Recent Amendments To The Cyprus Tax Legislation

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:

1. INCOME TAX

A. Notional Interest Deduction (NID) on new funds entering the business:

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 10 year government bond yield of the country in which the new equity is invested increased by 3% or
  • the 10 year government bond yield of the Republic of Cyprus increased by 3%.

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:

  • As with actual interest expenses, the deductibility of the deemed interest will be tax deductible only if it is used for financing new assets used in the business.
  • If the taxpayer’s new equity is derived from the new equity of another tax payer then the NID allowance is granted only once.
  • The NID granted cannot exceed the 80% of the Company’s Taxable Profits before the deduction of the NID expense, during that specific year.
  • The NID cannot create or increase tax loss
  • The NID cannot be carried forward against future profits
  • The NID may be restricted in case that the new equity is a result of a qualified re-organisation
  • The NID may be restricted by the Tax Commissioner where special arrangements have been done by the organisation with no economic or commercial reason with aim to benefit from the NID. Such arrangement may include for example old equity reintroduced into the Company as New Equity under related party transactions.

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.

B. Widow’s Pension:

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.

 

2. SPECIAL CONTRIBUTION FOR DEFENCE

A. Introduction of “Domicile” Concept:

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:

  • a person who has domicile of origin in Cyprus, based on the provisions of the Wills and Succession Law, but has acquired and retains choice residence (domicile of choice) in a country other than Cyprus, provided that it was not tax resident in Cyprus for any period of at least 20 consecutive years prior to the relevant tax year in which he/she is a tax resident in Cyprus (and thus he would normally be subject to special defence contribution).
  • a person who has domicile of origin in Cyprus and which It has retained, but it was not tax resident in Cyprus, in accordance with the provisions of the Wills and Succession Law, for at least 20 consecutive years prior to the entry into force of this law.

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.

B. Payment of Dividends under multiple tiers:

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.

 

3. CAPITAL GAINS TAX LAW

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.

 

4. DEPARTMENT OF LANDS AND SURVEYS (LEVY AND DUTIES) LAW

A 50% exemption from transfer fees under the Land and Surveys (Fees) Law will apply to ALL transfer applications provided that:

  • the transfer is effected until 31/12/2016, regardless of the date of entering into the contract or deposit of the contract in the Land Registry
  • the contract concluded and deposited in the Land between the period from 2nd December 2011 to 31st December 2016, regardless of the date of the transfer.

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

 
 
 
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