Changes to the tax laws making Cyprus an even more attractive jurisdiction

TAX ALERT – Changes to the tax laws making Cyprus an even more attractive jurisdiction

Favorable amendments have been passed to the provisions of the Cyprus Income tax legislation and the Special Contribution for Defence tax legislation. These amendments are applicable as of their date of publication in the Official Gazette (published on 16 July 2015 and thus applicable as from tax year 2015).

 The new amendments to theCyprustax system aim primarily to:

·        Assist/motivateCypruscompanies in attracting new equity capital in a tax efficient manner

·        Provide tax advantages to high-net worth individuals to transfer their residency toCyprus

The above amendments may be used towards avoiding the application of CFC rules where applicable. The changes are summarized below:

 Corporation tax – Notional interest deduction:  

 The main drive towards this change is to provide the initiatives for companies to introduce new equity in their structures, as opposed to debt financing which is provided at a high cost. As per these new amendments notional interest deduction on equity has been introduced as of 1 January 2015 onwards whereby:

• Deemed interest deduction will be allowed on ‘new equity’ funds introduced into aCyprustax resident company and which funds are used for the operations of a Company. New equity included both share capital and share premium introduced after 1 January 2015 (not applicable for equity existing directly or indirectly from reserves prior to 31 December 2014);
• Interest will be calculated at a rate which is equal to the effective interest earned on the 10 year government bonds of the country where the funds are invested, plus 3%, with the minimum rate the effective interest earned on 10 year bonds of the government of Cyprus, plus 3%;
• The deemed interest to be deducted cannot exceed 80% of the profits of the company and it cannot be applied in case of losses;

 Lastly, claiming the above mentioned notional interest deduction is not compulsory. Taxpayers may elect whether to claim this deduction wholly or partly.

 Special Contribution for Defence Tax: Non-Domicile Principle:  

 TheCyprusspecial contribution for defence tax law is amended so that individuals who are not considered to be ‘domiciled’ inCypruswould be exempt from payment of defence tax on dividends, interest and rents. This change is applicable to all relevant income irrespective of their source (ie from sources withinCyprusor abroad).

 The special contribution for defence tax law defines domicile in detail in accordance with the rules of the Wills and Succession Law. This change provides the incentives for high-net worth individuals to consider transferring their tax residency toCyprus.

 We hope the above are useful, at your disposal for any further assistance or clarifications required.