AMENDMENTS TO THE TAX FRAMEWORK
As part of a reform of the tax framework of the Republic of Cyprus, certain of the proposed amendments were voted into law by the House of Representatives and were published in the Cyprus Government Gazette on the 16th July, 2015.
The amendments were introduced in order to enhance the competitiveness of Cyprus as a jurisdiction for investments as well as to encourage high net worth individuals to invest in Cyprus.
In brief, the amendments already voted into law are as below:
Notional Interest Deduction on Qualifying Equity
Law 116(I)/2015 amending the Income Tax Laws of 2002 to (No.4) 2004
By the introduction of the Notional Interest Deduction (NID), companies that obtain new capital/equity may claim a notional tax deduction on the new capital for up to 80% of the company’s taxable profits.
The NID will be calculated as the multiple of the new capital/equity and the “reference interest rate”.
The “reference interest rate” is defined as the 10 year government bond yield of the country in which the new equity is invested increased by 3% with lower limit the 10 year government bond yield of the Republic of Cyprus increased by 3%. The rate used will be the rate as at 31 December of the previous tax year.
The NID can be set against any income generated by the company during the specific tax year.
New equity is defined as any equity introduced in the business on or after the 1st January 2015 and may be in the form of issued share capital and share premium, fully paid in cash or assets in kind. However, the amount of the new equity may not exceed the substantiated market value of the asset.
New equity does not include any amounts that have emanated from a revaluation of assets.
It is not obligatory for the company to claim part or all of the NID deduction available in a tax year.
In order to combat possible abuse of the NID, several anti-abuse provisions will be implemented.
The NID is applicable for Cyprus tax resident companies and permanent establishments in Cyprus of non tax resident companies.
Introduction of the “Domicile” status and exemption from Special Defence Contribution
Law 119(I)/2015 amending the Special Defence Contribution Laws of 2002 to 2013
As previously, the earned income (whether generating from Cyprus or abroad) of a Cyprus tax resident in the form of dividends or interest received, was subject to Special Defence Contribution (“SDC”) at the rate of 17% on dividend income and 30% on interest earned.
With this amendment, the income of individuals who are not of Domicile status in the form of dividends, interest received and rental income, is exempt from SDC, regardless of whether the income was generated in Cyprus or abroad.
For the purposes of the SDC Laws, an individual is considered to have Domicile in the Republic of Cyprus if they have a Domicile of Origin as per the provisions of the Wills and Succession Law, i.e. domicile of the father at the time of birth, but does not include:
(i) an individual who has acquired and maintains a Domicile of Choice outside Cyprus as per the provisions of the Wills and Succession Law, provided that they were not a tax resident of Cyprus for a period of at least 20 consecutive years prior to the tax year in question; or
(ii) an individual who has not been a Cyprus tax resident for a period of at least 20 consecutive years prior to the date of the Law becoming effective.
Furthermore, individuals who are tax resident as defined by the Income Tax Law for a period of at least 17 years out of the last 20 years prior to the year in question, are considered to have Domicile in the Republic of Cyprus regardless of point (i) above and will be thus subject to the relevant taxation if and when this condition is met.
In conclusion, individuals who are not considered to have Domicile in Cyprus will be exempt from SDC payments on dividends, interest and rental income, even if they are considered tax residents of the Republic of Cyprus.
Exception from Capital Gains Tax on future sales of immovable property acquired until the 31st December 2016
Law 117(I)/2015 amending the Capital Gains Tax Laws of 2002 to 2015
As per the amendment to the Capital Gains Tax Laws, any income gains generated by the disposal of immovable property consisting of land or land and buildings will be exempt from Capital Gains Tax, provided that:
(i) the immovable property is acquired from the date the amendment becomes in force until the 31st of December 2016; and
(ii) the immovable property is acquired by purchase or purchase agreement at market value from an unrelated party and not through exchange or donation.
It should be noted that it is expected that further positive amendments will be discussed and voted into law by the House of Representatives of the Republic of Cyprus in September. The amendments to be discussed will concern foreign exchange (forex) differences, losses carried forward on intellectual property income, extension of exemptions from personal tax on individuals who relocate to Cyprus for work purposes, increase of annual allowances for capital expenditure (plant and machinery and industrial buildings) and group relief for losses.