a. Introduction of “non-domiciled” concept for residents and their exemption from SDC in Cyprus.
Previously a person had been considered resident for tax purposes in Cyprus if they had spent 183 days in a calendar year in Cyprus. Residents were liable for Social Defence Contribution (“SDC”) as a type of tax on dividends income (17%), interest income (30%) and rental income (3%).
Non-domiciled persons would be exempted from liability to pay SDC in Cyprus starting from July 2015
The term “domiciled in Cyprus” is defined in the Law as an individual who has a Cypriot domicile of origin in accordance with the Wills and Succession Law. Criteria: an individual who has been a tax resident of Cyprus for at least 17 years out of the last 20 years prior to the tax year will be considered to be “domiciled in Cyprus” and as such be subject to SDC regardless of his/her domicile of origin. The Law also includes certain anti-abuse provisions.
Altus Citadel comment: This amendment is mainly directed to attract foreign executives and High Net Worth Individuals (HNWI) to take up residence in Cyprus.
a. Introduction of Notional Interest Deduction (“NID”).
The introduction of NID provides an allowable deduction from taxable income based on corporate equity, subject to certain conditions. This expands the possible forms of financing Cyprus companies and encourages the contribution of equity.
The calculation of deductible “interest” will be based on the “Reference Interest Rate” which in turn is based on a 10-year government bond yield of the country in which the new equity is invested plus 3%.
“New Equity” is referred to contributions of cash or in-kind made on or after 1 January 2015 in the form of issued share capital and share premium.
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.
Altus Citadel comment: The above amendment is mainly directed to encourage the use of Cyprus entities in international structures and attract business to the Republic.
3. REAL ESTATE
a. Capital Gains Tax exemption.
According to the latest amendment to the Capital Gains Tax Law, capital gains on disposal of property, which is going to be acquired in the period from 17 July 2015 to 31 December 2016 will be exempted from taxation. The following conditions apply for the property:
– The property consists of buildings;
– The property is acquired from an independent third party;
– The property is not acquired through an exchange or donation/gift.
b. Reduction of Land Transfer Fees.
Land transfer fees would be reduced to 50% for transfers of property, which are going to be effected in the period from 17 July 2015 to 31 December 2016.
Altus Citadel comment: Both of these measures are mainly directed at stimulating the real estate market sector in Cyprus.
More new tax amendments were submitted to the House of Representatives, which are currently under discussion and are expected to be voted in September 2015:
a. Extension of incentive for high-income earners coming to Cyprus.
Previously available incentive for individuals that were to take up their residence in Cyprus for the first time and had an annual employment income exceeding EUR 100,000 allowed an exemption of 50% of such income from taxation for a period of 5 years. Now the incentive has been extended to 10 years.
b. Abolition of foreign exchange gains and losses in tax computations.
Effectively from 1 January 2015 gains and losses on the foreign exchange will not be accounted for in tax computations. This would be applied irrespectively whether the gains/losses would be recognised on assets or liabilities and whether they would be realised or unrealised. This is expected to greatly simplify tax computations for Cypriot companies.
c. Aligning the exemption of dividend income with EU Parent-Subsidiary Directive.
Whereas previously any dividend earned by a 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.
d. Downward transfer pricing adjustments.
The right for arm’s length adjustments granted to the Commissioner for the imposition of deemed income is extended so now if the counterparty is another Cypriot entity, the equal and opposite expense is granted in that respect as an adjustment. This allows in essence transfer pricing downward adjustments subject to conditions.
e. Group Loss Relief provisions extended to the EU.
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.
For further information in relation to the contents of this circular, please contact the following officers of Altus Citadel Corporate Services Ltd.:
Tel.: +357 22 252 774 (ext. 204)
Tel.: +357 22 252 774 (ext. 207)
*This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please consult your advisors for specific advice.
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