Enactments of measures for fiscal reform
On 26 August 2011, the House of Representatives enacted several laws (the “Amendments”) aimed at reforming the fiscal position of the Government while, at the same time, maintaining the competitiveness of Cyprus as a financial centre. The Amendments were published in the Official Gazette of the Republic of Cyprus on 31 August 2011 (the “Effective Date”).
The most important of the Amendments are set out below.
(I). The Income Tax Law
Law 116(I)/2011 amended the Income Tax Law, Law 118 of 2002 (as amended) and introduced the following changes:
(1) Effective from the tax year 2011:
(i) a new income tax rate has been introduced at the rate of 35% for any income earned above €60,000;
(ii) the income and pension of the (a) President of the Republic of Cyprus and (b) President of the House of Representatives of the Republic of Cyprus will be taxable;
(2) Tax incentives have been introduced effective from 01 January 2012, to attract to Cyprus highly-paid employees and in this respect a 50% exemption will apply to the income of a non-resident person taking up residence in Cyprus, provided that the annual income of the employee exceeds €100.000. This exemption applies for a period of 5 years starting from the first year of employment.
(II). The Special Contribution for the Defense Fund
L.114(I)/2011 amended the Special Contribution for the Defence Fund of the Republic Law, Law 117 of 2002 (as amended) (‘the Special Contribution for Defence Law’) and introduced the following changes, effective as of the Effective Date:
(A) (A) The Special Contribution Tax (the “SCT”) on dividends received has been increased from 15% to 17%. Since the enactment of the Amendments, L.190(I)/2011 increased the SCT temporarily from 17% to 20% for 2012 and 2013. The rate of SCT on dividends has reverted to 17% with effect from 1 January 1 2014. In this respect, the following should be noted:
(i) In any event, if the recipient of the dividend from a Cyprus company is a non resident individual or a non resident company, such dividend is completely exempt from Special Contribution Tax and, therefore, the increase in the rate does not affect non residents who are recipients of dividend from Cyprus companies;
(ii) The exception in paragraph (i) above, effectively, applies equally when a relevant corporate structure involves a layer of Cyprus companies provided the ultimate owner is a non resident of Cyprus.
(B) SCT on interest income has been increased from 10% to 15%. Since the enactment of the Amendments, Law 29(I)/2013 has increased SCT to 30%. CLICK HERE In this respect, one should note the following:
(i) In case the interest received by a company is in its ordinary course of business or closely related thereto, the company is not liable to Special Contribution Tax on such interest but is liable to income tax at the normal corporate rate of 10%. Since the enactment of the Amendments, Law 27(I)/2013 has increased corporate income tax to 12,5%. CLICK HERE
(ii) In case the applicable tax is income tax as described in paragraph (i) above, the tax is levied on the net interest after subtracting all relevant expenses while, in case the interest is not received in the ordinary course of business and it is, therefore, liable to the 15% SCT, this tax is levied on the gross interest received. Since the enactment of the Amendments, Law 29(I)/2013 has increased SCT to 30%. CLICK HERE
(iii) There are several devices which can lawfully ensure that an investor, effectively, is only liable to income tax on interest received and not to SCT.
(III). The Companies Law
L.117(I)/2011 amended the Companies Law, Cap. 113 (as amended) and introduced a new section 391 as follows:
(1) As from 2011 an annual fixed duty of €350 is levied on all companies (except those that are dormant or own no assets) payable to the Registrar of Companies, noting that for groups of companies the total levy is capped at €20,000.
(2) The duty for 2011 is payable by 31 December 2011 and thereafter by 30 June.
(3) Failure to pay the duty by the due date incurs the following consequences:
(i) 10% penalty if duty is paid within two months from the due date;
(ii) 30% penalty if duty is paid within five months from the due date;
(iii) if duty is not paid within five months, the Registrar of Companies may remove the offending company from the registry, noting that there are procedures embedded in the law for reinstating such a company on the registry.
(IV). The Value Added Tax Law
The Amending Law No. 3 of 2011 of the Value Added Tax Law amended the Value Added Tax Law (as amended) and introduced the following changes:
(1) Currently, eligible individuals who purchase and/or construct a house or flat as their primary and permanent place of residence (“Residence Criteria”) are entitled to a government rebate of approximately €17,000.
(2) As of 01 November 2011, provided the Residence Criteria are met a reduced VAT rate of 5% will apply.