Cyprus: A fairer tax regime
The Cyprus government recently announced a number of tax
incentives aimed at encouraging economic activity and
attracting inward direct investment. At the same time it
submitted a number of draft laws to the House of
Representatives to implement the new provisions of the EU
Parent-Subsidiary Directive, to simplify the tax regime and
make it more attractive, fair, and effective. The draft laws
are going through the legislative process and the government
aims to have the new measures in place by autumn.
The proposed changes fall under three main headings:
stimulating economic activity and investment in real estate;
increasing competitiveness and aligning domestic legislation
with EU directives; and, attracting high-net-worth individuals
and high-earning employees.
In order to stimulate the property market, the fee payable
on transfers of immovable property will be halved until
December 31 2016. In addition, any future gain on the disposal
of immovable property acquired in the period beginning on the
date the law becomes effective and ending on December 31 2016
will be exempt from capital gains tax.
The accelerated tax writing-down allowances on plant and
machinery and industrial and hotel buildings will be extended
until December 31 2016.
In order to implement the latest changes to the EU Parent
Subsidiary Directive, after December 31 2015, the existing
exemption from Cyprus income tax on dividends received by
Cyprus-resident companies will not be available in cases where
the dividend was allowed as a tax deduction in the jurisdiction
of the paying entity, or where the arrangement is a sham.
In addition, the group loss relief provisions are to be
amended with retrospective effect from January 1 2015. In this
way, group relief is available between companies resident in
Cyprus and companies resident in other EU member states.
Cyprus does not have specific transfer pricing rules in its
domestic legislation, but the arm’s length principle is
incorporated into the Income Tax Law. It allows the tax
authorities to impose additional taxes on profits or benefits
arising from related party transactions. Currently, the only
adjustments that can be made are to increase profits, and there
is no provision for the corresponding expenses and losses to be
compensated. The Law will be amended to tax the profit arising
from the transactions between the related parties and to allow
a corresponding deduction for the counterparty to the
transaction. The government hopes that the adoption of
international transfer pricing principles will attract more
With effect from January 1 2015, companies and permanent
establishments of foreign companies are to be given a notional
interest deduction (NID) on new equity capital (share capital
and share premium) introduced after that date, calculated by
reference to the government 10-year bond. The NID will be
limited to 80% of the taxable profit before deducting the NID,
and no NID will be allowed in the event of losses.
The introduction of the NID is intended to level the playing
field between equity and debt finance, as both will be eligible
for tax deductions.
Profits and losses arising from currency exchange rate
fluctuations will be disregarded for tax purposes apart from
gains or losses arising from trading in foreign currencies or
foreign currency derivatives. Entities trading in foreign
currencies or foreign currency derivatives may irrevocably
elect to be taxed on the basis of realised profits or
Corporate reorganisations are exempt from all forms of tax.
In order to prevent abuse, it is proposed that the exemption be
withheld if the tax authorities consider that a reorganisation
is not carried out on valid commercial grounds.
At present, all Cyprus tax-resident individuals are liable
to pay Special Contribution for Defence (SDC tax) on rents,
dividends and interest. It is now intended to introduce the
option for individuals who are resident in Cyprus to obtain
exemption from SDC tax if their domicile is elsewhere.
Individuals taking up residence and employment in Cyprus
with income from employment of more than €100,000
($110,000) per annum are at present entitled to a 50% deduction
for the first five years of employment. The government intends
to extend the period for which the deduction is available from
five years to 10.