Cyprus - GAAR: Capturing Non-Genuine Transactions

In this episode, we explore the General Anti-Abuse Rule (GAAR) introduced in Cyprus under the EU’s Anti-Tax Avoidance Directive (ATAD). The GAAR serves as a broad safeguard against aggressive tax planning that may fall outside specific anti-avoidance rules like transfer pricing, CFC, or interest limitation provisions.

We break down how Cyprus applies the GAAR to non-genuine arrangements, what counts as “economic reality,” and how the rule fits into the broader international move toward substance-based taxation.

⚖️ The Rule in Focus

Under the Cyprus GAAR, any arrangement or series of arrangements that:

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• Are non-genuine, and
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• Have as their main purpose or one of their main purposes the obtaining of a tax advantage that defeats the intent of Cyprus tax law,
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➡️ will be ignored for tax purposes.

When the GAAR applies, the tax position is recalculated as if the arrangement had not occurred, according to the ordinary provisions of the Cyprus Income Tax Law.

🧩 What Counts as a Non-Genuine Arrangement

An arrangement—or a chain of transactions—is non-genuine when it lacks:

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• Valid commercial reasons, and
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• Economic reality.
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In simpler terms: if the structure exists mainly on paper, without substantive business purpose or risk-taking, the Cypriot tax authorities can disregard it.

This mirrors the “principal purpose test” under OECD and EU frameworks, and complements Cyprus’s CFC and interest limitation rules.

🧠 Key Insights

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• GAAR applies broadly, even where no specific anti-avoidance rule covers the transaction.
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• Focuses on intent and substance, not just legal form.
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• Authorities look at the economic reality—who truly earns income, bears risks, and makes decisions.
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• The rule empowers Cyprus to challenge artificial cross-border structures, especially those routing income through low-substance entities.
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💡 Practical Takeaways

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• Substance is key: Companies must maintain commercial justification, real operations, and decision-making in line with claimed residence.
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• Documentation matters: Keep evidence of the commercial rationale behind each step in a transaction.
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• Review structures: Especially those involving IP, financing, or holding arrangements where tax motives dominate.