Significant Tax Law Amendments

Summary of Tax Law amendments is stated below:

1. Introduction of a Notional Interest deduction (NID) regime on new equity

Companies (including permanent establishments of foreign companies) will be entitled to a NID on equity.

Companies that attract or introduce new equity/capital would be able to claim a NID of up to 80% of their taxable income, reducing their overall effective tax rate to as low as 2,5%.

The NID would be calculated as follows: NID = qualifying equity x reference rate. Qualifying equity will include share capital and share premium issued (provided it is fully paid) on or after 1st January 2015. New equity does not include amounts that have been capitalised as equity and which are the result of a revaluation of movable or immovable property.

Reference interest rate means the interest rate on the 10-year government bond rate (as at the end of the year preceding the relevant tax year) of the country in which the qualifying equity is invested in, increased by 3%, subject to a minimum rate equal to the 10-year Cyprus Government bond rate increased by 3%.

The notional interest would be deductible according to the same rules as actual interest expense, i.e. the degree of tax deductibility would depend on the way the new equity/capital will be utilised. In the event of losses, the NID will not be available. Consequently, this means that the NID cannot create or increase a tax loss. Taxpayers can elect not to claim the NID or claim part of it for each year.

The law includes a number of anti-abuse provisions. Where the capital originates directly or indirectly from loans obtained by another Cyprus company that has itself received a tax deduction for interest expense, then the NID will be reduced by that same amount. Similarly, where new capital originates either directly or indirectly from new capital introduced to another Cyprus company, only one company will be entitled to the NID.

The NID provides a significant tax incentive for existing companies to re-capitalise their operations. Furthermore, it aims to attract new companies to set up their operations in Cyprus and benefit from this tax incentive.

The NID regime is effective as of 1st January 2015.

2. Introduction of “domicile” concept / Non-dom rules for individuals

The Special Contribution for the Defence of the Republic Law (SDC) imposes tax on certain categories of income (interest, rents, dividends) received by persons who are considered to be residents for tax purposes of Cyprus, subject to any available exemptions. The SDC Law also includes provisions for the deemed distribution of profits of Cypriot tax resident companies to the extent that the shareholders of such companies are Cypriot tax residents.

With the introduction of the concept “domicile in the Republic” in the SDC Law, non-domiciled individuals will be exempt from Special Defence Contribution on their dividend, interest and rental income, even if they spend more than 183 days in Cyprus (Cyprus tax residents). Therefore, non-domiciled (or “non-dom”) Cyprus tax resident individuals will be exempt from both income tax and SDC on dividend income and interest income. This amendment aims to attract high net worth individuals to reside in Cyprus.

The law includes anti-abuse provisions as per which the tax authorities have the right to disregard the transfer of property made by a person who is domiciled in Cyprus to a relative up to a third degree of kindred who is not domiciled in Cyprus in case such transfer was made with the aim to avoid the imposition of SDC as a result of the introduction of “non-domicile” rules. The non-domicile rules are expected to further encourage the relocation of corporate executives and encourage high-net-worth individuals to take up residency in Cyprus.

The non-domicile rules are effective as of the date of publication in the Official Gazette of the Republic (17th July 2015).

3. Capital Gains Tax exemption on property acquired up to 31 December 2016

The Capital Gains Tax (CGT) Law has been amended as follows: any property acquired during the period between the date the new Law comes into effect (17th July 2015) and 31 December 2016, will be exempted from capital gains tax from a subsequent disposal, provided that:

  • The property consists of buildings
  • It is acquired from an independent third party
  • It is not acquired through an exchange of property or through donation/gift.

In addition, the amendment of the Law does not include any property that will be acquired as a result of sale of property in settlement of a debt.

4. Land Transfer Fees

The transfer fees are reduced to 50% for any purchase of property effected between the amendment date of the Law and 31 December 2016.

 

Cyprus Tax Law Amended to Allow for Exchange of Information under Tax Treaties

Cyprus amended its domestic tax legislation to incorporate the exchange of information provisions in Article 26 of the OECD Model Tax Treaty and as found in Cyprus tax treaties. These changes should allow Cyprus to bolster its reputation and respectability particularly with respect to being a jurisdiction that fulfils its information sharing obligations and cooperates with other jurisdictions in tackling tax evasion.

The amended legislation allows for the waiver of other legislative secrecy provisions, including that of bank and professional secrecy laws which include provisions for the maintenance of client confidentiality and data protection. However, the right to legal professional privilege is maintained and any information that provided during communications between a professional legal advisor and his/her client may not be disclosed to third parties.

The disclosure of information in the capacity of trustee or nominee of a non-resident person is not covered by this exception. Subject to legal privilege, lawyers as well as accountants will have a duty to disclose when required to do so for the purposes of exchange of information. Please note that the exchange of this information will be in very rare circumstances and it may involve only very substantial investments. The time and effort required makes it worthless to go through the whole process for anything less than very substantial investments. The time and effort required is too much as evidenced by the key provisions below before information can be exchanged.

The key provisions of the new rules include the following:

December 2015 Amendments

The second set of amendments in the provisions of the Cyprus tax legislation aim towards further improving the competitiveness of the tax system of Cyprus.

The second set of draft Bills submitted to the Cyprus Parliament were voted into law on 16 December 2015 and is in addition to the amendments already voted into law in July 2015.

These changes relate to the income tax legislation and the capital gains tax legislation and are summarised below.

 

Corporate Income Tax Law

 

1. Related party transactions - Introduction of deemed expense

As from 1st January 2015 onwards, if an adjustment in the income of one party has been made in accordance with the arm’s length provisions of Section 33 of the Cyprus income tax legislation, then a corresponding deduction/expense should be given to the other party of the transaction. Thus, if for example a deemed interest income is imposed on an interest free loan provided by one Cyprus company to another, then a corresponding deemed interest expense should be given to the Cyprus company receiving the respective loan.

2. Foreign exchange differences

Foreign exchange differences, both gains and losses irrespective of whether they are realised or unrealised, will be completely tax neutralised (i.e. not taxable/deductible) as of January 1, 2015 onwards. The only exception relates to companies trading in foreign currencies and related products, whereby such companies may elect not to be taxed on unrealised gains/losses but only be taxed when such foreign exchange differences realise.

The new provisions will apply as of 1st January 2015.

This is a significant development since it simplifies the tax treatment of FX differences. A Company (not dealing in FX trading) would be in a position to estimate its taxable profit more accurately, without any influence from FX fluctuations.

3. Anti-avoidance provisions for dividend income

Under the current provisions, dividends are exempt from income tax but may be subject to taxation under special contribution for defence tax.

However, as from 1st January 2016 onwards, and in order to comply with the requirements of the EU Parent-Subsidiary Directive (PSD), dividends will only be exempt from income tax to the extent these are not tax deductible by the paying company.

More specifically, if the dividends received by a Cypriot company from a foreign tax resident company are not considered as dividends by the latter but instead are treated as tax deductible expenses (i.e. ‘hybrid instruments’), then the dividends will be taxable under the Cyprus Income Tax Law as normal business income and will be exempt from Special Contribution for Defence.

In addition, the provisions of the EU Parent-Subsidiary Directive have been amended so that it does not apply in cases that there is an artificial arrangement having as a main purpose to obtain a tax advantage. The Cyprus income tax law has been amended to incorporate this change in its provisions.

4. IP Losses

Under the IP regime, only 20% of the net profit from the exploitation/disposal of qualifying intangibles is taxable. The net profit is calculated after deducting from the license income/gains from disposal, all direct expenses related to the production of this income.

Given that only 20% of IP related profits are taxable under the current IP regime, losses allowed will be limited to 20% of the “eligible” losses of a Company (or a PE).

 

These losses will be eligible to be surrendered (via group relief) and/or carried forward to subsequent year(s).

The new provision will be deemed to apply as of 1st January 2012.

It is also clarified that the notional deduction afforded in accordance with the newly introduced rules on Notional Interest Deduction (NID), which corresponds to qualifying IPs will be treated as a direct expense in the determination of the taxable profit from the IP.

5. Group Relief

Previously group loss relief was available only for losses incurred by Cyprus tax resident companies. In order to align the loss relief provisions with the decision of the European Court of Justice (ECJ) in the Marks & Spencer case, the law has been amended so that a subsidiary company which is tax resident in another EU member state can surrender its taxable losses to another group member company tax resident in Cyprus, provided the subsidiary has exhausted all means of surrendering or carrying forward the losses in its member state of residence or to any intermediate holding company.

The amount of taxable losses must be calculated on the basis of the Cyprus tax laws.

In order to determine whether two companies are members of a group the law has also been amended to allow the interposition of holding companies established in another EU member state, in a state with which Cyprus has concluded a double tax treaty or in a state which has signed the OECD multilateral convention for exchange of information.

The introduction of these amendments aligns the Cyprus tax laws with recent ECJ decisions and enhance even further the group relief provisions of the ITL.

The new provisions will apply as of 1st January 2015.

6. Anti-avoidance provisions for reorganisations

Corporate reorganisations are exempt from all forms of tax in Cyprus.

The Income Tax Law has now been amended by adding a new article 29A, allowing the Tax Authorities to withhold the exemption if they have sufficient reason to conclude that the reorganisation is not based on valid commercial or financial considerations and that the main purpose or one of the main purposes of the reorganisation is the reduction, avoidance or deferment of payment of taxes. Any such decision is open to objection and appeal in accordance with the provisions of articles 20 and 20A of the Assessment and Collection of Taxes Law.

The Tax Authorities will also have the right to impose conditions in relation to:

  • the number of shares which can be issued as part of any reorganisation; and
  • the minimum period for which such shares should be held, which cannot exceed three years.

These restrictions do not apply in the case of publicly listed companies and transfers of shares on death.

The new provisions will apply as of 1st January 2016.