On 9 July 2015, the House of Representatives enacted into laws a number of significant amendments to various tax laws. These amendments (i) modernize the Cyprus tax system framework (ii) improve Cyprus’ competitiveness in attracting foreign investments and (iii) encourage equity financing as an alternative to debt financing.
We briefly outline below the main provisions with respect to the following laws which have been amended:-
1. Income Tax Law
2. Capital Gains Tax Law
3. Special Contribution for Defence Law
1. Income Tax Law (the ‘IT Law’)
The IT Law has been amended to introduce a notional interest deduction (the ‘NID’) on equity capital. According to the amended IT Law, with effect from 1st January 2015, (i) companies resident in Cyprus, and (ii) companies not resident in Cyprus but which maintain a permanent establishment in Cyprus are entitled to a deduction of notional interest of up to 80% of their taxable income on new equity capital introduced after this date, which is effectively a tax allowable deduction against the taxable profits of the company. The NID is calculated by multiplying (i) the “new equity capital” held and used by the business in the carrying on of its activities with (ii) the “reference interest rate”.
For the purpose of the IT Law:
• “Reference interest rate” means the yield rate of a 10 year government bond of the country in which the new equity is invested increased by a 3% premium, having as a minimum rate
the 10 year Cyprus government bond yield as at 31 December of the tax year preceding the relevant tax year, increased by 3%.
• “New equity” is the equity introduced in the business on or after 1 January 2015 in the form of issued fully paid share capital and share premium and does not include amounts that
have been capitalised and which were derived from revaluation of movable or immovable property. It is provided that any new equity that has been introduced in a company on or after
1 January 2015 which directly/indirectly emanates from reserves existing as at 31 December 2014 but does not relate to the financing of new assets used in the business, is not deemed as new equity.
2. Capital Gains Tax Law (the ‘CGT Law’ )
The CGT Law has been amended to provide that a sale of immovable property consisting of land or land with building or buildings between 16 July 2015 and 31 December 2016 will be exempt from capital gains tax. The above will apply if the property was acquired by sale at its market value, and not by way of exchange or gift.
3. Special Contribution for Defence Law (the ‘SDC Law’)
The SDC law previously stated that all Cyprus tax resident individuals are liable to pay a special contribution for defence tax on certain categories of income, these being dividends, interest and rental income.
The SDC Law has been amended to introduce the concept of a non-domiciled tax resident in Cyprus so that an individual will now be subject to SDC if he/she is both (i) a resident for tax purposes of Cyprus and (ii) is also considered to be domiciled in Cyprus. Therefore, a Cyprus tax resident individual who is not domiciled in Cyprus will be completely exempted from the special contribution for defence tax on its worldwide income deriving from the categories listed above regardless of whether such income is remitted to a bank account or economically used in Cyprus. It is noted that, generally, no tax is imposed on individuals under the IT Law in respect of interest and dividend income.
An individual is considered to be a resident for tax purposes of Cyprus if he/she is physically present in Cyprus for a period or periods exceeding in aggregate 183 days during the calendar year.
How has ‘domicile’ been defined in the SDC Law?
Under the Law, a person who does not have its domicile of origin in Cyprus, in other words, any person who is not a Cypriot, in the ordinary sense of word, is not considered domiciled in Cyprus unless that person has been a tax resident of Cyprus for at least 17 years out of the last 20 years prior to the tax year and, therefore, will not be subject to the SDC Law.
In other words, any non-Cypriot will only become domiciled in Cyprus if he lives in Cyprus for at least 17 out of 20 years and, therefore, in effect, in almost all cases will not be liable to SDC tax.
The new legislation provides great opportunity for individuals who are interested in becoming tax residents in Cyprus and, at the same time, shield their worldwide income from Cyprus taxation.
For further advice please contact our tax lawyers, Stelios Triantafyllides, Olga Adamidou and Emily Petridou who can assist with your tax queries.