TAX UPDATES (JULY 2015)
Cyprus introduced significant changes to its tax regime
Last week a significant number of measures were approved and published in the Cyprus Government Gazette which were enacted into law and are effective from the 16th of July 2015. These measures provide changes to the Cyprus Tax laws without altering the long established comprehensive and transparent character of the Tax system of the country.
The changes serve multiple purposes including alignment of the Cypriot tax legislation with the recent amendments made in the European Union (EU) Parent-Subsidiary Directive. At the same time, the changes encourage the creation of business substance by offering compelling advantages to individuals from a personal tax perspective. Moreover, the changes are aimed at promoting economic development by encouraging the introduction of new equity capital as an alternative to excessive debt financing. In addition, the Government has ensured that the changes are aligned with global and EU developments in the field of corporate taxation. Finally, the Government’s aim was to ensure that the new tax measures will be fiscally viable without resulting to a reduction of tax revenues.
A. INCOME TAX LAWS
Notional interest deduction (NID) on equity
(i) Deemed interest deduction will be allowed on “new equity” funds introduced into a Cyprus tax resident company and which funds are used for the operations of the company. New equity may be contributed in cash or in assets in kind. In the case of assets in kind the amount may not exceed the market value of the asset which is substantiated.
(ii) Interest will be calculated at a rate which is equal to the effective interest earned on the 10-year government bonds of the country where the funds are invested, plus 3%, with the minimum rate the effective interest earned on 10 year bonds of the government of Cyprus, plus 3%. The NID is tax deductible in a similar manner as for actual interest expense.
(iii) The deemed interest to be deducted cannot exceed 80% of the taxable income of the company for the year before the deduction of the deemed interest expense. A taxpayer may elect not to claim part or all of the NID deduction available in any given tax year.
B. DEFENCE TAX LAWS
Non – domiciled persons not liable to defense tax
1. Defense tax is payable only by persons who are considered to be tax residents of Cyprus (as defined in the income tax laws), which effectively means an individual who spends at least 184 days in Cyprus every tax year. Defense tax is payable on dividends, interest and rental income.
2. The law is amended so that individuals who are not considered to be “domiciled” in Cyprus would be exempt from payment of defense tax on dividends, interest and rents, even if they are considered as tax residents of Cyprus and irrespective of whether such incomes are earned in Cyprus or abroad.
3. In the law there are clear provisions on who is considered as non - domiciled in Cyprus for defense tax purposes.
C. CAPITAL GAINS TAX
Capital gains from the subsequent disposal of immovable property purchased between the date the law comes into effect and 31 December 2016 will be exempt from capital gains tax. This covers both land and buildings, but it does not cover property acquired as a result of sale of property in settlement of a debt. The sale of the immovable property can be made any time. The exemption does not apply to immovable property that was acquired not by purchase or by purchase agreement but by a donation/gift or by way of an exchange
D. TRANSFER FEES EXEMPTION
1. For transfers of immovable property to be effected until 31 December 2016 the land transfer fees are reduced by 50%.
2. A number of other changes have been introduced on fees payable on transfers of property between related parties.