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Cyprus Tax Law Amentments - July 2015
Cyprus Tax Law Amendments

On 16 July 2015, a number of amendments to the Cyprus Tax Laws were published in the Cyprus Government Gazette.

We briefly outline below the main provisions with respect to the various tax law amendments:

Capital Gains Tax Law

Capital Gains Tax (CGT) Exemption:

The CGT law has been amended to provide that gains from the disposal of immovable property consisting of land or land and buildings are exempt from CGT, provided that:

- It is acquired from the date the amended Law comes into effect (16 July 2015) until 31 December 2016, and
- It is acquired through purchase or purchase agreement and not through an exchange or donation, at market value, from a non-related party.

This exemption does not apply to disposals of immovable property that has been acquired under foreclosure procedures.

Land and Surveys Law

Reduction in Immovable Property Transfer Fees & Lease / Sublease registration fees

As per the amended law, for any transfer of immovable property as well as the registration of any lease / sublease until 31 December 2016, a 50% reduction in immovable transfer fees and lease / sublease registration fees is provided.

This amendment is applicable as of the date of publication in the Official Gazette (published on 16 July 2015).

The above reduction does not apply to transfers of immovable property that have been acquired under foreclosure procedures.

Abolition of Levy Refunds

The amended law has abolished the provisions by which the Commissioner refunded after five years from the day of transfer the amount of levy imposed and collected:

- On transfers of immovable property from a partnership to a company having as sole shareholders the partners of the assignor partnership.

- On transfers of immovable property to a (family) company by an individual shareholder of the company or his/her close relatives (i.e. spouse or relatives up to third degree kindred).

The above amendment has come into effect on 16 July 2015, which is the date it was published in the Official Gazette.

Abolition of Special Levies on transfers from a company to relatives of the shareholders

As per the amended law, 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, and such transfers are now subject to the normal rates of levy on the values of the immovable property.

The above amendment has come into effect on 16 July 2015, which is the date it was published in the Official Gazette.

Income Tax Law

Taxability of Widow's pension

The amendment allows the individual taxpayer to opt whether his/hers widow's pension is to be taxed under the special mode of taxation (i.e. widow's pension exceeding EUR 19.500 taxed at the rate of 20%), or to be taxed under the general mode of taxation (i.e. widow's pension will be included in the individual's total taxable income net of allowable deductions).

The amendment is effective from tax year 2014 onwards.

Introduction of Notional Interest Deduction on 'Qualifying' Equity

The law has been amended to introduce a Notional Interest Deduction (NID) on equity.

According to the amended law, companies resident in Cyprus and companies not resident in Cyprus which maintain a permanent establishment in Cyprus are entitled to a NID on equity, which is effectively a tax allowance deduction against the taxable profits of the company.

The NID is calculated by multiplying the 'new equity' held and used by the business in the carrying on of its activities with the 'reference interest rate'.

For the purposes of the law:

- 'Reference interest rate' is the interest rate of the 10 year government bond yield of the country in which the new equity is invested or of the Republic of Cyprus (as at 31 December of the previous tax year), whichever is the highest, increased by 3%.

- 'New equity' is any equity introduced in the business on or after 1 January 2015. This includes issued fully paid share capital and share premium introduced into the business on or after 1 January 2015, but does not include amounts which have been capitalized and result from a revaluation of movable or immovable property or retained earnings (prior to 31 December 2014).

Anti-abuse provisions:

- In the calculation of the NID, only equity in excess of old equity will be taken into account. Any equity introduced into the business on or after 1 January 2015 which results directly or indirectly from reserves existing on 31 December 2014 and such equity does not relate to new assets used in the business, will not be treated as new equity.
- In the case where the new equity of a Cyprus tax resident company or a non-Cyprus tax resident company which maintains a permanent establishment in Cyprus, is derived directly/indirectly from the new equity of another Cyprus tax resident company or a non-Cyprus tax resident company which maintains permanent establishment in Cyprus, the NID on the new equity is available only to one of the two respective companies.
- In the case where the new equity emanates directly/indirectly from loans on which interest expense deduction is claimed, the NID on the new equity is reduced by the amount of the interest expense deduction claimed.
- In the case where equity is contributed in the form of assets in kind, the amount of equity for the purposes of NID may not exceed the market value of the assets at the date of their introduction into the business, and their market value must be substantiated by the Commissioner's judgment.
- In order to safeguard the coherence of the tax base, the NID will not be available in the case of losses neither can it exceed 80% of the profit.
- In the case where reorganization is carried out without generating profits subject to taxation, the NID on equity is calculated as if the reorganization has not taken place.
- The Commissioner may not grant the NID, if in his judgment actions/transactions have taken place without substantial economic or commercial purpose or the new equity on which the NID is claimed emanates from equity that existed prior to 1 January 2015 and is presented as new equity through actions/transactions with related parties, with the aim of claiming NID.

A company may in any given tax year elect to claim the whole or part of the amount of the NID available.

The above provisions have come into effect on 16 July 2015, which is the date they were published in the Official Gazette.

Special Contribution for Defence Law

Introduction of 'Domicile' concept

The current Special Contribution for Defence (SDC) provisions will exclude from SDC, dividends, interest and rents of individuals who are Cyprus tax residents but are not domiciled in Cyprus, irrespective of the origin of the relevant income.

The new provisions define domicile in accordance with the rules of the Wills and Succession Law under which two main kinds of domicile are identified:

1. A domicile of origin (i.e. the domicile received by him at his birth), and
2. A domicile of choice (i.e. the domicile acquired by him by establishing a home with the intention of a permanent establishment or indefinite residence).

A person who has his domicile of origin in Cyprus will be treated as 'domiciled in Cyprus' for SDC purposes with the exception of:

- An individual who has obtained and maintained a domicile of choice outside Cyprus under the provisions of the Wills and Succession Law, provided that this individual was not a Cyprus tax resident for any period of at least 20 consecutive years prior to the tax year in question, or
- An individual who was not a Cyprus tax resident for a period of at least 20 consecutive years immediately prior to the entry into force of the introduced provisions (i.e. prior to 16 July 2015).

An individual who is resident in Cyprus for a period of at least 17 years out of the last 20 years prior to the tax year in question shall be deemed as domiciled in Cyprus for SDC purposes regardless of whether or not he has his domicile of origin in Cyprus.

The above provisions will result to the complete exemption from SDC of a Cyprus tax resident individual, who in adopting the rules above is not a domicile of Cyprus for SDC purposes.

Anti-abuse measures:

- The exemption from SDC will not apply in the event of any assets that may give rise to SDC have been transferred from an individual domiciled in Cyprus to an individual not domiciled in Cyprus where one of the main reasons for the transfer was to benefit from the exemption. In such a case, SDC will be imposed on the income derived from such assets and may be collected either from the transferor or the transferee accordingly.

Taxation of dividends

In case where actual dividend is received by a company which is owned indirectly by Cyprus tax resident and domiciled individual(s) and the Commissioner considers that the interposition of this company as a shareholder of the company paying the dividend does not serve any substantial commercial or economic purpose but is primarily intended to prevent, reduce or postpone the payment of SDC, the Commissioner may deem that the dividend is paid directly to the Cyprus tax resident and domiciled individual(s) who directly/indirectly control the company receiving the dividend and require the payment of the SDC on the dividend either from the company receiving the dividend or from the Cyprus tax resident individual(s) who directly/indirectly control the company.

The above provisions have come into effect on 16 July 2015, which is the date they were published in the Official Gazette.

We are at your disposal to discuss how the above developments may affect your business.

Contacts
Tel. +357 22002700
Costas AfxentiouChief Executive Officer/Managing Partner
Polyvios PolyviouMember of the Board/Partner
Stelios ProdromitisMember of the Board/Partner
Marios HadjihannasMember of the Board/Partner in charge of Tax Services
 

 

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