Amendments to the Cyprus Tax Legislations
New Laws amending tax legislation passed by the Cyprus Parliament in 2015 (incl. the Income Tax Law, the Special Contribution for Defence Law and the Capital Gains Tax Law)
Special Contribution for Defence Law – N. 117(1)/2002
The Special Contribution for Defence (SDC) is the only tax that a natural person who is a Cyprus Tax Resident must pay on dividends, and it is currently at a rate of 17%. This Law has been amended with the law N. 119(1)/2015, as follows:
- Non Domiciled Individuals – effective from 16/07/2015
A person who qualifies as a Cyprus Tax Resident, according to the number of days spent on the Island, will not be subject to Special Defence Contribution (SDC) on the dividends and interest earned, if they simultaneously qualify as not Domiciled Individuals.
For the purposed of SDC Law individuals have their domicile in Cyprus if they have their domicile of origin in Cyprus according to the Wills and Succession Law.
Exceptions to the above are either:
- an individual who has acquired and maintains a domicile of choice outside Cyprus according to the provisions of the Wills and Succession Law and such individual was not a Cyprus Tax Resident according to the Income Tax Law for any period of at least 20 consecutive years prior to the tax year assessment, or
- an individual who was not a Cyprus Tax Resident according to the provisions of the Income Tax Law, for a period of at least 20 consecutive years immediately before the amending law 119(1)/2015 entered into force.
An individual can be deemed to have their domicile in Cyprus if they are a Cyprus Tax Resident according to the provisions of the Income Tax Law, for a period of at least 17 years out of at least 20 years prior to the tax year assessment.
Income Tax Law – N. 118(1)/2002
Three laws have been passed to amend the Income Tax Law and these are N. 116(1)/20015, N. 187(1)/2015 and N. 212(1)/2015. The key measures are as follows:
(1) Notional Interest Deduction (NID) – effective from 01/01/2015
A company resident in Cyprus or a Company resident abroad but permanently established in the Republic, will be allowed a deemed tax deduction on new capital introduced in Cyprus and this will take the form of deemed interest deduction. This amendment to the Income Tax Law aims to reduce corporate debt and encourage new equity (share capital and share premium) by introducing an annual tax allowable deduction. New equity introduced to a company as from January 1, 2015 in the form of paid-up share capital or share premium is eligible for the annual NID deduction.
New Equity may be contributed in cash or in assets ‘in kind’. In the case of assets in kind the amount of new equity may not exceed the market value of the asset, which must be substantiated.
The NID interest rate is the yield on 10 year government bonds (as at December 31 of the prior tax year) of the country where the funds are employed in the business of the company plus 3% premium. This is subject to a minimum amount which is the yield of the 10 year Cyprus government bond (as at the same date) plus a 3% premium.
In order to tackle possible abuse of the amendment introduces a general anti-avoidance provision for non-commercial transactions. The amendment also contains a number of specific anti-avoidance provisions which may restrict the NID.
- Offshore Activities – effective from 01/01/2016
The Term “Republic” has been amended and reads as follows “includes the territory, the soil, the territorial sea, and any other are besides the territorial sea including the contiguous zone, the exclusive economic zone and the Continental Shelf as these are defined in the Exclusive Economic Zone & Seabed Law and the Territorial Sea Law, and any installation, construction and technical island which lies in the aforementioned zones, during the enforcement of the sovereign rights and the jurisdiction of the Republic”.
With a further amendment, the term “permanent installation” includes all activities pertaining to the exploration and exploitation of the seabed in the Exclusive Economic Zone. (Article 2)
The gross income earned from the exploitation of the soil of the Republic, from a person who is not a Resident of the Republic, and which does not stem from a permanent establishment in the Republic, will be taxed at a rate of 5% (Article 23A).
- Tax Exempt income for local authorities – effective from 01/01/2015
Local Authorities will no longer enjoy exemption on income earned by renting immovable property. (Article 8(15)).
- Implementation of the EU Directive 2015/121 on the common tax regime of parent and subsidiary companies in different member states.
A Company resident in the Republic or a Company resident abroad but with a permanent establishment in the Republic will not receive the tax exemption for dividends received from a Company abroad, when the purpose of the dividend is to adjust the payable income tax of the paying Company. (Article 8(20)).
- Exemption of income from first employment in Cyprus
Individuals, who find employment in Cyprus and become tax residents, will be entitled to an exemption of 20% of their annual income earned from their employment in Cyprus, for the first five years of residence. This exception will be available until the year 2020. (Article 8(21)).
Individuals, who find employment in Cyprus and were not Cyprus residents immediately before the commencement of employment, enjoy a tax exemption equal of 50% of their income earned by their employment in the Republic. Article 8(23) contains the limitations to this exemption.
- Currency exchange rate fluctuations – effective from 01/01/2015
Profits arising from currency exchange rate fluctuations (but not profits from foreign exchange trading) will be exempt from the income tax. (Article 8(24)).
- Intellectual Property – applies retrospectively from 01/01/2012
In Cyprus expenses for acquiring or developing Intellectual Property by a person who is carrying out a business, are not calculated for income tax purposes.
With the recent amendments, when a loss arises from acquiring or developing intellectual property, only 20% of the loss will be offset against income from other sources or carried forward to be offset against income of subsequent tax years. (Article 9(1)(e)).
- Machinery writing down
The tax allowance of writing down plants and machinery is at the rate of 20% and of new industrial and hotel buildings at the rate of 7%. These increased allowances are extended until 31 of December 2016. (Article 10(2)).
- Group Loss Relief
This amendment allows a Company not tax resident in the Republic to surrender or carry forward losses to another Company of the same Group, resident in the Republic. The amount of taxable losses will be calculated according Cyprus Tax Law. (Articles 13(4) & 13(8)).
The Tax Authorities have the power not to allow the exemption of tax on profits earned after a reorganisation, if they are satisfied that the reorganisation (a) does not have an actual financial or commercial purpose and (b) has been carried out for the purpose of avoiding the payment of tax. (Article 29A)
- Related Party Transaction
If the tax authorities are satisfied that a related party transaction has been carried out on terms more favourable than a transaction between unrelated businesses, then they are allowed to impose additional taxes to one party under certain circumstances. (Article 33(5)).
The term restructuring has been added and means “the disposition and transfer of immovable property by virtue of a Contract for Sale which is deposited at the Land Registry Office between a borrower and a lender, for the purpose of alleviating the burden of debt, which is carried out until 31/12/2017”.
Profits arising out of a restructuring will be exempt from the taxable income.
Land Transfer Fees
Land transfer fees on all immovable properties purchased will be reduced by 50% until 31 December 2016;
Capital Gains Tax Law – 52/1980
In 2015 four legislative pieces have been passed to amend the Capital Gains Tax Law, and these are 59(1)/2015, 117(1)/2015, 189(1)/2015 and 213(1)/2015. The main provisions of these laws are discussed below.
The provisions relating to restructuring have been amended as to match the provisions of the Income Tax Law on restructuring and encourage the restructuring of non-performing loans.
- Exemption for properties bought after the passing of these laws
Any properties purchased after the new legislation is put in force, and before 31.12.2016, will be exempt from any future capital gains tax (Article 5A).
- Sale of shares of companies who own immovable property in Cyprus
Profits from the sale of shares in Companies that own immovable property in Cyprus indirectly (by owning the shares of a company owning immovable property in Cyprus), will be taxed according to the Capital Gains Tax Law, when the value of the immovable property represents 50% or more of the value of the assets of the company whose shares are sold.
- Trading gains
Trading gains from the sale of shares of companies that own immovable property are subject to capital gains tax
- Related Party Transactions
Tax Authorities have the right to substitute the contract price with the market value of the property in transactions between related parties, if they are satisfied that the contract price is less than the market value.
Limassol January 2016
Note of the Author: The above does not constitute a legal advice. Please contact one of our associates at 25107587 or [email protected] for further information and a one to one appointment and an opinion tailored to your needs.