In an attempt to enhance the Cyprus Tax System and attract new foreign direct investments, the Cyprus House of Representatives has recently voted (July 2015) new tax laws and amendments.
The new tax reforms aim to enhance the capital financing of the Companies as opposite to reduce the currently excessive debt financing as well as to attract new high worth investors that in general will create business substance and accelerate the local economy.
The main provisions of the new Tax reforms are as follows:
The main change under the Income Tax Law is the introduction of the Notional Interest Deduction (NID) which is defined as the multiple of the Reference Interest Rate and the New Equity introduced into the Company. The NIC will be, then, set out against the Income generated by the Company during the year to arrive at its taxable Income during that specific year.
"Reference interest rate" is defined as the higher of:
The rate used will be the rate as at 31 December of the previous tax year, i.e. for the 2015 tax statements the 31 December 2014 rate will be used.
“New Equity” is defined as any equity introduced in the business on or after 1st January 2015 in the form of issued share capital and share premium (provided it is fully paid either in cash or in kind – at market value) but does not include amounts that have been capitalised as the result of a revaluation of movable or immovable property or retained earnings prior to 31st December 2014.
Any Equity existed on 31st December 2014 is considered as Old Equity and does not form part of the calculation.
Anti-Abuse Provisions:
The NID is not compulsory and the taxpayer can elect to claim all or part of it during the tax year.
The NID provisions will be applicable as of the tax year 2015 onwards.
Based on the previous legislation introduced in 2014 (Article 20A of the Act), widow's pension is taxed under special provisions. Thus, income widows' pensions up to the amount of € 19.500 are taxed at 0% and revenue exceeding € 19.500 is taxed at the rate of 20%, separate from other income.
According to the law amendment voted, in order to avoid possible injustice, income from widow’s pensions may be taxed either as mentioned above or offset against other income of the taxpayer and taxed on the basis of the normal provisions of the law.
The tax payer may elect which tax method to apply for each tax year separately.
The provisions shall be applicable as from the fiscal year 2014.
The new law has been voted with aim to attract high Net-Worth Individuals to relocate to Cyprus by providing them tax incentives.
The amended law provides for the individuals who are tax residents of Cyprus but are not considered to be “domiciled” in Cyprus to be exempt from payment of Special Contribution for Defence on income derived from dividends, interest and rents. Thus, those persons will immediately save taxes of 17% on dividends, 30% on bank deposit interest and 3% on rental income.
On the other hand the non-doms will continue to be subject to taxation at the normal applicable personal tax rates in respect of rental and other forms of income that they receive (salaries, directors fees etc.).
This exemption, apart from individuals not domiciled in Cyprus, also covers:
IT has also been provided that regardless of the domicile of origin, any other person who has been Cyprus tax resident, under the provisions of the Wills and Succession Law, for at least 17 of the last 20 years prior to the relevant fiscal year will be deemed as resident (domiciled) in Cyprus and consequently not able to benefit from the exemption payment of the special contribution for defence from the 18th year onwards.
Persons that meet the above limit of 17 years, who also currently have no residence (domicile), in
Cyprus ((domicile) but was resident in Cyprus and thus paid special defence contribution on dividends, interest and rent, will then not pay any special defence contribution from 16th July
2015 onwards.
The above provisions have come into effect on 16 July 2015, which is the date they were published in the Official Gazette.
This anti-avoidance measure provides that, if a Cyprus tax-resident Company pays dividend to a Company which is not owned directly or indirectly by a Cyprus tax resident and domiciled individual(s), and the Commissioner considers that the interposition of this company as a shareholder of the company paying the dividend does not serve any substantial commercial or economic purpose but is primarily intended to prevent, reduce or postpone the payment of SDC, the Commissioner may consider that the dividend is paid by the Company paying the dividend directly to the tax resident(s) and domiciled Individual(s) that directly or indirectly control the company received the dividend, and require payment of special defence contribution on these dividends, either by the company received the dividend, or from the Cyprus tax resident individual(s) who directly/indirectly control the company.
Example:
Company A is owned by the Company B
Company B is owned by Company C
Company C is owned by Company D and
Company D is owned by Physical Person X
Company A pays dividend to Company B,
then the Commissioner has the right to request for payment of special defence contribution on dividends (if at its discretion the reasons mentioned above are applied), regardless if based on the remaining provisions of the tax law there is not withholding of special defence contribution for the payment of dividend by one Cyprus tax resident Company to another Cyprus tax-resident Company.
It is clarified that the above provisions do not apply where the direct or indirect shareholder of the Company paying the dividend is not a Cyprus tax-resident.
The above provisions have come into effect on 16 July 2015, which is the date they were published in the Official Gazette.
Under this amendment in the law, immovable properties acquired from 16th July 2015 to 31st December 2016 will be free from any future Capital Gains Tax in case that they are sold at any future time.
Particularly, the amended legislation provides the exemption from payment of Capital Gains Tax (CGT) on profits from the sale of (i) land (ii) land with a building or (iii) land with buildings from the date the amended Law comes into effect (16 July 2015) until 31 December 2016, regardless of the time of sale.
Therefore, (i) the land, (ii) the land with a building or (iii) the land with buildings acquired either through a purchase or a purchase agreement (excluding exchanges and donations), at a market value, by an unrelated person in the period from 16 July 2015 until December 31, 2016, will not be considered an immovable property for purposes of Capital Gains Tax at the time that they will be sold in the future, therefore they are tax free.
This exemption does not apply to disposals of immovable property that has been acquired under foreclosure procedures, under the new foreclosure law of Cyprus.
The above provisions have come into effect on 16 July 2015, which is the date they were published in the Official Gazette.
A 50% exemption from transfer fees under the Land and Surveys (Fees) Law will apply to ALL transfer applications provided that:
The above reduction does not apply to transfers of immovable property that have been acquired under foreclosure procedures.
The amendment applies to transfers done from 16th July 2015 onwards.
The content of this article is intended to provide a general guide to the subject matter. In the event of further information required, please do not hesitate to contact us.
First Audit Services Limited
Published on Saturday 1st August 2015