As part of the overall plan to improve Cyprus' attractiveness as an international business center and to attract foreign investment, the House of Representatives on 16 July 2015 passed a number of new laws that:
- Introduce the non-dom status with tax exemptions over dividends and interest earned by qualifying non-doms
- Provide incentives to Strengthen the use of Cyprus companies in international tax structuring
- Make Cyprus more attractive as a prime destination choice for persons
- persons wishing to invest in property (being a main pre-requisite for acquiring the Cyprus permanent residency permit or citizenship).
A number of other proposals such as the extension of existing tax exemptions granted to persons moving to Cyprus to work, the proposed exemption of exchange differences from taxable income and extending group loss relief to losses incurred in foreign subsidiaries have been deferred for consideration until after the House reconvenes in September.
1. The Cyprus Non-Dom regime
An individual is considered as domiciled in Cyprus by way of domicile of origin or by domicile of choice.
Individuals that are Cyprus tax resident for 17 out of the last 20 years are considered to be domiciled in Cyprus. Cyprus tax residency for individuals is determined by the number of days each person spends in Cyprus on each calendar year (183 days).
Individuals that were born in Cyprus are considered NOT to be domiciled in Cyprus where they have not been Cyprus tax resident for at least 20 years before returning to Cyprus.
Non Domiciled persons are now exempt from defence tax. Such persons are therefore exempt from taxation on both dividends and any passive interest they receive.
Those persons already living in Cyprus and who are Cyprus tax resident persons qualifying as non-doms will immediately see a tax saving of 17% on dividends, 30% on bank deposit interest and, 3% on rental income).
Cyprus tax resident non-doms will continue to be subject to taxation at the normal applicable personal tax rates in respect of rental and other forms of income that they receive (salaries, directors fees etc.)
BDO Observation: Together with the unconditional exemption afforded under tax law for Capital Gains realised on the disposal of securities (shares, bonds etc.), the new law creates an attractive tax environment for non-doms residing in Cyprus.
2. Notional interest deduction on equity
Companies are now entitled to a notional interest tax deduction on 'new equity'. New equity means funds or in-kind payments introduced into the share capital of the company after 1 January 2015 and which has actually been paid and is used for the operations of the company.
This interest will be calculated based on the effective interest earned on the 10 year government bond yield of the country in which the new equity is invested plus 3%, with the minimum rate being the equivalent 10 year bond yield of Cyprus plus 3%. This notional expense deduction will be tax deductible to the extent that it relates to business assets and cannot exceed 80% of the taxable income of the company for the year. A tax deduction is not granted where the company makes losses.
The law allows the capitalisation of existing loans.
The law also allows new capital to be introduced by way of in kind transfers. Such transfers must be made at market values and should be supported by appropriate valuations carried out by appropriately qualified professionals.
The Law specifically excludes the capitalisation of existing reserves (such as revaluation reserves) and of retained profits as at 31 December 2014 from the definition of new capital.
The law includes a number of anti abuse provisions. Where the capital originates directly or indirectly from loans obtained by another Cyprus company that has itself received a tax deduction for interest expense, then the notional interest deduction will be reduced by that same amount. Similarly, where new capital originates either directly or indirectly from new capital introduced to another Cyprus company, only one company will be entitled to the notional interest deduction.
BDO Observation: The aim of the law is to encourage new equity which in turn should increase the economic robustness of Cyprus companies through less reliance on debt financing. The new provision also potentially provides a solution to beneficial ownership issues that are increasingly the subject of double tax treaty anti- avoidance provisions.
3. incentives for Investment in Real Estate
3.1. New Capital Gains Tax Exemption:
In respect of property purchased from the date the law comes into effect and 31 December 2016 any capital gain arising upon the future disposal will be exempted from CGT
3.2. Land Registry (Transfer) Fees Reduced:
For properties transferred until 31 December 2016 there will be a 50% reduction on the land transfer fees.
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.