The second set of amendments in the provisions of the Cyprus tax legislation aim towards further improving the tax system of Cyprus, making it even more attractive to both the local as well as to the international business community. These changes relate to the income tax legislation and the capital gains tax legislation and are summarized below.
Corporate Income Tax Law
Related party transactions - Introduction of deemed expense
As from January 1 2015 onwards, if an adjustment in the income of one party has been made in accordance with the arm’s length provisions of Section 33 of the Cyprus income tax legislation, then a corresponding deduction/expense should be given to the other party of the transaction. Thus, if for example a deemed interest income is imposed on an interest free loan provided by one Cyprus company to another, then a corresponding deemed interest expense should be given to the Cyprus company receiving the respective loan.
Foreign exchange differences
Foreign exchange differences, both gains and losses irrespective of whether they are realized or unrealized, will be completely tax neutralized (ie not taxable/deductible) as of January 1, 2015 onwards. The only exception relates to companies trading in foreign currencies and related products, whereby such companies may elect not to be taxed on unrealized gains/losses but only be taxed when such foreign exchange differences realize.
Anti-avoidance provisions for dividend income
Under the current provisions dividends are exempt from income tax but may be subject to taxation under special contribution for defence tax. As from 1 January 2016 onwards, dividends will only be exempt from income tax to the extent these are not tax deductible by the paying company. More specifically, if the dividend income received by a Cypriot company from a foreign tax resident company are not considered as dividends by the latter but instead are treated as tax deductible expenses (i.e. ‘hybrid instruments’), then the dividends will be taxable under the Cyprus Income Tax Law as normal business income and will be exempt from Special Contribution for Defence.
In addition, the provisions of the EU Parent/Subsidiary Directive have been amended so that it does not apply in cases that there is an artificial arrangement having as a main purpose to obtain a tax advantage. The Cyprus income tax law has been amended to incorporate this change in its provisions.
Losses from the use of the IP regime
In cases where the special provisions of the Cyprus IP box regime are claimed (ie 80% deemed deduction is granted) and because of this claim there is a loss arising, only 20% of such loss may be carried forward for future utilization against the taxable income of the next 5 years. This change has a retroactive effect as from the tax year 2012 onwards when the IP box regime was introduced in the provisions of the Cyprus tax legislation.
Under the current provisions of the law group loss relief is only allowed between Cyprus tax resident companies. As from January 1 2015 onwards group relief provisions were amended to align Cyprus tax laws with a European Court of Justice’s decision in the Marks & Spencer case, thereby allowing cross-border group relief in the case of losses of an EU subsidiary that has exhausted all other possibilities to use the said losses in its country of tax residence.
In case of surrendering tax losses as noted above, taxable losses must be calculated on the basis of the Cypriot tax laws.
These provisions have also been amended to allow the interposition of EU member state companies, companies whereby a DTT has been concluded or companies in states that have signed the OECD multilateral convention for exchange of information for considering two companies being members of the same group.
Anti-avoidance provisions regarding re-organizations
A certain number of anti-avoidance provisions have been introduced which give the right to the Cyprus tax office not to accept tax free reorganizations if the Commissioner is not satisfied that there are real commercial or financial reasons for such reorganizations and the main purpose is the avoidance or deferral of tax.
Increased capital allowances
The existing provisions on increased annual allowances for new expenditure incurred in the years 2012, 2013 and 2014 for plant and machinery and new industrial buildings and hotels will be extended to years 2015-2016. Therefore, the annual allowances provided for tax years 2015-2016 will continue to be at the rate of 20% (instead of 10%) on plant and machinery and 7% (instead of 4%) for industrial and hotel buildings acquired during the years 2015 and 2016 as well.
Fees for issuing certificates/rulings
The Council of Ministers may issue administrative orders to introduce fees on the issuing of a Tax Residency Certificates and for the issuance of tax rulings.
Amendments to the personal tax system
Moreover, the exemption will be available for any year in which the taxpayer’s emoluments exceed €100.000, regardless of the fact that at any given tax year its emoluments may fall below the €100.000 threshold, provided that at the time the employment in Cyprus commenced, such emoluments exceeded €100.000.
It should be noted that it will no longer be possible for an individual to benefit under both exemptions simultaneously ie the 20% exemption and the 50% exemption.
Capital Gains Tax
Capital gains from sale of shares in property companies
The existing provisions are extended to apply Capital Gains Tax on the sale of shares of companies that indirectly hold Cyprus situated immovable property and whose at least 50% of their value derives from the market value of immovable property situated in Cyprus.
The new provisions will be entered into force as of the date of their publication in the Official Gazette.