Recent Enactments of Measures for Fiscal Reform  
In May 2012, the House of Representatives enacted laws (the “Amendments”) aimed at further reforming the fiscal position of the Government while, at the same time, enhancing the competitiveness of Cyprus as a financial centre. The Amendments are effective retrospectively from 01 January 2012 (the “Effective Date”).

The most important of the Amendments are set out below.

(A). The Income Tax Law

Law 102(I)/2012, was published in the Official Gazette of the Republic of Cyprus on 06 July 2012 and amended the Income Tax Law, Law 118 of 2002 (as amended). It introduced, among other, the following changes, effective as of the Effective Date:

(I). Intellectual Property (the “IP”) Rights

1. Prior to the Amendments, any IP rights generated income was taxed at 10% on net profits, which is the uniform corporate tax.

2. Following the Amendments, 80% of the profit (after deducting all direct expenses) realized on the sale or use of intangible assets (including damages for unlawful use of such assts) shall be deemed to be an expense and will ,thus, be tax-exempt (the “Exemption”).

3. The Amendments also allow for the cost incurred on the acquisition of IP to be amor¬tised in equal sums over a period of five years.

4. The Amendments capture any expenditure incurred by a person carrying on a business for the acquisition or development of intangible assets as those are defined in the Patent Law of 1998 as amended, Intellectual Property Rights Law of 1976 as amended and the Trademark Law, Cap 268 as amended. In other words, the following categories of intangible assets are within the scope of the Amendments: (a) patents (b) IP rights and (c) trademarks.

II. Deductibility of interest expense

1. Prior to the Amendments, the Inland Revenue Department did not treat any interest on loans received for the acquisition of shares in other companies as a tax deductible expense.

2. Following the Amendments and subject to paragraph 3 below, if a Cyprus parent company incurs an interest expense on the acquisition of shares of a company that is a 100% owned subsidiary (whether directly or indirectly and irrespective of whether the subsidiary is a Cyprus or foreign company), the interest expense will now be deductible for tax purposes by the parent company.

3. Related to paragraph (2) above:

(a) the deduction will only apply if the subsidiary does not own assets that are not used in the business;

(b) if the subsidiary holds such assets, the deductibility of interest expense will be limited to correspond to the amount of assets used in the business.

4. It is anticipated that the change outlined above will enhance the attractiveness of the Cyprus ‘holding company’, in particular because interest expense can be used in group structures for group relief purposes.

5. This change is effective in respect of interest incurred on borrowings used for the purchase of shares purchased on or after the Effective Date.

III. Capital Allowances

Following the Amendments certain types of fixed assets purchased in 2012, 2013 and 2014 will benefit from a considerable increase in the allowable deduction for depreciation, namely for:

(a) plant and machinery acquired in the tax years 2012, 2013 and 2014, the annual capital allowance is increased from 10% to 20%, unless the rate of capital allowances is greater pursuant to a directive;

(b) industrial and hotel premises acquired during 2012, 2013 and 2014, the annual capital allowance is increased from 4% to 7%.

IV. Group Loss Relief

1. Prior to the Amendments, group relief (i.e. setting off the losses of a company with the profits of another in the same tax group) was permitted only when companies were part of the same tax group for a whole tax year.

2. Following the Amendments, in cases where a company has been incorporated by its parent company any time during the year of assessment will be considered to be part of the same group for group relief purposes for that tax year. The effect of this will be to enable groups to claim ‘group loss relief’ from the year of acquisition.

3. Under Cyprus tax legislation, two companies shall be deemed members of a group if:

(a) one is by 75% subsidiary of the other or each one separately are by 75% subsidiaries of a third company;

(b) at least 75% of the voting shares of the companies are held by another company.