RECENT AMENDMENTS TO THE INCOME TAX LAW L.118(I)/2002 AND SPECIAL DEFENSE CONTRIBUTION LAW L.117(I)/2002

On 22 October, 2009; the House of Representatives enacted Laws 110(I)/2009 and 111(I)/2009 amending the Income Tax Laws and the Special Contribution for the Defense Fund for the Republic Laws respectively (the “Amendments”).

The Amendments are effective as of 01 January, 2009; and have an impact on the tax treatment of the following matters:

(a) interest income;

(b) dividend Income;

(c) Collective Investment Schemes (the "CIS").

It is expected that these Amendments will enhance the position of Cyprus as an international business centre and render Cyprus an attractive location for the establishment of CIS.

For purposes of this note the term "Cyprus Company" refers to a company which is a tax resident of Cyprus.

A. Interest income received by Cyprus Companies:

1. Prior to the Amendments, the treatment of interest income received by Cyprus
Companies was as follows:

(a) If the interest income was received in the ordinary course of business or in
close connection thereto, this was subject to 10% Income Tax.

(b) If the interest income was not received in the ordinary course of business or in
close connection thereto, then:

(i) 50% of such income was subject to 10% Income Tax; and
(ii) the gross amount of the whole of such income was subject to 10% Special Contribution Tax (the "SCT").

2. Pursuant to the amendments, item l(b)(i) above has been abolished. Thus the gross amount of interest income received by a Cyprus Company, and which is not received in the ordinary course of business or in close connection thereto, is totally exempt from income tax and is only subject to 10% SCT.

B. Dividend income received by Cyprus Companies:
1. Dividend income received by a Cyprus Company is not subject to Income Tax.

2. The normal rate of SCT on dividends is 15%.

3. Prior to the Amendments, the position regarding Cyprus Companies was that if the dividend was received by a Cyprus Company from another company which as not a tax resident of Cyprus, then the following provisions applied:

(a) The dividend was exempt from SCT provided that the Cyprus Company held at least 1% of the share capital of the payer;

(b) The exemption in (a) above did not apply if (i) the payer engaged directly or indirectly more than 50% in activities which lead to investment income and (ii) the foreign tax burden of the payer was substantially lower than the tax burden of the recipient.

4. Pursuant to the Amendments, the proviso in 3(a) above has been abolished and there is no minimum holding requirement, to enable a Cyprus Company to enjoy the exemption of the SCT.

C. Amendments applicable to CIS:

1. Deemed dividend distributions:

(a) Every Cyprus Company is deemed to have distributed to its shareholders who are tax residents of Cyprus 70% of its distributable profits in the form of dividends as at the end of a 2 year period from the end of the year of assessment to which the profits related.

(b) 15% SCT is payable on such deemed distributions described in (a)
above.

(c) Pursuant to the Amendments, a tax resident of Cyprus who is deemed to receive dividends from a CIS (the establishment and operation of which is governed by the UCITS Law of 2004 or by other legislation regulating the establishment and operation in Cyprus of other CIS) is no longer subject to 15% SCT but to 3% SCT on the amount of such deemed dividend.

2. Deemed dividend distributions upon dissolution:

(a) In case of dissolution of a Cyprus Company the profits of the last 5 years (which were not distributed or deemed to have been distributed), are deemed to have been distributed to the shareholders upon dissolution.

(b) 15% SCT is payable on such deemed distributions described in (a) above.

(c) Pursuant to the Amendments, the dissolution of a CIS falls within (a) above but a tax resident of Cyprus who is deemed to receive dividends from a CIS (the establishment and operation of which is governed by the UCITS Law of 2004 or by other legislation regulating the establishment and operation in Cyprus of other CIS) is no longer subject to 15% SCT but to 3% SCT on the amount of such deemed dividend.

3. Deemed dividend distributions on reduction of capital:

(a) On the occasion of a capital reduction of a Cyprus Company, any sums that were payable to the shareholders up to the amount of the undistributed taxable income are classified as deemed dividend distributions.

(b) 15% SCT is payable on such deemed distributions described in (a) above.

(c) Pursuant to the Amendments, the redemption of units/shares in CISs is not considered as a reduction of capital. Consequently, any amounts payable to the shareholders of a CIS will not be deemed as distributed dividends and therefore, will not be liable to 15% SCT that is otherwise chargeable.

4. Disposal of units/shares in CISs:

(a) Under Cyprus Income Tax Law, the disposal of securities is exempted from income tax.

(b) Prior to the Amendments, it was unclear, whether the definition of securities included the disposal of units/shares in CISs.

(c) Pursuant to the amendments, it has been clarified that profits arising from the disposal of units/shares in CISs are exempt from income tax as these are
regarded as securities.

5. Interest Income:

(a) Pursuant to the Amendments, it is expressly stated and clarified that interest income earned by a CIS is deemed to derive from its normal course of business and is consequently only taxed at the standard 10% Income Tax rate.