Important Changes to the Cyprus Tax System
As part of the overall effort to continuously improve and simplify the Cyprus tax system as well as to remain a highly compliant and attractive jurisdiction, various new bills have been passed into new laws by the House of Representatives on 9 July 2015. Furthermore, a number of submitted bills, which are expected to be approved, have been deferred for approval by the House of Representatives for the session after the summer holidays.
The new tax related law amendments and deferred bills mainly aim to: Harmonize and align the Cyprus tax system with relevant EU guidelines Simplifying the Cyprus tax system and making it more attractive Strengthening the use of Cyprus companies in international tax structuring Make the island more attractive as a prime destination choice for persons wishing to invest in Cyprus property (being a main pre-requisite for acquiring the Cyprus permanent residency permit or Citizenship), move to Cyprus permanently along with their families, setting up real business substance and moving key employees to Cyprus. This is achieved by introducing certain tax exemptions or relaxations on property transactions and income from Cyprus employment and the introduction of the ‘non-dom’ status. The non-dom status that is being introduced for the first time will also solve many inherent issues that foreign High Net Worth Individuals have when it comes to taxing their worldwide income after they become Cyprus tax residents. Non-doms will be exempted from defence tax which is applicable on Cyprus tax residents on dividends, interest and rental income. This gives scope for ample planning to foreign persons already residing or who plan to reside or work in the island. It will also help tremendously the tax issues in the cases of foreigners who are beneficiaries to Trusts and subsequently become Cyprus tax residents. An outline of the main tax changes that have passed into law are set out below. Defence Tax Related Non domiciled persons are not subject to defence taxFor physical persons, defence tax was applicable on those who were Cyprus tax residents, and was applied on certain types of worldwide income (e.g. 17% on dividends, 30% on bank deposit interest, 3% on rental income). Cyprus tax residency for individuals is determined by the number of days each person spends in Cyprus on each calendar year (183 days).
The new amendment to the law introduces the concept of ‘non-domiciled’ persons and provides that defence tax is applicable on Cyprus tax resident persons who are also domiciled in Cyprus. This means that individuals who are NOT DOMICILED in Cyprus, and regardless of whether they are Cyprus tax residents, will now NOT BE SUBJECT to defence tax. An individual is considered as domiciled in Cyprus by way of domicile of origin or by domicile of choice. It is also noted that an individual who has spent 17 out of the last 20 years as a tax resident of Cyprus will be considered to be domiciled in Cyprus. Furthermore, an individual who has Cyprus as domicile of origin shall be considered NOT to be domiciled in Cyprus provided he was not a Cyprus tax resident for at least 20 years before the year he becomes tax resident in Cyprus. Property Related New Capital Gains Tax exemptionGain on a future sale of a Cyprus situated property (land or buildings) will be completely exempted from the 20% capital gains tax if such property is purchased between the date the law comes into effect and 31 December 2016. Land registry (Transfer) fees reducedFor properties transferred until 31 December 2016 there will be a 50% reduction on the land transfer fees. Income Tax Related Notional interest deduction on equity introduced.
As from 1 January 2015, companies will be entitled to a notional interest tax deduction on ‘new equity’. New equity means funds or in-kind payments introduced into the share capital of the company after 1 January 2015 and which have actually been paid and used for the operations of the company. This interest will be calculated based on the effective interest earned on the 10 year government bond yield of the country in which the new equity is invested plus 3%, with the minimum rate being the equivalent 10 year bond yield of Cyprus plus 3%. This notional expense deduction will be tax deductible to the extent that it relates to business assets and cannot exceed 80% of the taxable income of the company for the year. Deferred Bills A number of other tax related bills which were approved by the Council of Ministers and submitted to the House of Representatives have been deferred for consideration after the summer holidays.
These include the following:
Extended tax exemptions of income from first employment in Cyprus.
Exchange differences being tax neutral unless the company is trading in forex.
Group loss relief extended to also include foreign subsidiary companies that are resident in EU member states.
Increased allowances on new capital expenditure
Anti-avoidance provisions on the Cyprus tax exemption of dividends when these derive from hybrid instruments.
Anti-avoidance provisions for company reorganisations.
Broadening the term definition of “Republic of Cyprus” to also cover the exclusive economic zone of the island in such a way to ensure the territorial taxation from various activities and exploitations therein.