Tax Amendments – Modivations

The House of Representatives voted on July all the tax law amendments as have been announced at the beginning of the month by Finance Minister.

The tax amendments aim to:

  1. Attract businesses to set up operations in Cyprus
  2. Relocate their senior management in Cyprus
  3. Attract foreign investments
  4. Motivation for high net worth individuals to reside in Cyprus

Below are presented the main tax amendments:

  1. Introduction of Notional Interest Deduction(NID) on qualifying equity-(Income Tax)
  2. Extension of personal Income Tax exemptions
  3. “Domicile” concept-(Special Contribution for Defense Law)
  4. Capital Gains Tax Law
  5. Department of Lands and Surveys (Levy and duties) Law
  6. Taxation on dividends-(Special Defense Law)

Introduction of Notional Interest Deduction(NID) on qualifying equity-effective from 16/07/2015

 NID : is the concept where companies would be able to claim notional interest deduction of up to 80% of their taxable income, reducing their overall effective tax rate to as low as 2.5%. This notional interest incentive is given to companies that obtain fresh equity/capital. (Settled on or after 1st January 2015)

Calculation of NID:

Notional Interest will be treated similar to actual interest expense therefore it will reduce the taxable income of the company. The tax deductibility would depend on the way the fresh equity/capital will be utilized.

Notional interest= qualifying equity* x interest rate*

*Qualifying equity:

Is the equity introduced in the business on or after 1 January 2015 in the form of issued share capital and share premium (fully paid) and does not include amounts that have been capitalized and derived from revaluation of movable or immovable property. Is not deemed as qualifying equity any equity arising direct or indirect from reserves existing as at 31/12/2014, but does not relate to the financing of new assets used in the business.

*Interest rate:

The applicable interest rate will be the 10-year government bond ( as at the end of the year preceding the relevant tax year) of the country in which the qualifying equity is invested in , increased by 3%, subject to minimum rate equal to the 10-year Cyprus Government bond rate increased by 3%.

Note: There are Anti-abuse measures which prevent entities to take advantage of the above tax amendment. (Transactions without economic or commercial substance will not be subject to NID, if the new Equity indirect or direct introduced from loans which interest expense deduction is claimed then NID is reduced by the amount of the interest expense deduction claimed, etc)

Extension of personal Income Tax exemptions

 Non-Cyprus resident individual taking up employment for the first time in Cyprus are eligible to claim on of the following two exemptions:

  1.  20% of their employment income earned in Cyprus to be exempt from income tax, up to maximum €8,550 for a period of 5 years (before was 3 years). Extension is given for employment that commenced on or after 2012. (First employment)
  2.  50% of their employment income earned in Cyprus to be exempt from income tax, for individuals earning more than €100,000 per year. Tax exemption is extended from 5 to 10 years.(First employment)

Introduction of “domicile” concept-effective from 16/07/2015

New concept of “domicile in the Republic” in the Special Defense Contribution Law, non-domiciled individuals will be exempt from Special Defense Contribution on their interest, dividend and rental income. The rule of 183 (Cyprus Residence) is irrelevant, what is relevant now is where the individual maintains a domicile of choice outside Cyprus under Wills and Succession Law*(lives and intends to live in another country) and was not living in the Republic for at least 20 years prior to the tax year or has not been resident in the Republic for at least 20 years prior to the provisions of this law.

The Non-Domicile concept is affecting both “new residences” and “old residences”. (Old residences up to 16 years in the Republic of Cyprus)

Incentive: Non-domiciled Cyprus tax resident individuals will be exempt from SDC on dividend income, interest received and rental income which constitute Cyprus very attractive for individuals that have investments in shares, bonds, property, companies etc.

Capital Gains Tax Law-effective from 16/07/2015

It will be no Capital gains tax for any property that acquired from 16/07/2015 or will be acquired up to 31/12/2016. Gains from the disposal of immovable property (land, land and buildings) are exempt from CGT.

Acquisitions below market value, through exchange or donations, under foreclosure procedures and from related parties are not applicable.

Disposals under income tax and disposals of shares in companies that own immovable property are not exempt. (In the first case is under Income Tax)

Department of Lands and Surveys (Levy and duties) Law-effective from 16/07/2015

  •  50% reduction in immovable property transfer fees, lease/sublease and registration fees up to 31/12/2016. (Does not apply to transfers of immovable property that have been acquires under foreclosure procedures.)
  •  The special levies imposed on transfers of immovable property from a company to relatives of up to third degree of kindred of the shareholders are abolished. (now are subject to normal rates)
  •  Refunds on levies related on transfers of immovable property from a partnership to a company and transfers of immovable property to a (family) company by the shareholder of the company or close relative, are abolished.

Taxation on Dividends

In cases that actual dividend distributed to company which the direct shareholder is not individual and based on the Commissioner judgment, the interposition of this company as shareholder of the company paying the dividend does not serve any substantial commercial or economic purposes but has as primary purpose to avoid, reduce or postpone the payment of Special Defense Contribution, then the Commissioner may deemed that the dividend has been paid to the individual/individuals that direct or indirect control the company which received dividend and demand payment of the SDC .

*The above tax amendments are only a part of the general planning to constitute Cyprus an attractive center for both investors and individuals while at the same time aim to help actual economy. Additional measures are expected to be introduced in the next months.

Due to the fact that the above amendments have been introduced very recently is highly recommended to request a professional advice before taking any action.

S.C Audit Ltd is willing to help you to take the correct decisions.

Comments are closed.