Amendments to the Income Tax Law
On 9th of July 2015, the House of Representatives voted into law certain amendments to the income tax law which modernize the Cyprus tax system, improves its competitiveness in attracting foreign investments and business relocating in Cyprus together with their senior management as well as give intentions to high net worth individuals to live in Cyprus permanently.
Deemed (Notional) Interest Deduction
Companies financed through capital (share capital and share premium, known as qualifying equity) will be entitled to deduct from their taxable profits deemed interest which is calculated on the qualifying equity provided that this equity was issued and settled on or after 1 January 2015.
The applicable rate to be imposed on the qualifying equity will be the 10 year government bond rate, as at the end of the year preceding the relevant fiscal year, of the country in which the qualifying equity is invested increased by 3%. The applicable rate is the minimum of 10 year Cyprus Government bond rate increased by 3%.
This deemed interest is deducted from the taxable profits of the Cyprus Company using the same rules as the actual interest expense and cannot exceed 80% of the taxable profits of the Cyprus Company each fiscal year. Same rules imply that the deductibility of the interest depends on the way the qualifying equity is invested.
Extension on the exemption from first employment in Cyprus
Foreign individuals not being Cyprus tax residents before their employment by a Cyprus Company are entitled to tax exemptions as per the two plans below:
a) 20% of their employment income or Eur 8.550 (lower of) is tax exempted from their employment income for a period of 3 years. This period is now extended to 5 years until the year 2020.
b) 50% of their employment income is tax exempted for a period of 5 years provided that the individuals earn more than Eur 100.000 per year. This period is extended to 10 years.
The foreign individuals becoming after their employment Cyprus tax residents can claim only one of the two plans.
Non Domicile Concept
The concept of “non-domicile” rules for individuals is for the first time introduced in the Cyprus tax system. Individuals not domiciled in Cyprus will be exempt from Special Defence Contribution (SDC). This covers also the case in which the non domicile individual is a Cyprus tax resident i.e. he/she stays in Cyprus more than 183 days and thus he/she is a Cyprus tax resident.
Prior this change, all Cyprus tax residents were subject to SDC on the rental income, dividends income and interest income. As per this amendment in the law, non domicile individuals exempt from SDC.
Domicile individual is considered to be the individual who spent in Cyprus 17 out of the last 20 years as a tax resident of Cyprus.
Land Registry Fees
Immovable properties to be transferred until 31 December 2016 will be subject to 50% reduction on the land transfer fees.
Furthermore, there will be no land transfer fees on transfers of immovable properties from the parents to children.
Capital Gains Tax
Disposal of Immovable Property which comprise of land and/or land and building situated in Cyprus is not subject to Capital Gains Tax Law provided that the immovable property is acquired from 16th of July 2015 until 31st of December 2016.
The immovable property is acquired through purchase or purchase agreement and not through exchange or donation at market value from a non-related party.
The exemption does not apply for immovable properties acquired under foreclosure procedures.
Amendments to the Parent – Subsidiary Directive
The EU Parent – Subsidiary directive (EU PSD) provides for elimination of withholding tax on the payment of dividends from a Member State of the EU to another Member State provided that at least 10% of the share capital of the dividends paying Company is owned by a Company in other Member State.
In addition, the EU PSD provides for no imposition of tax in the Member State of the Company receiving the dividends or, if the Member State taxes the dividends to allow credit relief on the underlying tax suffered by the paying dividends Company (including lower tier companies).
The amendments in EU PSD relate to the following two cases:
1. Artificial arrangements carried out exclusively with the purpose of tax benefit are ignored. An example is to include a Company between the paying dividends company and the receiving dividends company for avoidance of withholding tax.
Company in MS (A) pays dividends to its Parent Company outside EU (B). No DTT exists between A and B and withholding tax is imposed in A (based on the domestic tax rules). A Company in MS (C) is introduced between them and the domestic tax law in C provides for no withholding tax rate on dividends. This means that under the EU PSD no withholding tax will be imposed in A upon payment of dividends to C and C will impose no withholding tax upon payment of dividends to B (outside EU).
This will be considered as artificial arrangement with the purpose of tax benefit and thus MS (A) is allowed to deny the benefit of the PSD.
2. Dividends payment were in certain cases treated as tax deductible in the hands of the paying dividends company due to classification of the instrument as hybrid one (i.e. preference share capital). The amendment on this case is to treat the dividends income in the hands of the parent company as taxable event since the payment was treated as tax deductible in the hands of the paying company. This amendment is expected to be taken into effect in Cyprus as from 1 January 2016. In such a case, the dividends income will be subject to corporation tax at the rate of 12,5% instead of Special Defence Contribution.
Antonis Chrysanthou FCCA
Olesya Chrysanthou ACCA