Cyprus: Amendments To The Cyprus Tax Laws

In July 2015 the Cyprus government submitted a package of amendments to the tax laws to the House of Representatives. The amendments are aimed at encouraging economic activity, attracting inward direct investment and simplifying the tax regime in order to make it more attractive, fair, and effective. Consideration of certain of the proposals was deferred until after the parliamentary recess, but the amendments described below became law on 16 July 2015).

Amendments to the Income Tax Law

Notional interest deduction for new equity capital

In order to level the playing field between debt and equity finance the Income Tax (Amendment) Law introduces a deemed interest deduction ("NID") on new equity capital (paid-up share capital and share premium) introduced after January 1 2015 into companies and permanent establishments of foreign companies in order to finance business assets. The NID will be deductible for the purpose of calculating taxable profit. The reference rate for calculation of the NID is the 10-year government bond yield of the country in which the assets funded by the new equity are utilised plus 3percentage points, or the 10-year Cyprus government bond yield plus 3percentage points, whichever is the higher. The bond yield rates to be used are as at December 31 of the year preceding the year of assessment.

New equity may be contributed in cash or in the form of other assets, in which case the amount of new equity will be the market value of the assets agreed with the tax authorities. No NID is available in respect of capitalisation of reserves, revaluation of assets or for companies benefiting from the reorganisation exemptions included in the tax laws, and NID may be refused if the Tax Department considers that the transaction concerned has no economic or business purpose.

The NID will be limited to 80% of the taxable profit before deducting the NID, and no NID will be allowed in the event of losses. Unutilised NID cannot be carried forward to be offset against future years' profits.

Taxation of widows' pensions

Widows' pensions were exempt from income tax until the end of 2013. From the beginning of 2014 a special basis of taxation applied under which the first €19,500 per year was tax-free and any amount above €19,500 was taxed at 20%.

The amendment to the law gives the taxpayer the option, from the 2014 tax year onwards, to elect on a year-by-year basis whether to be taxed on this special basis or under the general rules.

Amendments to the Special Defence Contribution Law

Up to and including July 15 2015 Cyprus resident individuals and companies were liable to Special Defence Contribution, commonly referred to as SDC tax, on dividends, passive interest and rents received, at the rates of 17% 30% and 3% (applied to 75% of the rent) respectively. Dividends and passive interest (but not rents or active interest) are exempt from personal or corporate income tax.

The Special Defence Contribution (Amendment) Law restricts liability to SDC tax with effect from July 16 2015 to taxpayers who are both resident and domiciled in Cyprus for the year of assessment concerned. Coupled with the income tax exemptions applying to such income, individuals who are resident but not domiciled in Cyprus are exempt from Cyprus tax of all forms on dividends and passive interest, regardless of source.

For the purposes of determining liability to SDC tax an individual has a domicile in Cyprus if he or she has a domicile of origin in Cyprus as defined in the Wills and Succession Law, unless he or she has acquired and maintains a domicile of choice outside Cyprus and was not a tax resident of Cyprus as defined in the Income Tax Law for any period of at least 20 consecutive years prior to the year of assessment, or unless he or she was non-resident for purposes of the Income Tax Law for any of the immediately preceding 20 tax years. In any event, an individual will be deemed to be domiciled in Cyprus if he or she has been a tax resident for 17 or more of the 20 tax years immediately preceding the year of assessment.

The principles of the Wills and Succession Law regarding domicile follow English law. In summary, an individual acquires a domicile of origin at birth. It is generally the same as the domicile of the father at the time of birth, and in exceptional cases that of the mother. A domicile of origin may be replaced by a domicile of choice if in actual fact an individual permanently establishes himself or herself in another country with the intention of living there permanently and dying there.

The amendment includes an anti-avoidance provision restricting its application in cases where domiciled individuals transfer assets to related non-domiciled persons in order to take advantage of the changes. It inserts a new article 3(11) into the Special Defence Contribution Law allowing the tax authorities to disregard transfers of assets from any person domiciled in Cyprus to an individual who is not domiciled in Cyprus, and who is a spouse or relative within the third degree of kindred of the transferor.

SDC tax anti-avoidance

The SDC Amendment Law also introduces a new anti-avoidance measure to deal with a common device used to reduce or postpone the payment of SDC tax. It inserts a new article 3(4) into the Special Defence Contribution Law enabling the tax authorities to disregard the interposition of a company without any real business or economic purpose between an individual and a company making profits, if this has been done with the principal objective of reducing or deferring the payment of SDC tax.

Amendments to the Capital Gains Tax Law

Capital gains tax in Cyprus is charged only on disposals of immovable property situated in Cyprus and of shares in unlisted companies to the extent that their value derives from such property. In order to stimulate the real estate market the Capital Gains Tax (Amendment) (No 2) Law introduces a further exemption for property acquired between 16 July 2015 and 31 December 2016, provided that the property was acquired on an arm's length basis and not under the foreclosure provisions of the Transfer and Mortgage of Immovable Properties Law. Any gain on the disposal of the property will be exempt from capital gains tax, irrespective of the date of disposal.

As an added incentive, the normal transfer fee payable to the Department of Lands and Surveys on acquisition of immovable property will be discounted to 50% of the standard rate until 31 December 2016, provided that it was acquired on an arm's length basis and not under the foreclosure provisions of the Transfer and Mortgage of Immovable Properties Law. Alternatively, if VAT is payable on the purchase of the property, no transfer fee is payable at all, provided that the sale agreement is deposited with the Land Registry by 31 December 2016.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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