Tax measures for a more competitive environment │Second set of draft tax laws voted into law
The much expected developments in taxation aim to modernize and further enhance the competitiveness of the Cyprus tax system. The second set of draft Bills submitted to the Cyprus Parliament is in addition to the amendments already voted into law in July 2015.
The second set of amendments to the Cyprus tax system aim primarily to:
- Eliminate double taxation in respect of arm’s length re-adjustments;
- Harmonize the Cyprus Tax Laws with EU provisions;
- Align the Cyprus tax framework with the new era of hydrocarbon activity;
- Create business substance and attract high-net worth entrepreneurs and individuals by setting out a bundle of attractive incentives;
- Correct inconsistencies and introduce anti-avoidance measures.
Corporate Taxation
Arm’s Length Provisions – Introduction of deemed expense
The arm’s length provisions were amended to address issues of correlative adjustments under which, a downward TP adjustment can be made to the taxable profit of a Cyprus tax resident entity if, by virtue of commercial or business transactions with another related Cyprus tax resident entity, the profits of the latter have been increased.
The new provisions will apply as of January 1, 2015.
FOREX Neutralization
FOREX gains or losses will be completely tax neutralized as of January 1, 2015 without taking into account whether these are realized or unrealized provided that such FOREX gains/losses should be taxable/deductible accordingly.
The new provisions will apply as of January 1, 2015.
Dividend taxation
As of January 2015, and in order to comply with the requirements of the Parent – Subsidiary Directive, dividends will only be exempt from income tax to the extent these are not tax deductible by the paying company.
In the event where the above conditions are not met, the dividend will be taxable under the Cyprus Income Tax Law and will be exempt from Special Contribution for Defence.
In the event where dividends distributed by a company resident in another Member State are taxable in Cyprus by virtue of the above, tax credit will be allowed. The credit will not be granted in the case of an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage, are not genuine having regard to all relevant facts and circumstances. An arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.
IP Losses
Given that only 20% of IP related profits are taxable under the current IP regime, losses allowed will be limited to 20% of the ‘’eligible’’ losses.
The new provision will be deemed to apply as of January 1, 2012.
It is also clarified that the notional deduction afforded in accordance with the newly introduced rules of Notional Interest Deduction, which corresponds to qualifying IPs will be treated as a direct expense in the determination of the taxable profit from the IP.
Group Relief
Group relief provisions were amended to align Cyprus tax laws with EU Case law thereby allowing cross-border group relief, as of January 2015 onwards, ONLY in the case of losses of an EU subsidiary that has exhausted all other possibilities to use the said losses in its country of tax residence.
Amendments further provide that a Cypriot tax resident parent company will be entitled to group relief with a sub-subsidiary when the intervening company is a company tax resident in another Member State.
The new provisions will apply as of January 1, 2015.
Anti-avoidance provisions regarding re-organizations
The new law introduces anti-avoidance provisions to combat abusive use of restructurings as a means to avoid the payment of tax; under the new provisions the Tax Department retain the discretion to refuse granting the tax exemptions provided by law safeguarding the tax neutrality of re-organizations if they are of the opinion that the re-organization is not carried out for valid commercial reasons which reflect economic reality.
Alternatively, the Tax Department may render the tax neutrality of a re-organization conditional upon a number of constituents such as the number of shares to be issued and the period for which the shares issued cannot be disposed (maximum period of three years).
The new provisions will apply as of January 1, 2016.
Oil & Gas Provisions
Given the hydrocarbon activities in Cyprus’ exclusive economic zone (EEZ), it was made clear that such activities would fall within the scope of Cyprus taxation by amending the definition of the term ‘Republic of Cyprus’ and including the definition of the term ‘Permanent Establishment’ offshore activities with regard to the exploitation of natural resources as well as the installation of pipelines and the provision of services related thereto.
Further provisions have been inserted under which a withholding rate of 5% is imposed on the gross income derived by any person not resident in Cyprus as consideration for services related to oil and gas and other natural resources. It has further been clarified that when the payer is not a Cyprus tax resident but the payment relates to a related party that is a Cyprus tax resident, the related Cyprus tax resident party is responsible for withholding the tax and submitting it to the Tax Department by the end of the month following the month in which the payment was made.
The new provisions will apply as of January 1, 2016.
Accelerated Depreciation
The existing provisions on accelerated depreciation for plant and machinery and selected buildings will be extended to years 2015-2016. Therefore, the depreciation provided for tax years 2015-2016 will continue to be at the rate of 20% on plant and machinery (excluding application software and tools for which a higher rate was provided) and 7% for industrial and hotel buildings acquired during the said years.
The new provisions will apply as of January 1, 2015.
Administrative Fees
The Council of Ministers is now vested with the right to introduce fees on the issuing of a Tax Residency Certificate.
Fees may also be introduced for the issuance of tax rulings.
The new provisions will apply as of January 1, 2015.
Personal Taxation
Amendments to the personal tax system
The existing framework provided to expatriates has been clarified and re-designed so as to render Cyprus a beneficial place for entrepreneurs.
- The exemption of €8,550 or twenty percent (20%), whichever is lower, from the gross emoluments of an individual who was not a tax resident of Cyprus prior to the commencement of his employment in Cyprus will be gradually phased out by 2020.
This exemption will continue to apply until year 2020 with regard to employment that commenced from 2012 onwards for a maximum period of five (5) years.
- On the other hand, the existing exemption of 50% for five (5) years, of emoluments in excess of €100,000 from the personal income tax of individuals that were not Cyprus tax residents prior to the commencement of their employment, is extended to 10 years. To combat possible abuse, the exemption will not be available to individuals that were Cyprus tax residents for a period of 3 out of 5 years preceding the year of employment but after the entry into force of this law.
Moreover, the exemption will be available for any year in which the taxpayer’s emoluments exceeded €100,000 regardless of the fact that at any given tax year its emoluments may fall below the €100,000 threshold, provided that at the time the employment in Cyprus commended, such emoluments exceeded €100,000.
An individual will not be entitled to both exemptions simultaneously.
The new provisions will apply as of January 1, 2015.
Capital Gains Tax
Taxation of Capital Gains resulting from directly or indirectly held real estate companies
The existing provisions are extended to apply Capital Gains Tax on the sale of shares of companies that indirectly hold Cyprus situated immovable property and whose at least 50% of their value derives from the market value of immovable property situated in Cyprus.
The new provisions will be entered into force as of the date of their publication in the Official Gazette.
Capital Gains Tax Computation
The amendment provides that in determining the profit for capital gains tax purposes upon the sale of shares, the cost of the immovable property taken into account is:
- The value of the immovable property on the date of initial acquisition of the shares, or
- The value of the immovable property on January 1, 1980 if the shares were acquired prior to that date.
Upon a disposal concerning immovable property that formed party of previous disposals (either by sale of the property itself or by sale of shares of the company directly or indirectly owning the immovable property), the sale proceeds of the immediately prior disposal form the cost of acquisition deducted in the determination of the taxable profit (for capital gains tax purposes) of the current disposal.