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Cyprus Property News
18/08/2015 - Amendments to the Tax Law in Cyprus
Amendments to the Tax Law in Cyprus
In an effort to improve the tax system of Cyprus and make it more attractive to both the local and international business community, the Government of Cyprus proposed a major tax reform. Most of the bills relating to this tax reform were voted to laws by the House of Representatives in July, while additional changes will be reviewed by the House of Representatives in September 2015.
The most significant changes are summarized below.
A. Income Tax Law
Notional interest deduction (NID) on equity
It is now possible to get a notional interest deduction on funds introduced into a Cyprus tax resident company in the form of shareholders equity, “new equity”, which funds are used for the operations of the company. “New equity” is defined as share capital and share premium to the extent that it has actually been paid in cash or in kind (for the latter at market value), introduced into the business after 1 January 2015. It does not include revaluation or any other reserves converted into share capital.
The notional interest will be calculated at a rate equal to the effective interest earned on the 10 year government bonds of the country where the funds are invested, plus 3%, with the minimum rate considered being the effective interest earned on 10 year bonds issued by the Republic of Cyprus, plus 3%.
In addition, a number of anti-avoidance provisions are included in the legislation, including a provision where, as with actual interest expense, the deductibility of the notional interest will be tax deductible only if it is used for financing assets used in the business. Another such provision is that the deemed interest is capped at 80% of the taxable income of the company during the year before the deduction of the notional interest expense.
The new provisions seem promising as they allow Cyprus tax resident companies to fund their operations from their own capital and obtain a tax deduction, which depending on the level of capitalization, reduces the effective tax to as low as 2.5%.
B. Special Contribution for Defense (SCD)
Introduction of the “Domicile” rules
Under the new law, SCD is payable only by Cyprus tax residents, which, in the case of individuals, means persons who spend at least 183 days during the calendar year in Cyprus: 17% is charged on dividends, 30% on interest and 3% on rental income. So, with the introduction of the new rules, individuals who are Cyprus tax residents but are not considered to be “domiciled” in Cyprus will be effectively exempt from payment of SCD in Cyprus, irrespective of where the income is generated or remitted.
An individual can be considered as domiciled in Cyprus either by domicile of origin or by domicile of choice, as defined by the Wills and Succession Law of Cyprus. An individual who has a domicile of origin in Cyprus can still be considered not to be “domiciled” in Cyprus for this purpose in the following cases:
If the individual obtained and maintained a domicile of choice outside Cyprus in accordance with the Wills and Succession Law, provided that such an individual has not been a Cyprus tax resident for a period of 20 consecutive years preceding the tax year under examination;
If the individual was not a Cyprus tax resident for a period of at least 20 consecutive years prior to the introduction of the law.
Irrespective of the above, an individual who has been a Cyprus tax resident for at least 17 years out of the last 20 years before the year of assessment, will be considered to be “domiciled” in Cyprus and will be subject to SCD, regardless of his/her domicile of origin.
Nevertheless, the introduction of the “domicile” rule for SCD allows Cyprus tax resident individuals who are not domiciled in Cyprus to enjoy dividend, interest and rental income and be exempt from SDC, making the holding of investments in such assets by non-Cyprus domiciled individuals even more appealing.
C. SCD Treatment on Dividends
The new rule gives the Tax Commissioner the power and discretion to treat the dividend as if paid directly to the Cyprus tax resident and domiciled individual(s) who control the company, in the case where dividends are paid to a company beneficially owned indirectly by Cyprus 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.
This is clearly an anti-avoidance measure introduced to safe-guard against abuse of the deemed distribution provisions by Cyprus resident and domiciled individuals.
D. Capital Gains Tax
(a) Capital gains from sale of shares in property companies
Currently, Capital Gains Tax is charged on disposal of immovable property located in Cyprus or on disposal of shares of companies, which own immovable property located in Cyprus.
Under the new law, gains from the sale of shares in companies which indirectly own immovable property in Cyprus will also be subject to capital gains tax. This will apply only in case the value of the immovable property represents more than 50% of the value of the company whose shares are sold.
(b) Exemption from Capital Gains Tax related to immovable property acquired until 31 December 2016
The new law provides that any gains on disposal of property in Cyprus acquired from the date the amending law comes into force and up until the 31st of December 2016, will be completely exempt from Capital Gains Tax.
Further to this, with regards to transfers of immovable property to be effected until 31st of December 2016, the transfer fees paid to the Lands Registry will be reduced by 50%.
E. Other amendments in the pipeline...
1. Foreign Exchange Differences
Any foreign exchange gains or losses, irrespective of whether they are realized or unrealized, and of the purpose for which the funds in a foreign currency have been used for, will be exempt from taxation, but not for companies trading in currencies and related products. Such companies will be able to irrevocably elect to be taxed on a realized basis and that any unrealized foreign exchange difference will be taxed when they become realized.
2. Extending available exemptions to individuals taking tax residency in Cyprus
Currently, non- Cyprus tax resident individuals who are taking residency in Cyprus for work purposes, are entitled to exempt either 20% of the income from employment in Cyprus for a period of three years to a maximum amount of €8.550 per annum, or 50% of the income from employment in Cyprus for a period of five years provided that the income from employment in Cyprus exceeds the amount of €100.000 per annum.
The new law extends the period of the first exemption (20%) from three to five years and this exemption is valid until 2020. The second exemption (50%) is extended from five to ten years.
3. Increase of annual allowances for capital expenditure
Under the existing provisions of the law, increased annual allowances are granted for new assets acquired in the years 2012, 2013 and 2014 if they relate to plant, machinery, industrial buildings and hotels. The amended law will continue to offer increased capital allowances for the years 2015 and 2016 with the following rates: the rates for plant and machinery will be 20% instead of 10% and for industrial buildings and hotels will be 7% instead of 4%.
4. Group loss relief
Under the current provisions of the law, group loss relief can only be claimed by Cyprus tax resident companies. This means that both the surrendering and the claimant company must be Cyprus tax residents during the year in which the claim is made.
The new law will allow a Cyprus company to utilize the losses of a company in the same group provided that this company is resident in an EU member state and provided that the surrendering EU Company has exhausted all means of surrendering its tax losses in its own member state.