The Cyprus Parliament voted the following tax changes during 2015:
Income Tax Law
1. Introduction of Notional Interest Deduction (NID) in Qualifying Equity
Companies resident in Cyprus and Permanent Establishments in Cyprus of non-resident Companies are entitled to a NID on equity, which is a tax allowable deduction against the taxable profits of the company.
The NID is calculated by multiplying the New Equity (New Equity means the new equity introduced in the business on or after 1 January 2015, in the form of issued share capital and share premium fully paid up. Any reserves that existed as at 31 December 2014 can be regarded as New Equity only if they are used to finance new assets used in the Company) with the Yield interest rate (Yield interest rate is the yield of the 10-year government bond of the state which the new equity is invested by a 3% premium).
The Notional Interest Deduction cannot exceed the 80% of the taxable income. In the case of loss, NID cannot increase the losses.
A Company may elect to claim the whole or part of the NID in any tax year and the deduction is yearly with no end date unless there is reduction of capital.
2. Widow’s pension
From 1 January 2014 onwards widow’s pension is taxable.
The tax payer is allowed to elect whether:
• To be taxed on the pension income separately from any other income and not included to the total taxable income i.e. Pension not exceeding €19,500 is taxable at the rate of 0% and pension exceeding €19,500 is taxable at the rate of 20%.
• Or tax the pension income together with any other income.
3. Tax neutral treatment for foreign currency exchange differences which do not related to trading in forex.
From 1 January 2015 any realized or unrealized FX differences (gains or losses) will be tax neutral, in other words FX gains will not be taxable and FX losses will not be tax deductible.
The exemption to the above is the gains and losses arising from the FX trading. In such a case the legislation gives an option for FX trading companies to make an irrevocable election to be taxed only on the realized FX differences.
4. Extension of employment income tax exemptions
Currently individuals not previously resident in the republic taking up employment in Cyprus are eligible to claim one of the following two exemptions:
• First employment exemption which is the lower of 20% of their employment income (earned in Cyprus) and €8,550, and eligible for 3 years after the year taking up the employment.
• Executive exemption which is 50% of their employment income provided their annual employment income is more than €100,000, eligible for 5 years commencing from the year taking up employment in Cyprus.
First employment exemption
The exemption period is extended from 3 years to 5 years provided the employment started in 2012 onwards. It applies up to 2020.
Executive exemption
The exemption period is extended from 5 to 10 years.
Additionally individuals commencing employment in 2015 should also satisfy additional requirements in order to be eligible for the exemption. The additional requirements are as follows:
• The individual should not have been a Cyprus Tax resident for at least 3 out of 5 years immediately prior to the year of commencement of employment and not resident in the year immediately prior to the year when employment is taken up.
• The exemption will be granted when the annual employment income of the individual is over €100,000. The exemption will be given for 10 years if the annual employment income of the individual in the first year of employment is more than €100,000. If during the 10 year period the annual employment decreases this will not be relevant if the Commissioner is satisfied that the fluctuation on the annual employment income was not intended to take advantage of the 50% tax exemption.
These amendments are effective from 1 January 2015.
5. Accelerated capital allowances (extensions)
In 2012 the Income Tax Law was amended to increase the capital allowances for the plant and machinery and industrial buildings purchased in 2012-2014 as follows:
• Plant and machinery 20%
• Industrial buildings and hotels 7%
This amendment will be extended to the years 2015-2016 and will be effective from 1 January 2015.
6. Personal income tax deductions for contributions to approved pension and medical schemes.
From 1 January 2015 individuals will be able to deduct from their Income Tax computation contributions made to insurance companies, pension and medical schemes which have been approved by the Commissioner of Taxation.
7. Extension of Arm’s length transaction
Currently when taxable profits are earned on related party transactions and these taxable profits are below arm’s length amount, an adjustment is necessary to correct this situation.
From 1 January 2015 the Income Tax Law is amended to provide not only for upwards adjustments to profits but for downwards adjustments as well in cases where an upward adjustment is made for a Cyprus tax resident.
8. Intellectual Property Regime-Restriction of losses
Under the current regime only the 20% of the net profits related with the Intellectual Property is subject to Income Tax. This amendment clarifies that in the case of a loss only 20% of the loss will be eligible for deduction. That amendment suggests that in cases of a loss only 20% of that loss will be available for group relief or available to be carried forward.
9. Taxation of dividend income
From 1 January 2016, any dividend received from abroad will be taxable in Cyprus if it is tax deductible in the tax computation of the paying company.
Additionally, in cases where such dividend is taxable, a double tax relief will be available. Prior to this amendment the dividends were always exempt from Income Tax.
10. Group relief to EU companies
Prior to this amendment a resident company could only surrender losses to another CY resident company.
In order to harmonize this legislation with European Court of Justice decisions, this amendment was made in order to allow losses incurred in a 75% group EU company to be surrendered to a CY resident company provided the EU company had no other options to utilize its loss. Both companies should be members of the same 75% group according to the Cyprus group provisions. In addition to this, in order to establish whether two CY companies are within the same 75% group, the interposition of a non-Cyprus tax resident company will not affect the eligibility for group relief when the non-CY tax resident company is resident in an EU country or in any other country with which Cyprus has a Double Tax Treaty.
11. Reorganizations and anti-avoidance
The Income Tax Law has been amended in relation with the reorganization so as profits generated from re-organization will not be eligible for tax-free if the main reason or one of the main reasons of such reorganizations is the avoidance, reduction or postponement of tax. The Commissioner of Taxation has the right to request any documentation considered necessary for the establishment of his decision.
This decision will be subject to objection and appeal in accordance with the Assessment and Collection of Taxes law.
When the Commissioner decides to approve the tax-exemption he may enforce conditions in relation to:
• The number of shares which will be issued
• The period which the shares issued are required to be kept by the recipient (should not exceed 3 years).
The above amendment will be effective from 1 January 2016.
12. Assessment and Collection of Tax Law amendment-refund of overpayment of provisional tax
When in any year of assessment the taxpayer can prove that an overpayment of provisional tax has been made, the excess amount is refundable. This amendment is effective from 1 January 2015.
Special Contribution for the Defence Law
1. Introduction of the new term ‘Domicile’
An individual has a domicile in the Republic if he has a domicile of origin, a domicile of choice or deemed domiciled in Cyprus. Domicile of origin is the domicile of the father at the time of birth. Domicile of choice is the domicile you choose to have which is determined by the actions of the taxpayer. Deemed domiciled in Cyprus is when an individual is resident in Cyprus for at least 17 out of the last 20 years.
Exemptions
• An individual with a domicile of origin in Cyprus, who has acquired and maintains a domicile of choice outside Cyprus.
• An individual with a domicile of origin in Cyprus, who is resident overseas from more than 20 consecutive years.
Any individual who is either not domiciled or not resident in Cyprus in not liable to Special Defence Contribution on rental income, interest income and dividend income.
Capital Gains Tax Law
1. Exemption from Capital Gains Tax on Immovable Property acquired until 31 December 2016.
If an immovable property has been acquired between 16 July 2015 and 31 December 2016 any future disposal will be exempted from Capital Gains Tax Law.
Conditions
• The immovable property has been acquired between 16 July 2015 and 31 December 2016.
• The immovable property has been acquired by a way of purchase or a purchase agreement and not by way of an exchange of donation.
• The immovable property should be acquired at Market value from a non-related party.
• The exemption does not include an acquisition of shares that own immovable property.
• The exemption does not apply to disposals of immovable property that has been acquired under closure procedures.
2. Changes in the Capital Gains Tax Law
Extension of the definition ‘Property’
Prior to this amendment any capital gains derived from the disposal of immovable property situated in Cyprus or disposal of (unlisted) shares of a company that owns immovable property situated in Cyprus was subject to Capital Gains Tax.
This amendment extends the term ‘property’ and includes in the term ‘property shares’ in companies which are direct or indirect shareholders in companies that own Cyprus immovable property and at least 50% of the Market Value of the shares derive their value from the Market Value of the Cyprus Immovable Property.
Extension of the definition ‘Gain’
According to this amendment any trading profits relating to property not subject to Income Tax is now subject to Capital Gains Tax.
Based cost adjustment for Capital Gains Tax purposes due to a previous disposal:
According to this amendment, a disposal of:
• An immovable property that was property of a company during previous share disposal
• Shares in a company (owning immovable property) that owns shares in another company.
Where is such a disposal, Capital Gains Tax was imposed and paid, the value of the immovable property which is deducted should be equal to the sale value used for the purposes of computing the capital gain in the previous disposal.
Determination of sales proceeds for related parties
When there is a disposal between related parties and the sales proceeds are below the market value of the property, the sales proceeds are deemed to be the market value of the immovable property as set by the Commissioner of Taxation.