is further noted that the meaning of an "arrangement" is broader than that of an "agreement" and does not depend upon the existence of an agreement between the participants of the arrangement.

The Guidelines clarify that in the case of a pre-existing arrangement (i.e., first step of implementation had initially been taken before 25 June 2018) which is extended or renewed, this may be considered as a "new arrangement" captured under the timeframes of the Law, in case there is a material change to the arrangement. However, decisions relating to tax compliance positions shall not automatically render a past/historic arrangement a "new arrangement."

The term "participant," which is crucial in establishing the existence of the "cross-border" element, is defined in the Guidelines, where it is also clarified that a person needs to actively participate in the arrangement and be substantially related to the arrangement in order to be a participant.

In regard to "marketable arrangements," the Guidelines clarify that any kind of tax planning scheme that is marketed or promoted should not necessarily be regarded as a marketable arrangement.

Hallmarks A-E of the Law

The hallmarks can be distinguished as hallmarks which are subject to the MBT, and those which of themselves trigger a reporting obligation without being subject to the MBT.

Most elements of the hallmarks included in the Law are not expressly defined. The Guidelines provide some clarifications in this regard.

Areas of clarification and further guidance

Hallmark A1 - Confidentiality clauses

It is clarified that any confidentiality clauses/agreements which are intended to protect commercial or personal data are not captured by this hallmark.

Hallmark A2 – Remuneration in relation to a tax advantage

The key feature of this hallmark is that the intermediary's fee (or other form of compensation) for providing a service in relation to a cross-border arrangement is linked to a tax advantage being obtained. Moreover, a non-exhaustive list of examples of the form that a contingent fee may have (e.g., penalties and surcharges, supply of goods or services, percentage of the tax advantage and success fee) is provided.

Hallmark A3 - Standardized documentation and/or structure

The Guidelines provide, inter alia, that this hallmark is intended to capture what is often referred to as "mass-marketed" or "off-the-shelf" arrangements that are primarily tax driven and whereby the finished product requires little or no modification to suit the specific requirements or circumstances of the relevant taxpayer.

Hallmark B1 – Acquisition of loss-making entities

It is stated that for the purpose of this hallmark, steps will be contrived where they are pre-planned, artificial and/or complex for no evident commercial reason. Moreover, it is also clarified that the loss-making company being acquired is not considered as a participant. Intragroup acquisitions are also included within the scope of this hallmark.

Hallmark B2 – Conversion of income into capital, gifts or lower-taxed/tax-exempt income

It is noted that in order to fully assess the applicability of this hallmark, it would be necessary to consider whether there is a conversion of an existing or prospective income stream into capital, gifts or other categories of revenue which are taxed at a lower or other non-taxable/exempt form. Therefore, a comparison test should be made for the tax that would have been payable had the conversion of income not taken place with the amount of tax that is payable (if any). The Guidelines further state that in case persons are granted with share options as part of their remuneration package, any increase in value could be taxed as a capital gain, depending on the jurisdiction of residence. Despite the fact that the remuneration package could have consisted entirely of salary income, share options are a legitimate commercial choice to remunerate employees. In such case, there is no conversion of income into capital, but simply a choice between different options, which are widely used and have an underlying commercial rationale. The above will apply in the cases where the share options do not substitute 25% of the total remuneration package. Finally, it is clarified that where arrangements are designed in advance, or do not constitute normal commercial practice, or involve additional artificial steps, which result in making the payments non-taxable or taxable at much lower rates, it is more likely for hallmark B2 to be triggered.

Hallmark B3 – Circular transactions

For this hallmark to be met, there must be a circular transaction resulting in the round tripping of funds (cash or cash equivalents), involving either:

  • Interposed entities without primary commercial function

  • Transactions that offset or cancel each other (or have similar features)

An arrangement is considered to result in "round-tripping of funds," if the jurisdiction from where the funds originate is the same as the ultimate destination jurisdiction. The Guidelines add that in order to identify whether there is a "primary commercial function," it will be necessary to consider whether the round-tripping of funds serves little or no commercial purpose and has been done primarily to obtain a beneficial tax treatment that would not otherwise be available.

Hallmark C1 – Deductible cross-border payments between associated enterprises

It is highlighted that this hallmark only refers to actual payments and not to "deemed"/"notional" payments or transfer pricing adjustments. In addition, where the payment is made to an entity which is tax transparent in its jurisdiction of incorporation or establishment, such as a partnership, it is considered that the recipient of the payment is the partner/investor. The Guidelines further clarify that the term "deductible payments" in this hallmark does not extend to acquisitions of depreciable assets or interest that is capitalized into the cost of an asset (e.g., interest used to finance the construction of a building and capitalized into the cost of the building).

Hallmark C1(a) – Recipient not resident for tax purposes in any jurisdiction

This hallmark covers legal persons that have no tax residence in any jurisdiction. It should not cover jurisdictions that do not have the concept of tax residence in their tax regimes, either because a territorial system of taxation is applied, or because they do not charge corporation tax.

Hallmark C1(b)(i) - Recipient tax resident in a jurisdiction that does not impose corporate tax or that imposes corporate tax at a rate of zero or almost zero

The Guidelines state that for the purpose of this hallmark, "zero or almost zero corporate tax" refers to a nominal rate/headline corporate tax rate below 1% that applies generally in the state of residence of the recipient and not to the effective tax rate applicable to the recipient. Furthermore, where the recipient of payment benefits from an exemption from tax, such as sovereign wealth funds, government entities, etc., the hallmark C1(b)(i) will not apply.

Hallmark C1(b)(ii) - Recipient tax resident in a jurisdiction included in a list of third-country jurisdictions which have been assessed by Member States collectively or within the framework of the OECD as being non-cooperative

With respect to the Organisation for Economic Co-operation and Development's (OECD) list, the Guidelines state that the jurisdictions covered by this hallmark are those which are assessed as "non-compliant." Further guidance is provided with regard to which version of the EU's list of non-cooperative jurisdictions for tax purposes and the OECD's list of non-compliant jurisdictions for the purpose of exchange of information upon request should be relied upon, given that those lists are periodically updated. Accordingly, for the transitional period, the version of the EU's and OECD's lists that should be relied upon is the one in force at the date of the first step of implementation of the arrangement, while for the application period, consideration should be made at the time that the reporting trigger is met (whichever occurs first).

Hallmark C1(c) - Recipient tax resident in a jurisdiction where the payment benefits from full exemption from tax

It is highlighted that this hallmark is based on the tax treatment of the payment and not of the recipient. The hallmark applies in those cases where specific payments are made to persons that are subject to tax, but the payments are exempt from tax in the jurisdiction of the recipient.

Hallmark C1(d) - Recipient tax resident in a jurisdiction where the payment benefits from a preferential tax regime

The Guidelines make clear that this hallmark is based on the tax treatment of the payment and not of the recipient. Furthermore, a "preferential" regime for the purpose of this hallmark is defined as the regime which has been assessed by the EU Code of Conduct Group (Business Taxation) or the EU State aid rules as a "harmful" preferential regime. It is also noted that the notional interest deduction rules or similar rules on notional interest deduction on equity in other jurisdictions, the intellectual property and tonnage tax regimes, which have been assessed by the EU Code of Conduct Group (Business Taxation) as "non-harmful" preferential tax regimes, are not considered as "preferential" regimes and thus should not fall within the scope of this hallmark.

Hallmark C2 – Depreciation deducted multiple times on the same asset

The Guidelines clarify that situations whereby the same depreciation claimed in two jurisdictions is coupled with dual inclusion of income are not within the scope of this hallmark, by also providing examples of such cases.

Hallmark C3 – Relief from double taxation in respect of the same item of income or capital is claimed in more than one jurisdiction

A list of examples is provided where the same taxation is relieved in two jurisdictions coupled with dual inclusion of income to highlight that such situations fall outside the scope of this hallmark. It is also clarified that the application of the dividend income exemption in Cyprus should not be considered as a claim for double tax relief for the purpose of this hallmark and as such this hallmark shall not apply.

Hallmark C4 – Transfer of assets with a material difference in the amount treated as payable

The Guidelines state that the transfer of tax residence does not fall within the scope of this hallmark. The amount that is treated as payable refers to the tax value of an asset. Whenever an asset has no tax value for the transferor and/or transferee, then this hallmark does not apply as there is no "difference." The accounting value is relevant only if it affects the tax value. It is also clarified that transactions between a head office and its permanent establishment(s) are within the scope of this hallmark but only if an asset has a tax value for both the transferor and the transferee. The hallmark can also be triggered when assets are transferred between unrelated third parties.

Hallmark D1 – EU legislation or any equivalent agreements on the automatic exchange of financial account information circumvented

Hallmark D1 will be triggered where it is reasonable to conclude that an arrangement has, or is designed to have, the effect of undermining the reporting obligation under the national laws implementing Council Directive 2014/107/EU and the Common Reporting Standard or equivalent agreements on the automatic exchange of information on Financial Accounts, including agreements with third countries.

For the purpose of this hallmark, "reasonable to conclude" is determined from an objective standpoint by reference to all the facts and circumstances and without reference to the subjective intention of the parties involved.

Hallmark D2 – Non-transparent legal or beneficial ownership chains used

Examples of cases of non-identification of beneficial owners are provided in the Guidelines. In relation to trusts, in case the beneficial owners are disclosed or identified, and such disclosure or identification is in accordance with the "Prevention and Suppression of Money Laundering Activities Law," then this hallmark does not apply.

Hallmark E1 – Use of unilateral safe harbor rules

The Guidelines highlight that, unlike hallmarks E2 and E3, hallmark E1 should not be taken to concern only arrangements between associated enterprises, but also dealings within the same legal entity (i.e., arrangements between a head office and its foreign permanent establishment). For the hallmark to apply, the use of unilateral safe harbor rules introduced by an EU Member State or a third country should always take place in the context of cross-border intragroup arrangements. It is also clarified that bilateral or multilateral advance pricing agreements concluded between tax authorities are not "unilateral" safe harbors and are therefore out of scope of hallmark E1. A non-exhaustive list of examples of types of transactions that should not be considered to involve the use of unilateral safe harbor rules is provided in the Decree. Further guidance is provided for Cyprus, according to which: (i) the use of the administrative simplification measure of 2% minimum margin after tax (i.e., margin of 2.29% before tax) on intragroup back-to-back financing transactions by Cypriot tax resident financing companies, as per the Transfer Pricing Circular of 2017; as well as (ii) the use of a return on equity of 10% (after tax) in the case of entities performing functions similar to those performed by regulated financial institutions or other parties engaged in credit-granting activities which are subject to the Regulation (EU) No. 575/2013, are both considered as unilateral safe harbor rules for the purpose of this hallmark.

Hallmark E2 – Transfer of hard-to-value intangibles between associated enterprises

"Rights in intangible assets," such as a license or a contractual right to use the intangible asset, should also constitute "intangibles" for the purpose of hallmark E2. There is also guidance on the categories of assets which can be considered as "intangibles," such as, inter alia, patent rights, know-how, trade secrets and trademarks. Further guidance is provided on the interpretation of the "hard-to-value" element of the hallmark with reference to indicative features or characteristics (e.g., partial development, no commercial exploitation, exploitation in a novel manner, etc.). In addition, it is noted that there should be a cross-border transfer of the intangible asset/right to the intangible asset, i.e., from an EU Member State to another EU Member State or from an EU Member State to a third country (or vice versa), for the hallmark to apply. A transaction involving only one person (e.g., transfer of tax residence) should not be considered a "transfer" for the purposes of this hallmark.

Hallmark E3 – Profit shifts following an intragroup cross-border transfer of functions and/or risks and/or assets

The Guidelines clarify that the term "transfer" includes changes based on contractual arrangements, as well as changes in the activities or conduct within a multinational group (i.e., not only changes of legal ownership, but also changes in the functions performed or the allocation of risks).

It is noted that there should be a "cross-border" transfer of assets, functions or risks between jurisdictions for the hallmark to apply and the transfer of tax residence is not considered a "transfer" for the purposes of hallmark E3.

Furthermore, it is clarified that the concept of "EBIT" (earnings before interest and taxes) refers to earnings for financial/accounting purposes and not to taxable profits. It is further noted that, for the purpose of this hallmark, dividend income is not part of EBIT.

Main benefit test

The Decree reiterates the position adopted in the Law that the tax advantage relates to taxes imposed by EU Member States and thus should have an EU nexus.

The Guidelines state that a tax advantage may also arise where an arrangement prevents a tax disadvantage which occurs due to an amendment in the tax law.

It is emphasized that the MBT is an objective test, implying that there is no need to examine the specific motives or intentions of a person which enters into an arrangement. The Guidelines also highlight that in determining whether an arrangement results to a tax advantage, a comparison is required between the amount of tax due, having regard to the arrangement, with the amount of tax that would be due under the same circumstances in the absence of the arrangement.


The Law provides for an exemption from reporting for intermediaries and relevant taxpayers if sufficient proof of reporting of the same information is provided by the other intermediary/relevant taxpayer.

The Law also provides for an exemption from reporting for intermediaries covered under legal professional privilege (LPP). The Guidelines clarify that LPP applies only in cases of lawyers exercising the profession of lawyer and Law Firms, as defined in the Advocates Law, Cap 2.

It is explained, however, that the privilege is that of the client and not of the legal professional. Therefore, the client may elect to waive their right to LPP to the extent necessary to allow the legal professional to disclose the information to the tax department.

Moreover, it is highlighted that the legal professionals covered under LPP should notify the rest of intermediaries/relevant taxpayer of their reporting obligations as per the Law within 10 calendar days from the day on which the reporting obligation would have arisen if the intermediary was not covered by LPP.

With respect to "primary intermediaries," the Guidelines clarify that they comprise of intermediaries that actively design and advise on tax planning schemes, such as professional tax advisors or other persons specializing in tax law and that they are expected to have a full understanding and knowledge of the details with respect to the cross-border arrangement.

With regard to "secondary intermediaries," it is stated that aid, assistance or advice may include the provision of tax, legal or other advisory services with respect to planning or structuring transactions, expertise or knowledge, financing, fiduciary and trust services, accounting advisory services and generally any other professional services in the context of implementing a reportable cross-border arrangement.

However, it is also highlighted that the provision of compliance services in relation to historic data, that is not part of the implementation of a reportable cross-border arrangement, e.g., assistance with the completion of a tax return for a client who has previously entered into a reportable cross-border arrangement, would not result to the person providing the services being an intermediary.

"Knows or could be reasonably expected to know" criterion

The Decree provides extensive guidance on the application of the criterion "knows or could be reasonably expected to know." Among others, the Guidelines provide that the criterion will be satisfied where a reasonable person in the position of a "secondary intermediary" would have the relevant degree of expertise and understanding required to provide the service. This test requires that the "secondary intermediary" has both sufficient knowledge and the professional background that would normally be expected of the person providing the service. "Secondary intermediaries" are not required to have or apply a level of expertise beyond that which is reasonably required to provide the service.

In addition, "secondary intermediaries" are not expected to perform additional due diligence to establish whether the service to be provided triggers a reporting obligation. A "secondary intermediary" should perform the normal due diligence for the type of transaction and the client in question. However, if a "secondary intermediary" purposefully failed to perform its normal due diligence or found other ways to be willfully ignorant by purposefully not asking particular questions, then the test may still be satisfied and they would be considered an intermediary.

Reporting deadlines

The Decree provides for a formal extension to the deadlines for DAC6 submissions to the Cypriot Tax Department (CTD) to 30 November 2021 for both the transitional period (25 June 2018 – 30 June 2020) and the q application period between 1 July 2020 and up to 30 October 2021.

Practically, this means that the "live" reporting period (i.e., the application of the 30-day deadline based on specific triggering events) in Cyprus commenced on 31 October 2021.

Proof of submission

The Guidelines clarify that upon submission of information for DAC6/MDR purposes to the Cypriot Government's Gateway Portal "Ariadni," the CTD will issue an identification number (the unique reference number for the arrangement), i.e., "Arrangement ID," for the arrangement and a disclosure number, i.e., "Disclosure ID", which proves that the relevant DAC6 submission to the CTD has been successfully completed.

It is further noted that the proof of DAC6 submission that must be provided by a Cypriot intermediary/relevant taxpayer in order to be exempted from the obligation to submit information to the CTD must consist of:

(a) a copy of the information (i.e., of the DAC6 XML report) submitted to the CTD or to the competent authority of another EU Member State; and

(b) a written confirmation of the unique reference number ("Arrangement ID") assigned to the arrangement by the CTD or the competent authority of another EU Member State.


In accordance with the Law, penalties for non-compliance may range from €1,000 up to a maximum of €20,000. The Decree does not provide additional details; however, the possibility of the CTD issuing further guidance in the form of a tax circular should not be excluded.

For more details on applicable penalties, see our EY Global Tax alert on the Cypriot MDR Law.2

Next steps

Determining if there is a reportable cross-border arrangement raises complex technical and procedural issues for taxpayers and intermediaries. Due to the scale and significance of the regime enacted in the Cypriot MDR Law, taxpayers and intermediaries who have operations in Cyprus should review their policies and strategies for logging and reporting arrangements so that they are fully prepared for meeting their obligations and relevant deadlines.


For additional information with respect to this Alert, please contact the following:

Ernst & Young Cyprus Limited, Nicosia



  1. For background on MDR, see EY Global Tax Alert, EU publishes Directive on new mandatory transparency rules for intermediaries and taxpayers, dated 5 June 2018.

  2. See EY Global Tax Alert, Cyprus law to implement Mandatory Disclosure Rules enters into force, dated 2 April 2021.