Cyprus: Cyprus Tax Alert – Amendments to the Income Tax and Special Contribution for the Defense Laws

Last Updated: 19 August 2012
Article by Charles Savva

On 24 May 2012, the House of Representatives of Cyprus approved a number of important amending laws in relation to the intellectual property regime, interest expense deductibility, group loss relief, and deemed distribution of dividends. It should be noted these changes have retrospective effect from 1 January 2012.

These long awaited amendments will create significant opportunities for Cyprus to become an even more attractive intellectual property holding jurisdiction, and overall are expected to change the EU Intellectual Property landscape.

A summary of the relevant amendments follows below:

Income Tax Law

Intellectual property rights

  • The meaning of patent rights and intellectual property (IP) rights has been amended to correspond with the definition in the Patent Rights Law of 1998, the Intellectual Property Law of 1976 and the Law regarding Trademarks. The definition of IP now includes all intangible assets, including copyrights, patents and trademarks, and thus ensures that all types of IPs will be covered by the new regime.
  • Expenses for the acquisition and/or development of intangible assets is amortised in equal instalments over a five year period. The new law provides for an 80% exemption on the net profit from the exploitation of such intangibles, similar to the provisions existing within Luxembourg tax law.
  • Net profit is calculated after deducting from the licensing revenue derived from the intangibles all direct expenses associated with the production of the income.
  • The rate of capital allowances on such intangibles has been set at 20% of the cost of acquisition, with a full year's allowance allowable in the year of acquisition. 
  • Any profit arising from the disposal of such intangibles will also benefit from the 80% exemption. As a result, an effective rate of only 2% can be achieved upon realising a profit on disposal of IP.

Interest deductibility

  • No interest expense restriction will apply in cases where financing is obtained to acquire shares (whether directly of indirectly) in a wholly owned subsidiary provided that this subsidiary does not own any assets which are not used in the business,  irrespective of the tax residency status of the subsidiary company.
  • If the subsidiary does own assets that are not used in the business, the restriction of interest will only correspond to the percentage of assets not used in the business.

Capital Allowances

  • The rate of capital allowances for any plant and machinery (excluding private saloon cars) purchased in the tax years 2012, 2013 and 2014 has been set at 20% (previously 10%), unless the rate of capital allowances on such assets is higher.
  • For industrial and hotel buildings purchased in the tax years 2012, 2013 and 2014, the capital allowances rate has been set at 7% (previously 4%).

Group relief

  • Previously the group relief rules applied only to companies being members of a group for the whole of a tax year. 
  • With the amended legislation, in cases where a company has been incorporated by its parent company during the tax year, this company will be deemed to be a member of this group for group relief purposes for that tax year.

Provident Funds

  • For the purposes of the Income Tax Law, approved Provident Funds and Pension Funds are those which have been approved by the Commissioner of Income Tax.

Special Contribution for the Defense Law

  • In calculating the profits subject to deemed distribution under the SCD Law, a deduction will be given for the acquisition of any plant and machinery purchased in tax years 2012, 2013 and 2014.
  • The definition of plant and machinery is the same as that in the Income Tax Law and it excludes any saloon cars purchased for private use.
  • This provision will apply for profits earned in the tax years 2012, 2013 and 2014.

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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Authors
Charles Savva
 
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