Aiming at the expansion of the island’s economic activity and the attraction of foreign investment, the Cypriot government announced in July 2015 a new package of tax incentives, which have made Cyprus’ tax framework more competitive, effective and fair.
The main tax incentives and proposed changes are summarized herein.
Taxation on Cyprus property
Property transfer fees payable at the Land Registry upon transfer of a title deed in the name of the purchaser have been reduced by 50%. The current rates of transfer fees are 3% on the first EUR85,000 of the purchase price, 5% on the amount between EUR85,001 – EUR170,000 and 8% on any amount over EUR170,000. Likewise, the transfer fees payable on transfers of property from parent to child as well as the fees payable when properties of an equal value are exchanged have been abolished.
The proposed bill has already been approved by the House of Representatives and will apply to all property sales and registrations of leases or subleases that will take place until the 31st of December 2016.
Capital Gains Tax
As a general rule capital gains tax is imposed on the net profit generated from the disposal of immovable property situated in Cyprus, or shares in companies, which have immovable property in Cyprus at the rate of 20%. The new tax incentives package has introduced a full exemption of any future sale of immovable property acquired between the day the law is enacted and the 31st of December 2016 from the capital gains tax, provided that:
- The property has been acquired from an independent third party; and
- The property has not been acquired through an exchange of property or through donation/gift.
Introduction of notional interest deduction regime
As per the amended law, with effect from the 1st of January 2015, corporate entities (including permanent establishments of foreign companies) will be entitled to a Notional Interest Deduction (“NID”) on new equity capital. The NID granted on equity cannot exceed 80% of the taxable profit before its deduction and no notional interest deduction will be available if the tax computation results in tax losses. It is intended by the introduction of NID to effectively remove any distortions and level the playing field between equity and debt finance as well as to help deleverage corporate entities.
Introduction of non-domicile rules for individuals
In accordance with the Special Contribution for the Defense of the Republic Law, any person who was considered to be a resident of Cyprus for tax purposes was previously liable to pay a special contribution for defense tax on rent, dividends and interest. The abovementioned law has now been amended so that a distinction is drawn between tax resident of Cyprus who are domiciled in Cyprus and those who are not. The new “non-dom” rules provide that individuals who are not domiciled in Cyprus, as per the requirements set out in the relevant legislation, would be exempted from payment of the special defense tax on dividends, interest and rental income, despite the fact that they may be Cypriot tax residents. This exemption will apply to income even if derived from sources within Cyprus and regardless of whether such income is used in Cyprus.
Upcoming tax amendments
In addition to the above, the Cypriot government has submitted to the House of Representatives a number of other tax reforms, which have not yet been discussed or been given effect. It is expected from the House of Representatives to discuss and vote on the proposed tax bills in the coming months. Some of the proposed changes to be considered by the House are set out below:
Annual Accelerated Capital Allowances
Annual Accelerated Capital Allowances for fixed asset expenditure which have already been in place for 2012-2014, will be extended to years 2015 and 2016.
Abolition of local property taxes
Immovable property taxes charged by local authorities shall be abolished.
Incorporation of the EU Parent Subsidiary Directive and ECJ decisions
Any dividend earned by a Cypriot resident company was previously not subject to income tax. The new proposed bill provides that, after the 31st of December 2015, this exemption will not apply in cases where the dividend was allowed as a tax deduction at the level of the foreign paying entity or where the arrangement has no real economic substance, i.e. is a sham. put in place to take advantage of this exemption without real economic substance.
In addition to the above, the Income Tax Law shall be amended with retrospective effect from the 1st of January 2015 so as to reflect the ECJ case law on group loss relief, allowing group relief between EU member state companies and other group companies resident in Cyprus.
Tax neutrality of profits and losses resulting from foreign exchange fluctuations
Any forex gains and losses of Cypriot companies will no longer affect the tax computation, since they will neither be taxable or deductible. However, the tax neutrality will not be applicable to any profit or loss resulting from trading in foreign currencies or foreign currency derivatives, which will still be taxable or deductible.
Amendment to the arm’s length principle
Currently, Cyprus law does not include any specific rules regarding transfer pricing, though the Cypriot Income Tax Law does incorporate a codification of the arm’s length principle. It has now been proposed that the relevant arm’s length principle provisions included in the Income Tax Law be amended so that they provide for downward transfer pricing adjustments.
Extending income tax exemption that is already available for high earners
Individuals taking up tax residency in Cyprus, who have over EUR100,000 annual employment income, currently enjoy a 50% exemption from personal income tax for the first 5 years of their employment. The law is expected to be amended so as to extend this exemption period from 5 to 10 years.
All of the above amendments are part of the general endeavor to simplify the Cypriot tax regime and bring it in line with global and EU developments. This serves the Government’s underlying goal to facilitate the return to an economic growth path by creating opportunities both for individual and corporate investors.
For further information, please contact Lorena Charalambous. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought on your specific circumstances.