The Republic of Cyprus has recently voted for amendments in its tax legislation to make investments in or through the island an even more attractive option to foreign investors. The tax amending laws have a retrospective effect from 1 January 2012.

Income Tax Law

Intellectual property rights

There is an 80% exemption on the net profit (defined as income from intellectual property minus all expenses attributable with the specific income) from the utilization of patent, trademark or any other intellectual property rights. The same exemption applies in cases of any gain arising from the disposal of such intellectual property. In addition, the rate of capital allowances on such intangibles has been set at 20% of the cost of acquisition.

It is worth noting that the definition of patent right and intellectual property rights has been amended to correspond to the meaning of the local Patent Rights Law of 1998, the Intellectual Property Law of 1976 and the Law regarding Trademarks. This development ensures that uncertainty is lifted in regards to which types of intellectual rights are covered.

Interest deductibility

In cases where shares are acquired directly or indirectly in a 100% subsidiary and if the subsidiary does not own any assets which are not used in the business, there will be no interest expense restriction. In cases where the subsidiary holds assets both used and not used in the business then the interest restriction will be applied as a percentage of assets not used in business and total assets. Do note that this amendment is effective for loans/interest made for acquisition of shares post 1 January 2012.

Group relief provisions

The amendment provides for when parent companies form a subsidiary. In this case, the subsidiary company will be deemed to be a member of this group for group relief purposes from the year of incorporation as well. Please note that according to the current provisions of group relief a company is considered to belong to the same group for group relief purposes, if it is part of that group for a whole tax year.

Capital Allowances

The amendments provide for incentives in the form of increased rates of capital allowances. For plant and machinery purchased during 2012, 2013 and 2014 the rate has been set at 20% (unless the rate of capital allowances on such assets is higher). Also, the rate for industrial and hotel buildings purchased during 2012, 2013 and 2014, will be 7% instead of 4%.

Provident Funds

It has been clarified that approved Provident and Pension Funds for income tax purposes are those, which have been approved by the Commissioner of Income Tax.

Special Contribution for the Defence Law

For the calculation of the profits subject to Defence Tax on deemed dividend distribution a full deduction will be given for amounts spent on the acquisition of any plant and machinery (as defined in the Income Tax Law and excludes private cars). This amendment is applicable for profits generated and acquisitions made during 2012, 2013 and 2014. This incentive is given to local investors and businesses, since the provisions of the deemed dividend distribution are not applicable to foreign investors.