The Cyprus government has announced a series of new tax incentives to boost economic activity and attract foreign investment. International investors (individuals and corporate groups) can now better enhance corporate substance and improve the tax efficiency of their international operations.
The main amendments of the legislation for Companies and Individuals are summarised below:
Tax legislation amendments for Cyprus Companies
1. Introduction of Notional Interest Deduction (“NID”), subject to conditions, on ‘New Capital’ contributed and paid to Cypriot companies from 2015 onwards to help deleverage Cyprus companies, and boost investment and productivity.
The NID will be calculated based on the ‘New Capital’ and a ‘Reference Interest Rate’. The Reference Interest Rate will be based on the 10 year government bond yield of the Country in which the new equity is invested in, plus 3% (a minimum rate applies).
The New Capital will be equity, contributed and paid in the company on or after 1 January 2015, in the form of issued share capital and share premium (subject to conditions).
The NID granted in any tax year cannot exceed 80% of the taxable income of the company in that year. If the tax computation results in tax losses then the NID is restricted, and cannot create taxable losses to be carried forward.
The legislation includes specific anti abuse provisions and is effective 1 January 2015.
2. Foreign Exchange gains or losses will no longer affect the tax computation irrespective of the assets / liabilities creating these FX results or whether these are realised / unrealised. Simply put, any FX gains will not be taxable and any FX losses will not be deductible.
An exemption from this rule applies for companies specifically trading in FX Currencies, FX currency options and relevant derivatives.
This is a significant simplification to the current tax methodology regarding FX treatment, which is effective 1 January 2015.
3. The unconditional exemption of dividend income from Income Tax in Cyprus is amended to bring the legislation in line with the corresponding amendments to the EU Parent Subsidiary Directive.
Whereas previously any dividend earned by Cypriot company was unconditionally exempt from Income Tax, this exemption will not apply for tax years 2016 onwards for dividend income which is allowed as a tax deduction at the level of the foreign paying entity. The restriction of this exemption will also apply in the case that an arrangement has been put in place to take advantage of this exemption without real economic substance.
The dividend income which falls within the above criteria and hence does not enjoy the Income Tax exemption will be treated as trading income and will be subject to 12.5% Income Tax in Cyprus. It will not be subject to Special Defence Contribution.
4. The scope of application of the Group Relief loss provisions has now been amended to allow for surrendering of losses by EU member state companies to its Cyprus Group companies, subject to conditions. This amendment to the legislation brings it in line with the court decisions of the ECJ on this matter. This is effective as of 1 January 2015.
Tax legislation amendments for Individuals
1. The personal tax exemption for high earners which is already available (since 1 January 2012) is now been granted for 10 years instead of 5 years.
Individuals taking up tax residency in Cyprus and earning over €100,000 per year employment income, enjoy 50% exemption from personal income tax. Certain conditions apply to be eligible for this exemption.
This amendment to the legislation is expected to encourage the relocation to Cyprus of decision makers and top management to enhance business substance of Cyprus operations.
2. Payment of Special Contribution for Defence on Income for non-domiciled individuals is abolished.
Defence tax is payable on dividends, interest and rental income. Individuals who are considered to be “non-domiciled” in Cyprus (subject to criteria defined in the legislation), would be exempt from payment of defence tax on dividends, interest and rental income, even if they are tax residents of Cyprus. Numerous anti-abuse provisions are also included in the legislation to eliminate cases of tax avoidance.
The rules regarding non-domiciled individuals are effective starting July 2015, and are expected to encourage the relocation to Cyprus of high net-worth individuals.
Other General Tax Amendments
1. Expansion of the definition of ‘Republic of Cyprus’ in the Income Tax legislation to include all activities carried out within the Exclusive Economic Zone (“EEZ”) of Cyprus.
2. Accelerated Annual Capital Allowances for fixed asset expenditure which have already been in place for tax years 2012-2014, are now extended to years 2015 and 2016.
3. Anti-avoidance provisions for postponement of deemed dividend distribution arising from artificial structures (arrangements with no real trading or economic substance).
4. Local authorities will no longer be exempted from taxability of rental income, as it creates an unfair advantage against other entities which are operating in the same industry.
Many of these tax changes offer the right opportunity for correct and efficient tax planning.