Cyprus Tax Regime

 

Cyprus Tax Regime

Cyprus imposes corporation tax on 'companies': this term includes all companies incorporated or registered under any Cyprus law, and any foreign company which carries on business or has an office or place of business (permanent establishment) in Cyprus.

As from 2003, Cyprus applies a residence-based taxation regime. "Resident in the Republic", when applied to a company, means a company whose management and control is exercised in the Republic; and "non-resident or resident outside the Republic" will be construed accordingly.

A Company is considered to be tax resident in Cyprus if its management and control is exercised in Cyprus. In order to achieve tax residency, several factors are taken into consideration by the Tax Authorities such as the make-up of the Board of Directors, the place where major decisions are taken and major contracts are signed. Tax residency is required in order for a company to be taxed under the Cyprus tax laws and also for taking advantage of all European directives as well as the Double Tax Treaty (DTT) network that Cyprus has secured for tax resident persons.

As from 1st January 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.

Due to the global initiatives in the international tax sector, particularly the OECD/G20 initiative and the base erosion and profit shifting (BEPS) action plan, the profit margins (0,35% or lower) that used to be applicable for tax purposes on back to back financing arrangements, have ceased to be acceptable as from 1st of July 2017.    

The term “intra-group financing transaction”, refers to any activity consisting in the granting of loans or cash advances to related entities, remunerated (or that should be remunerated) by interest to related companies, financed by financial means and instruments, such as debentures, private loans, cash advances and bank loans.

In view of the above, for companies involved in such intra-group financing transactions, two separate tax computations should be submitted for the accounting period of 2017. One for the period 01/01/2017-30/06/2017 and one for the period 01/07/2017-31/12/2017.

However, from the 1st of July 2017 onwards, the tax computation will be based on the arm’s length principle, being the international standard adopted by OECD member states.

This means that for each intra-group financing transaction conducted (for example a loan agreement) the Company has to determine through a transfer pricing (TP) study, that the agreed remuneration (for example interest) complies with the arm’s length principle i.e. corresponds to the price which would have been accepted by independent entities in comparable circumstances. If according to the transfer pricing study, a higher interest rate should be imposed on the loan agreement, the tax computation will be adjusted accordingly.

For the sake of simplification, a back to back intra-group financing arrangement will be deemed to comply with the arm’s length principle, if the company receives a minimum after tax return of 2% on the assets generating the interest income (simplification measures). Even in such a case, the Tax Authorities may still request the submission of a transfer pricing study.  

Corporate tax for resident companies is imposed at the rate of 12,5% for each year of assessment upon the taxable income derived from sources both within and outside Cyprus. However, in arriving at the taxable income, deductions on such income and exemptions must be taken into account; all relevant expenses for the production of that income are deductible expenses whereas dividends, capital gains or profits from the sale of shares and other securities are also tax exempt.

Tax treatment of foreign dividend income received by Cyprus tax resident companies

The amendments voted by the Cyprus Parliament in 2009, abolished the minimum 1% holding requirement for the exemption of foreign dividends from taxation in Cyprus when received by a Cyprus tax resident company. This makes it easier for portfolio investors to benefit from the dividend participation exemption.

Therefore, the requirement is that the dividend from abroad tax exemption (i.e. no tax) will not apply only when:

a) more than 50% of the foreign paying company’s activities result directly or indirectly in investment income, and

b) the foreign tax is significantly lower than the tax burden in Cyprus, i.e. less than 6,25% (from 2013 onwards).

The above exemptions do not apply (as from 1 January 2016), for dividends which are tax deductible for the paying company.

“Permanent establishment” is a fixed place of business, through which the business of an enterprise is wholly or partly carried on. "Permanent establishment" has the same meaning as defined in the OECD Model Tax Convention

For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

The term "permanent establishment" includes especially:

a. a place of management

b. a branch

c. an office

d. a factory

e. a workshop, and

f. a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.

Notwithstanding the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include:

a. the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise

b. the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery

c. the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise

d. the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise

e. the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character

f. the maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs a) to e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.

Losses of a permanent establishment outside the Republic Tax losses arising from a permanent establishment maintained outside the Republic can be offset against taxable profits of the company arising in the Republic in the same year. However, any subsequent taxable profits from such a permanent establishment are taxable up to the amount of tax losses previously offset.

Allowable Deductible expenditure needs to be incurred 'wholly and exclusively' for the business; however, mixed private/company expenses can often be apportioned. Among others, the following expenses are allowable:

 Contributions to an approved fund

 Bad debts and provisions for them

 Scientific research expenditure (subject to conditions)

 Expenditure on film infrastructure and technological equipment (subject to conditions/restrictions apply)

 Various types of charitable expenditure (approved charitable organisations and if these do not create taxable losses)

 Interest expense incurred for the acquisition of a directly or indirectly owned subsidiary provided that the latter does not directly or indirectly own any assets that are not used in the business, if the subsidiary directly or indirectly does own assets not used in the business, the interest is restricted to the amount which relates to the assets not used in the business (applicable for acquisitions from 1 January 2012).  

 Interest expenses incurred for the acquisition of fixed assets used for business purposes

 Expenses incurred for the acquisition of shares in innovative small and medium sized business (subject to conditions/restrictions apply)

 Donations to political parties (subject to conditions/restrictions apply)

 Rental payments

 Losses from a permanent establishment abroad (subject to conditions)

 Notional interest – new equity introduced as from 1 January 2015 (for further details please see below relevant section: ‘’Introduction of a Notional Interest deduction (NID) regime on equity’’

 Salaries and other compensation costs for employees and directors.

Non-deductible expenses

The following expenses cannot be deducted from the income in the computation of taxable income:

 Incorporation expenses for the formation of a company

 Annual levy paid to the Registrar of Companies (€350)

 Expenses relating to share capital/acquisition of shares

 Private motor saloon car expenses

 Expenses paid on behalf of other companies

 Business entertaining expenses over the amount of €17.086 or 1% of turnover, whichever is lower

 Expenses not supported by invoices or other supporting documentation

 Wages and salaries on which employer’s contributions have not been paid to the relevant funds (including provident funds), in the year they are due will not be tax deductible in the relevant tax year. If the contributions are paid within two years from the end of the relevant tax year, then they are tax deductible in that year.

 Interest payable or deemed to be payable in relation to the acquisition of a private motor vehicle, irrespective of whether it is used in the business or not, or other asset not used in the business. This restriction is lifted after 7 years from the date of acquisition of the relevant asset.

 Interest expense incurred for the acquisition of shares in a wholly owned (direct or indirect) subsidiary will be deductible for income tax purposes provided that this subsidiary does not own (directly or indirectly) any assets which are not used in the business. If this subsidiary does own (directly or indirectly) assets that are not used in the business, the interest expense that corresponds to the percentage of assets not used in the business will not be deductible. This applies to shares acquired from 1 January 2012

Effective from the 2015 tax year exchange differences, both gains and losses, and irrespective of whether they are realised or unrealised will no longer be taxable or tax deductible, irrespective of the purpose for which the funds in a foreign currency have been used for. This provision will not apply in the case of companies trading in foreign currencies and related derivatives. However, such companies will be able to may make an irrevocable election not to be taxed on unrealised gains or losses, and to be taxed only when such gains or losses are realized.

Taxable Losses carried forward

Previously, any trading losses that have arisen in the Cyprus Company could be set off against its profits and any excess could be carried forward, indefinitely.

However, according to the relevant Amendment with the Law 188(I)/2012, article 13(1), the taxable loss of a specific year can be carried forward only to the next five years.

The restriction of five years means that for the taxation of year 2012 (year the law becomes effective), the taxable losses which can be claimed from the taxable income of year 2012 should be the losses relating to years 2007 to 2011 (five years).

Circular – ‘Titles’

Circular 2009/06 (amending Circular 2008/13) was issued by the Income Tax Authorities listing the financial instruments that fall within the definition of ‘titles’. The full list is as follows:

 Ordinary shares

 Founder’s shares

 Preference shares

 Options on titles

 Debentures

 Bonds

 Short positions on titles

 Futures / Forwards / Swaps on titles

 Depositary receipts on titles (ADRs and GDRs)

 Rights of claims on bonds and debentures (rights on interest of these instruments are not included)

 Index participations only if they represent titles

 Repurchase agreements or repos on titles

 Participations in companies; Russian OOO and ZAO, US LLC provided they are not transparent entities for the purposes of taxation on their income, Romanian SA and SRL and Bulgarian AD and OOD

 Units in open-end or closed-end collective investment schemes that have been incorporated, registered and operate in accordance with the provisions of the relevant legislation of the incorporated country. Examples of such units are:

o Investment trusts, investments funds, mutual funds, unit trusts, real estate investments trusts

o International collective investment schemes – ICIS

o Undertakings for collective investment in transferable securities or UCITS

o Other similar financial institutions.

The circular applies for tax years 2003 and onwards.

Therefore, profits from the sale of the above titles are not taxed in Cyprus.

One crucial point to mention is that promissory notes, bills of exchange and cryptocurrencies are NOT titles according to the Income Tax Law. Therefore, any profit from the sale of promissory notes is taxed at 10%/12,50% depending on the year it relates to (12,5% from 2013 onwards).

Group relief provisions

The Group Relief rules provide for group relief of tax losses among companies of the same group. A company will be considered as member of a group if:

 A company is at least a 75% subsidiary of the other, or

 Both companies are at least 75% subsidiaries of a third company.

 A company will be considered to be a 75% subsidiary of another company if and so long as not less than 75% of its ordinary share capital with voting rights are owned directly or indirectly by that other company, and that other company is entitled to not less than 75 per cent of:

o Any profits available for distribution to the equity shareholders, and

o Any assets of the subsidiary company which would be available for distribution to its equity holders on a winding up.

Group tax losses may be set off as long as both companies are Cypriot tax residents and are members of the same group during the whole year of assessment. Only the loss of any year of assessment of a company can be set off against the other company's profits of the corresponding year of assessment. Losses brought forward will not be available for Group Relief. In addition, where a company has been incorporated by its parent company during the tax year, this company will be deemed to be a member
of this group for group relief purposes for that tax year.

As from 1 January 2015, interposition of a non – Cyprus tax resident company(ies) will not affect the eligibility for group relief as long as such company(ies) is/are tax resident of either an EU country or in a country with which Cyprus has a tax treaty or an exchange of information agreement (bilateral or multilateral). A partnership or a sole trader transferring a business into a company can carry forward tax losses into the company for future utilisation.

The group loss relief is extended to include qualifying group subsidiary companies that are also tax residents in any EU member state. However, this will only apply provided the group subsidiary company has exhausted all the means available for using the available tax loss in its respective country of residence or in the country where its immediate holding company resides.

Cyprus Withholding Tax

Payment of dividends, interest and capital distributions made by a Cypriot company to non-resident shareholders are free from any withholding taxes

Provisional tax

For every year, the Company should submit Provisional Tax Assessment on 31 July of the specific year, and pay the tax relating to the year by two instalments.

Provisional tax instalments made by companies and self-employed individuals are two (from three that previously applied) and these instalments are due on 31 July and 31 December each year.

Then, when the Tax Form for the specific year is prepared, in case the profit per the Assessment is more than 75% of the actual profit per the Tax Form, then the penalty of 10% on the tax payable is not levied.

However, the Company can submit a Revised Provisional Tax Assessment until the 31st of December of the specific year, in order to change the profit estimate and pay the total tax and thus, avoid the 10% penalty.

Reorganisations

Transfers of assets and liabilities between companies in the context of reorganisations can be effected without any tax consequences.

Tax losses can be carried forward by the receiving entity.

Annual wear and tear allowances on assets

These are calculated as a percentage on the cost of each asset used in the business and the relevant amount is deductible from the taxable income.

Plant and machinery*

Rate %

Plant and machinery

10

Furniture and fittings

10

Industrial carpets

10

Machinery and tools used in an agricultural business

15

 

Vehicles and Means of Transportation*

Rate %

Commercial motor vehicles

20

Motor cycles

20

Excavators, tractors, bulldozers, self-propelled loaders and drums for petrol companies

25

Armored cars (e.g. used by Security Services)

20

Specialized machinery for the laying of railroads

20

Specialized machinery for the laying of railroads

20

New airplanes

8

New helicopters

8

Sailing vessels

4,5

Motor Yachts

6

Steamships, tug-boats and fishing boats

6

Ship launching machinery  

12,5

New cargo vessels

8

New passenger vessels

6

Used cargo/passenger vessels

Over their UEL

*Plant and machinery, vehicles (excluding private motor vehicles) and other assets acquired during the tax years 2012 - 2018 (inclusive) are eligible to accelerated tax depreciation at the rate of 20% (excluding such assets which are already eligible for a higher annual tax rate of tax depreciation).

Other  

Rate %

Televisions and videos

10

Computer hardware and operating systems

20

Application software

33 1/3

Application software for less than €1.709 is written off in the year of acquisition

 

Wind Power Generators

10

Photovoltaic Systems

10

Tools in general

33 1/3

Videotapes property of video clubs

50

 

Buildings* 

Rate %

Commercial buildings

3

Industrial, agricultural and hotel buildings

4

Flats

3

Metallic greenhouse structures

10

Wooden greenhouse structures

33 1/3

* In the case of industrial and hotel buildings that are acquired during the tax years 2012 - 2018 (inclusive), accelerated tax depreciation at the rate of 7% per annum applies. 

 

Special contribution for defence

As per Article 3 of the Special Contribution for the Defence of the Republic Law No. 117(I)/2002, Cyprus tax resident individuals and companies and also individuals domiciled in Cyprus, are liable to Special Defence Contribution (“SDC”) as follows:

Source

Cyprus tax resident Companies

Cyprus tax resident and domiciled individuals

Cyprus tax resident but non-domiciled individuals

Dividends from Cyprus tax resident companies

0%

 

17% if received after the lapse of 4 years from the end of the year in which the profits were distributed

17%

0%

Dividends from non-Cyprus tax resident companies

0%

 

However, 0% and not 17% is applicable when:

a) more than 50% of the foreign paying company’s activities result directly or indirectly in investment income, and

b) the foreign tax is significantly lower than the tax burden in Cyprus, i.e. less than 6,25%

17%

0%

Interest income arising from the ordinary activities or closely connected with the ordinary activities of the business

0% but subject to corporation tax

0% but subject to personal tax

0% but subject to personal tax

Other interest income

30%

30% (subject to conditions)

0%

Rental income less 25%

3%

3%

0%

 

Deemed dividend distribution

Under the deemed distribution provisions, a Cyprus company should distribute as dividends at least 70% of its accounting profits (after tax) within two years from the end of the year in which the relevant profits were generated. If the above dividend distribution provisions are not satisfied, then the Cyprus Company will be considered to have declared such dividends, and SDC is applicable.

Deemed dividend distribution is reduced with payments of actual dividends which have already been paid out from the profits of the relevant year.

SDC is charged to the extent that the ultimate direct and/or indirect shareholders of the company are individuals who are both Cyprus tax resident and Cyprus domiciled.

As of 16 July 2015, the deemed distribution provisions should not apply to the extent that the ultimate direct/ indirect shareholders of the company are individuals who are Cyprus tax residents, but non- Cyprus domiciled.

For the purpose of calculating the amount of the deemed distribution, the term profits means the accounting profits arrived at using generally acceptable accounting principles, after the deduction of any transfers to reserves as specified by any law. Any losses brought forward, group losses as well as any amounts, including any additional depreciation, which emanate from the revaluation of movable and immovable property are ignored.

The term tax includes:

· the corporation tax, which includes the 10% additional tax

· the special contribution for defence

· the capital gains tax and

· any tax paid abroad that has not been credited against income tax and/or special defence tax payable for the relevant year

 

 

Capital Reduction

In the case of a capital reduction of a company, any amounts paid or due to the shareholders over and above the previously paid-in equity, will be considered as dividends distributed subject to special defence contribution at 17% after deducting any amounts which have been deemed as distributable profits.

The redemption of units or shares in a Collective Investment Scheme is not subject to the above provisions.

Before 16 July 2015, the above three provisions applied only if the ultimate shareholders (direct or indirect) are individuals who are tax residents in Cyprus. As from 16 July 2015, the above provisions apply only if the ultimate shareholders (direct or indirect) are individuals who are both tax residents in Cyprus and domiciled in Cyprus.

Disposal of assets to shareholder at less than market value

When a company disposes of an asset to a shareholder who is individual or a relative of his up to second degree or his spouse for a consideration less than the market value of the asset, the difference between the consideration and the market value will be deemed to have been
distributed as a dividend to the shareholder. This provision does not apply for assets originally gifted to the company by a shareholder who is individual or a relative of his up to second degree or his spouse.

Company dissolution

In the case that a company is dissolved, the accumulated profits of the last 5 years prior to the dissolution, which have not been distributed or deemed to have been distributed, will be considered as distributed on dissolution and will be subject to Special contribution for defence at the rate of 17% (3% for Collective Investment Schemes). The above provision is not applicable if there is a dissolution under a reorganisation.

Non – domiciliation rules

The Special Contribution for the Defence of the Republic Law (SDC) imposes tax on certain categories of income (interest, rents, dividends) received by persons who are considered to be residents for tax purposes of Cyprus, subject to any available exemptions. The SDC Law also includes provisions for the deemed distribution of profits of Cypriot tax resident companies to the extent that the shareholders of such companies are Cypriot tax residents.

With the introduction of the concept “domicile in the Republic” in the SDC Law, non-domiciled individuals will be exempt from Special Defence Contribution on their dividend, interest and rental income, even if they spend more than 183 days in Cyprus (Cyprus tax residents). Therefore, non-domiciled (or “non-dom”) Cyprus tax resident individuals will be exempt from both income tax and SDC on dividend income and interest income. This amendment aims to attract high net worth individuals to reside in Cyprus.

The new provisions define domicile in accordance with the rules of the Wills and Succession Law:

· A domicile of origin (i.e. the domicile received by an individual at birth), and

· A domicile of choice (i.e. the domicile acquired by an individual by establishing a home with the intention of a permanent or indefinite stay).

A person who has a domicile of origin in Cyprus will be treated as “domiciled in Cyprus” for SCD purposes with the exception of:

· An individual who has obtained and maintained a domicile of choice outside Cyprus under the provisions of the Wills and Succession Law, provided that this individual was not a Cyprus tax resident for a period of at least 20 consecutive years prior to the tax year in question, or

· An individual who was not a Cyprus tax resident for a period of at least 20 consecutive years immediately prior to the entry into force of the introduced provisions (i.e. prior to 16/07/2015).

Irrespective of his/her domicile of origin, an individual who remains a tax resident of Cyprus for a period of at least 17 years out of the last 20 years prior to the tax year in question, shall be deemed as domiciled in Cyprus for SDC purposes.

The law includes anti-abuse provisions as per which the tax authorities have the right to disregard the transfer of property made by a person who is domiciled in Cyprus to a relative up to a third degree of kindred who is not domiciled in Cyprus in case such transfer was made with the aim to avoid the imposition of SDC as a result of the introduction of “non-domicile” rules. The non-domicile rules are expected to further encourage the relocation of corporate executives and encourage high-net-worth individuals to take up residency in Cyprus.

The non-domicile rules are effective as of the date of publication in the Official Gazette of the Republic (17th of July 2015).  


Capital Gains Tax


Capital Gains Tax (“CGT”) applies to the gains of an individual or company arising from the disposal or disposition of chargeable property situated in Cyprus and shares in companies which directly or indirectly own immovable property situated in Cyprus.

Such gains are not subject to income tax. The Law in question is the Capital Gains Tax Law 52/80 as amended.

Chargeable property means:

· Immovable property situated in Cyprus;

· Shares of companies, which are not listed on a recognised Stock Exchange, and which own immovable property situated in Cyprus;

· Shares of companies which directly or indirectly participate in a company or companies which own immovable property situated in Cyprus and at least 50% of the market value of these shares (without taking into account any liabilities) derives from the market value of the immovable property;

· Rights under a sales agreement for the sale of immovable property situated in Cyprus.

The gain made from a chargeable disposal or disposition of property is subject to CGT at the rate of 20%.

Certain disposals are exempt from CGT. These are the following:

· A transfer by reason of death

· Gifts from parent to child and transfers between husband and wife

· Gifts or transfers to relatives up to third degree of kindred

· Gifts to a company where the company’s shareholders are and continue to be members of the donor’s family for a minimum period of five years after the day of the transfer

· Gifts by a family company to its shareholders, provided that the property was originally acquired by the company by way of gift. The property must have been kept by the donee for a period of at least three years

· Gifts to charities and the Government

· Transfers under a company reorganisation scheme approved by the tax authorities

· Exchange or disposal of immovable property under the Agricultural Land (Consolidation) Laws

· Expropriations

· Exchange of properties, provided that the whole of the gain made on the exchange has been used to acquire the other property. The gain that is no taxable is deducted from the cost of the new property, i.e. the payment of tax is deferred until the disposal of the new property

· Transfers of property between spouses after the issue of divorce and which constitutes a settlement of property between them.

Determination of capital gain

Liability is restricted to gains accruing since 1 January 1980. The costs that are deducted from the gross proceeds on the disposal of immovable property are the market value of the property at 1 January 1980, or the costs of acquisition and improvements of the property, if made after 1 January 1980, as adjusted for inflation up to the date of disposal based on the consumer price index (CPI) in Cyprus. Expenses that directly relate to the acquisition and disposal of immovable property (e.g. transfer and legal fees etc.) are also deducted, subject to certain conditions.


Lifetime Exemptions

Individuals can deduct from the capital gain the following:

Disposal of private residence (subject to certain conditions)

85.430

Disposal of agricultural land by a farmer

25.629

Any other disposal of immovable property

17.086


The Transfer of Immovable property is made at the District Lands Office.

Transfer fees are charged by the Department of Land and Surveys to the acquirer on transfers of immovable property.

The transfer fees are calculated on the market value of the property or lease/sublease as estimated by the Department of Land and Surveys at the following rates:

Market value

Rate %

Fees

Accumulated fees

Up to 85.000

3

2.550

2.550

85.000 – 170.000

5

4.250

6.800

Above 170.000

8

 

 

 

The following transfers are exempt from transfer fees:

· Transfer of immovable property on which VAT is imposed;

· Transfer of immovable property from a company to company under a reorganisation scheme;

· Transfer executed in the context of bankruptcy, liquidation or disposal of mortgaged immovable property by the lender.

Transfer fees are reduced by 50% in cases where the purchase of immovable property is not subject to VAT.

On the transfer of immovable property by donation between spouses, spouses and children or relatives up to third degree of kindred, transfer fees are calculated on the value of the property as at 1 January 2013 at the following rates:

Transfer to children

0%

Transfer to spouse

0,1%

Transfer to a relative (up to 3rd degree)

0,1%

 

 

 

Cyprus IP Rights Box Regime

Background Information

As part of the amendments in the Cyprus Income Tax Laws towards the end of May 2012, and as part of the government’s programme to stimulate the economy, a series of incentives and exemptions relating to income from IP rights, commonly known as an IP rights box have been introduced. The amendments were effective from January 1, 2012.

Under the old IP regime, qualifying intangible assets are those defined in the Patent Rights Law, the Intellectual Property Law and the Trademarks Law.

In calculating the taxable profit, an 80% deemed deduction applies to the net profit from the exploitation and/or disposal of such intangible assets.

Any capital gain from the sale of such intangible asset by any person who did not enjoy the tax benefits of the provisions of the old IP regime is exempt from tax.

The net profit is calculated after deducting from the income and/or profit that is generated from the exploitation and/or disposal of such intangible assets, all direct expenses associated with the production of this income or profit, as well as a 20% annual capital allowance, applicable on the cost of acquisition and/or development of such an intangible asset.

Where a net loss is created, only 20% of such loss is eligible to be surrendered to other group companies (under the group relief provisions) or to be carried forward to subsequent years (subsequent to the 5-year rule restriction).

Transitional provisions have been included for taxpayers who have previously entered the old IP Box regime. More specifically those taxpayers shall be able to continue to benefit from the application of the old IP regime until 30 June 2021, with respect to IPs which:

a. were acquired before 2 January 2016, or

b. were acquired directly or indirectly from a related person during the period from 2 January 2016 until 30 June 2016 and which assets at the time of their acquisition were benefiting under the IP Box regime or under a similar scheme for intangible assets in another state, or

c. were acquired from an unrelated person or developed during the period from 2 January 2016 until 30 June 2016.

For intangible assets which were acquired directly or indirectly from a related person during the period from 2 January 2016 until 30 June 2016 and which do not fall under the above provisions, a transitional period until 31 December 2016 will apply.

The income qualified for the application of the current IP Box regime now includes embedded income and income from intangible assets for which only economic ownership exists.

New IP regime

The provisions of the new IP regime are effective from 1 July 2016.

The new IP regime apply only to patents and patents equivalents, copyrighted software, utility models and other IP assets that are non-obvious, useful and novel (Qualifying IP assets). These are assets acquired, developed or exploited by a person in furtherance of his business, which is the result of research and development activities and for which economic ownership exists. Any marketing related IP assets such as trademarks will not be treated as qualified assets.

Qualifying profits are determined under the Organisation for Economic Co-Operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Action 5 nexus approach. In calculating the taxable profit, an 80% deemed deduction applies to the qualifying profits from the exploitation of such qualifying intangible assets which is calculated based on a specific formula that follows the modified nexus approach.

Capital Gains arising from the disposal of a qualifying asset are not included in the qualifying profits and are fully exempt from income tax.

The taxpayer may choose to forego the whole or part of the deduction in each year of assessment. Where the calculation of qualifying profits results in a loss, only 20% of this loss may be carried forward or group relieved.

The Nexus Approach provides that there should be sufficient substance and an essential nexus between the expenses, the IP assets and the related IP income in order to benefit from a new Cyprus patent box regime. Qualifying profits will be calculated by using the following ratio:

 

Qualifying expenditure excludes though the R&D costs of outsourcing to related parties, contrary to the cost of outsourcing to unrelated parties which are considered as part of ‘qualifying expenditure”, the cost of the acquisition of intangible assets and costs which cannot be directly connected to a specific qualified IP asset.

In addition, an up-lift expenditure equal to the lower of:

i. 30% of the eligible costs, or

ii. the total amount of the cost of acquisition and outsourcing to related parties for research and development in relation to the eligible intangible asset will be added to the qualifying expenses.

Expenditure of acquiring a non-qualifying intangible asset in accordance with the new rules or which does not qualify for the transitional provisions and the asset is used in furtherance of the business of the taxpayer can be amortized over the period of its useful life (maximum of 20 years) in accordance with the accepted accounting principles.

Goodwill does not qualify for amortization.

Introduction of a Notional Interest deduction (NID) regime on equity

Companies (including permanent establishments of foreign companies) will be entitled to a NID on equity.

Companies that attract or introduce new equity/capital would be able to claim a NID of up to 80% of their taxable income, reducing their overall effective tax rate to as low as 2,5%.

The NID would be calculated as follows: NID = qualifying equity x reference rate. Qualifying equity will include share capital and share premium issued (provided it is fully paid) on or after 1st January 2015. New equity does not include amounts that have been capitalised as equity and which are the result of a revaluation of movable or immovable property.

Reference interest rate means the interest rate on the 10-year government bond rate (as at the end of the year preceding the relevant tax year) of the country in which the qualifying equity is invested in, increased by 3%, subject to a minimum rate equal to the 10-year Cyprus Government bond rate increased by 3%.

The notional interest would be deductible according to the same rules as actual interest expense, i.e. the degree of tax deductibility would depend on the way the new equity/capital will be utilised. In the event of losses, the NID will not be available. Consequently, this means that the NID cannot create or increase a tax loss. Taxpayers can elect not to claim the NID or claim part of it for each year.

The law includes a number of anti-abuse provisions. Where the capital originates directly or indirectly from loans obtained by another Cyprus company that has itself received a tax deduction for interest expense, then the NID will be reduced by that same amount. Similarly, where new capital originates either directly or indirectly from new capital introduced to another Cyprus company, only one company will be entitled to the NID.

The NID provides a significant tax incentive for existing companies to re-capitalise their operations. Furthermore, it aims to attract new companies to set up their operations in Cyprus and benefit from this tax incentive.

The NID regime is effective as of 1st January 2015.


Tonnage tax regime

Shipping companies

Taxation for shipping activities is governed by the Merchant Shipping (Fees and Taxing) Legislation which provides for exemption from Income tax on the shipping activities. It, however, provides for the Tonnage Tax System (TTS) which applies to qualifying ship owners, managers and charterers. TTS can apply to qualifying community ships (ships registered to the Shipping Registry of an EU member or of a country within the European Economic Area) and to non-community ships.

Non-community vessels owners

They must comply with certain conditions in order to enjoy the perks of being taxed under the TTS. These include among others:

(i) At least 60% of the fleet should comprise of EU flag ships. e percentage is measured in terms of tonnage.

(ii) If the fleet is less than the requested 60%, the Tonnage Tax regime can still be utilized if:

a. the commercial and strategic management of the fleet must be carried out from the EU/EEA.

b. A share of the fleet should comprise of EU flag ships and this share shall not be reduced in the following 3 years from the first year of TTS election.

The main advantages that Cyprus has to offer in brief are:

· EU approved Tonnage Tax system available to ship owners, ship managers and charterers, that provides full exemption from corporate taxation of:

o Profits from exploitation of a qualifying ship employed in a qualified activity

o Profits from the disposal of a qualifying ship

o Profits from rendering crewing and/or technical ship management services to a qualifying ship

o Full tax exemption of dividends paid out of profits falling within the Tonnage Tax regime

o No capital gains tax on the sale or transfer of a Cyprus-registered vessel or the shares of a vessel owning company

o No income tax on the wages of officers and crew

o No estate duty on the inheritance of shares

Important general notes:

· All or nothing rule – in case a shipowner/ charterer/ shipmanager of a group elects to be taxed under the Tonnage Tax regime, all shipowners/ charterers/ shipmanagers of the group should elect the same

· The emoluments of the captain, officers and crew members of a qualifying Cyprus ship are exempted from taxation in Cyprus

· Ship owners and ship managers who elected to be taxed under the Tonnage Tax system, must remain under the regime for 10 years, unless they have a valid and solid reason to exit.

· Proper books and records shall be maintained so that it will be possible to determine the income subject to all types of taxes

 

The Cyprus Alternative Investment Funds (AIFs) and Undertakings for Collective Investment in Transferable Securities (UCITS)

The Alternative Investment Funds, as these are explicitly stated in the Alternative Investment Funds Law 124(I)/2018, are collective investment undertakings, which:

· Collect investment funds from a number of investors, with a view to investing those based on a predefined investment policy for the benefit of those investors, and

· Do not need to be authorised through section 9 of Law 78(I)/2012, or through the legislation of another member state that has similar provisions with Article 5 of the Directive 2009/65/EC, as amended.

Three types of AIF are allowed to be established in Cyprus:

· Alternative Investment Funds with Limited Number of Persons (50) (AIFLNPs)

· Alternative Investment Funds with Unlimited Number of Persons (AIFs)

· Registered AIFs (RAIFs)

The various legal forms in which either type of AIFs can manifest are as follows:

AIFLNP:

· Variable Capital Investment Company (VCIC)

· Fixed Capital Investment Company (FCIC)

· Limited Partnership (LP)

AIF/RAIF:

· VCIC

· FCIC

· Common Fund (CF)

UCITS:

A UCITS is an undertaking the sole object of which is the collective investment of capital raised from the public in transferable securities and/or other liquid financial instruments, as such are referred to in the UCI Law. It also operates on the principle of risk spreading and the units/shares of which are, at the request of the investor, redeemed or repurchased, directly or indirectly, out of this undertaking’s assets.

UCITS can take the following legal forms:

· CF

· VCIC

Taxation of funds

Funds whose management and control is exercised in Cyprus are considered tax residents in Cyprus and are subject to taxation in Cyprus. In cases where the funds have compartments, each compartment is taxed separately. Under circumstances and depending on the legal form of the fund, some funds may be transparent for tax purposes.

 

Additional key provisions which are relevant to funds are set out below:

Sale of Fund Units

There is no capital gains tax on the gains arising from the disposal or redemption of units in funds unless the fund owns immovable property in Cyprus.

However, even if it owns immovable property in Cyprus, no capital gains tax arises if the Fund is listed on a recognised stock exchange.

Stamp Duty

No stamp duty obligation exists in cases of subscription, redemption, conversion or transfer of fund’s

units.

No creation of a permanent establishment

In accordance to the Cyprus tax legislation, a permanent establishment does not exist:

(i) For non-Cyprus tax resident investors, who created investments in Cyprus tax transparent

investment funds

(ii) As a result of management of non-Cyprus investment funds from Cyprus.

Management services

Management fees charged to investment funds for collective management services are exempt from VAT, under certain conditions.

Variable remuneration of individuals employed in the Funds industry

e employees and/or executives of the following investment fund management companies are free to elect a different mode of personal taxation:

· Alternative Investment Fund Managers authorised under the Alternative Investment Fund Managers

· Law 56(I)/2013, as amended (hereinafter, the ‘AIFM Law’)

· Internally managed AIFs authorised under the AIFM Law

· UCITS Management Companies authorised under the UCI Law, and

· Internally managed UCITS authorised under the UCI Law.

The variable remuneration of the employees and executives of the above investment fund management companies, which is effectively connected to the carried interest, is taxed at the flat rate of 8% with a minimum tax liability of €10.000 per annum. The particular special mode of taxation is available for a period of 10 years.

 

Special Modes of taxation

1. Insurance companies – Minimum tax payable cannot be lower than 1,5% of their annual gross insurance premiums

2. Profits of professionals, entertainers etc. – 10% tax is withheld on the income of non-resident individuals, public entertainers etc. who have performed any type of profession in Cyprus.

3. Intellectual property (IP) rights – income arising from IP rights, compensation or other similar income arising from sources within Cyprus is subject to 10% withholding tax.

4. Film royalties – 5% tax is withheld on the income derived by a non-resident person in respect of royalties arising from a film projection in Cyprus

5. Income from oil and gas related activities – 5% tax is withheld on the income derived from sources within Cyprus by a non-resident person

Other special modes of taxation include the following:

1. Technical assistance

2. Pension income from services rendered abroad

3. Widow’s pension

4. Variable remuneration of individuals employed in the Funds industry

5. Film production companies.

 

EU Anti -Tax Avoidance Directive

· Cyprus is in the process of adopting and publishing the laws, regulations and administrative provisions necessary to comply with the provisions of the EU Anti -Tax Avoidance Directive (“ATAD”), which was approved by the EU Commission in 2016.

· EU Anti -Tax Avoidance Directive (“ATAD”) creates a minimum level of protection against corporate tax avoidance throughout the EU, while ensuring a fairer and more stable environment for businesses.

· The Anti-Tax Avoidance Directive contains five legally-binding anti-abuse measures, which all Member States should apply against common forms of aggressive tax planning.

Controlled foreign company (CFC) rule:

Multinational companies sometimes shift profits from their parent company in a high tax country to controlled subsidiaries in low or no tax countries, in order to reduce the Group’s tax liability. The proposed Controlled Foreign Company (CFC) rule should discourage them from doing this.

The CFC rule will allow the Member State where the parent company is located to tax certain profits that the company parks in a no or low tax country. The CFC rule will be triggered if the tax paid in the third country is less than half of that which would have been paid in the Member State in question. The company will be given a tax credit for any taxes that it did pay abroad. This will ensure that profits are effectively taxed, at the tax rate of the Member State in which they were generated.

With the proposed CFC rule, the EU Member State can tax the subsidiaries profits as though they had not been shifted to the no-tax country, thereby ensuring effective taxation at the tax rate of the Member State concerned.

Interest Limitation Rules:

In order to discourage artificial debt arrangements designed to minimise taxes interest limitation rules are adapted which provide that borrowing costs shall be deductible in the tax period in which they are incurred only up to 30% of the taxpayer’s earnings before interest, tax, depreciation and amortisation in a tax year.

General Anti-abuse rule:

General Anti-abuse rule comes to counteract aggressive tax planning when other rules don’t apply. It provides that for the purposes of calculating the corporate tax liability, the tax authorities can ignore an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, are not genuine having regard to all relevant facts and circumstances.

Exit Taxation: 

In order to prevent companies from avoiding tax when re-locating assets new exit rules ensure that Member states can impose tax on the value of the of the market value of the transferred assets, at the time of exit of the assets, less their value for tax purposes.

Hybrid mismatches:

Hybrid mismatch rules provide that when a hybrid mismatch:

1. results in a double deduction, the deduction shall be given only in the Member State where such payment has its source.

2. results in a deduction without inclusion, the Member State of the payer shall deny the deduction of such payment.

 

Effective date of the changes:

The interest limitation rules, CFC rules, and GAAR, which should be transposed into Cyprus shall be effective from 1 January 2019.

Exit tax rules, as well as rules regarding hybrid mismatches will be effective from 1 January 2020, in line with the dates provided in the Directives.

 

VALUE ADDED TAX (VAT)

VAT applies on the supply of goods and on the provision of services within the Republic, as well as on the acquisition of goods from Member states of the EU and importation of goods from third countries.

A taxable person is any person, who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity. Trough the relevant legislation, taxable persons charge VAT on their taxable supplies (output tax) and are charged by other taxable persons with VAT on goods and services they receive (input tax). Where, output tax is in excess of the input tax, a VAT tax liability is created, and a payment is due to the Republic. Otherwise, when a credit is created, it is either set off against future VAT tax liabilities or an immediate refund is made to the taxable person.

Immediate refund of excess input VAT can be obtained in the following cases:

i. A period of eight months has elapsed from the date the VAT became refundable

ii. Input VAT which cannot be set off against output VAT until the last VAT period of the year which follows the year in which the VAT period in which the credit was created falls

iii. The input VAT relates to zero rated transactions

iv. The input VAT relates to the purchase of capital assets of the company

v. The input VAT relates to transactions which are outside the scope of VAT but would have been subject to VAT had they been carried out within Cyprus

vi. The input VAT relates to exempt financial and insurance services provided to non-EU resident clients (services for which the right to recover the related input VAT is granted)

No VAT cash outflow arises on intra-community acquisition of goods (with the exception of goods subject to excise taxes) as VAT is accounted by using the acquisition accounting method. This involves a simple accounting entry in the books of the business whereby it self-charges VAT and at the same time claims it back, provided it relates to supplies for which the right to recover input VAT is granted, thereby creating no cost to the business. In cases the acquisition relates to a transaction for which the right to recover the input VAT is not granted, the trader must pay the VAT that corresponds to the acquisition.

Taxable transactions are those executed for a consideration within Cyprus by a taxable person acting as such. These include the following:

· Supply of goods,

· Intra-Community acquisition of goods,

· Supply of services, and

· Importation of goods.

VAT rates

The VAT legislation provides for the tax rates shown below:

· Zero rate (0% - 6th Schedule of the Cyprus VAT Laws)

· Reduced rate (5% - 5th Schedule of the Cyprus VAT Laws)

· Reduced rate (9% - 12th Schedule of the Cyprus VAT Laws)

· Standard rate 19% - applicable to all taxable supplies not exempted or not subject to the reduced or zero rates.

· Exempt transactions (7th and 8th Schedules of the Cyprus VAT Laws)

 

Exemptions

Transactions involving the below goods or services are exempt from VAT:

· Rental of properties used for residential purposes

· Financial services (with exceptions)

· Hospital and medical care services

· Educational and sports activities

· Acquisitions of second-hand buildings

· Services performed by the national postal authority

· Lottery tickets and betting coupons

VAT on immovable property

i. Leasing of immovable property

As of 13 November 2017, VAT at the standard rate must be charged on lease of immovable property when the lessee is a taxable person and is engaged in taxable activities by at least 90%. The lessor has the right to opt not to impose VAT on the specific property. The option is irrevocable.

ii. Sale of non-developed building land

As of 2 January 2018, undeveloped building land sale attracts VAT at the standard rate of 19%. Undeveloped land is defined as land intended for the construction of one or more structures that should be used in carrying out a business activity. VAT does not apply on purchases or sales of land which is located in livestock zones or areas which are not intended for development.

iii. Repossession of immovable property by financial institutions

As of 2 January 2018, any transactions taking place during the process of loan restructurings or for compulsory transfer to the lender (financial institution), should be taxed under VAT accounted under the reverse charge provisions.

iv. Leases of immovable property which effectively transfer the risks and rewards of ownership of immovable property

As of 1 January 2019, leases of immovable property which effectively transfer the risks and rewards of ownership of immovable property are considered to be supplies of goods. They also become subject to VAT at the standard rate.

Imposition of the reduced rate of 5% on the acquisition and/or construction of residences for use as the primary and permanent place of residence.

As from 8 June 2012, the reduced rate of 5% applies to the acquisition and/or construction of residences to be used by eligible persons (residents of the Republic or/and other EU member states or other non-EU member states) as the primary and permanent place of residence, only after obtaining a certified confirmation from the Commissioner.

The statutory declaration may be filed at any stage at the time of construction of the residence or in case of supply prior to the eligible person obtaining possession. As from 18 November 2016, the reduced rate of 5% applies for the first 200 square meters of the residence’s buildable area as determined by the building coefficient (and not on the first 200 square meters of a residence which does not exceed 275 square meters as was the case up until 17 November 2016).

In case of families with more than 3 children the allowable total covered area increases respectively.

Under the new provisions of the law which apply as from 18 November 2016, a person who has exercised the right to purchase a residence with a reduced rate of VAT is eligible to exercise this right again for the purposes of the purchase of another residence before 10 years have elapsed only if that person has ceased to use the residence as the primary and permanent place of residence before the period of 10 years has elapsed, has notified the Tax Commissioner accordingly and has paid the difference in the VAT between the reduced VAT rate and standard VAT rate as were applicable during the time of delivery or construction of the residence.

Persons who have already acquired a residence on which the reduced VAT rate was imposed, can re-apply and acquire a new residence on which the reduced VAT rate will be imposed, irrespective of whether the 10-year prohibition period for using the initial residence has lapsed or not. A condition for this to apply is that in case the 10-year period of using the residence as the main and permanent place of residence has not lapsed, the persons must return to the Tax Department the difference in the VAT between the standard and reduced VAT rates applicable at the time of the acquisition or construction of the residence.

Persons who make a false declaration to benefit from the reduced rate are required by law to pay the difference of the additional VAT due. Furthermore, the legislation provides that such persons are guilty of a criminal offence and, upon conviction, are liable to a fine, not exceeding twice the amount of the VAT due, or imprisonment up to 3 years or may be subject to both sentences.

Imposition of the reduced rate of 5% on the renovation and repair of private residences

The reduced rate of 5% applies to all the residences in which renovations and repairs are necessary. There is a condition though, that a period of 3 years has lapsed from the first day the residence was used. In cases where the value of the materials intended to be used in the renovation and repair works exceed by more than 50% the value of the services, then the value of these materials is subject to the standard VAT rate.

Additionally, the reduced rate of 5% is applicable to the renovation and repairs of old private residences, for which a period of 3 years has lapsed from the first day the residence was used, and which are used by vulnerable groups of people or which are residences located in remote areas.

Zero vs Exempt supplies

The difference between zero rate and exempt supplies is that businesses that make exempt supplies are not entitled to recover the VAT charged on their purchases, expenses or imports.

Irrecoverable input VAT

There are some cases where VAT input cannot be recovered:

· Acquisitions used for exempt supplies

· Purchases, importations and hiring of private saloon cars

· Expenses related to entertainment and hospitality

Obligation for registration

Individuals and companies have the obligation to register if their turnover for the prior 12 months exceeded the threshold of €15.600 or if they expect that their turnover will exceed the threshold in the next 30 days. However, there are businesses that can register voluntarily. Such businesses are those whose turnover does not exceed the threshold or those whose supplies are outside the scope of VAT.

Obligation for registration also exists when the businesses acquire goods from other EU member states which are more than €10.251,61 during any period. Obligation for registration arises for businesses who are engaged in activities involving supply of services in the EU, for which the recipient shall apply VAT under the reverse charge provisions. Similarly, businesses in Cyprus which carry activities through the receipt of services from abroad, for which the Cyprus business is obliged to apply VAT through reverse charge provisions, an obligation exists if these services exceed the threshold of €15.600. No registration threshold exists for the provision of intra-community supplies of services.

VAT declaration

The businesses shall submit electronically the VAT returns on a quarterly basis. In case where VAT is payable i.e. VAT output is more than the VAT input, the payment must take place the 10th day of the second month following the end of the VAT period.

VAT registered persons have the right to request for a different filing period. The approval of the Commissioner of Taxation is required. The Commissioner of Taxation also has the right to request from a taxable person to file his VAT returns for a different period.

Payment or refund of VAT 

Where the input VAT incurred on expenses exceeds the output VAT on sales, the taxable person is in a VAT refundable position for the VAT period. This is either refunded or transferred against the VAT due amount for the next VAT period. In the cases where a refund is requested (via submission of the 4B form together with the VAT return), the VAT Authorities need to repay the amount within 4 months (extended to 8 months in case of investigation). If they fail to repay within the above time limits, interest will be due on the principal amount for every complete month the Authorities do not repay the VAT refundable amount. Payments are made electronically which requires informing the Authorities of the taxable person’s bank account details through the TF1900 form.

VAT Information Exchange System (VIES)

VIES (recapitulative return) is a system of exchange of information between the VAT Authorities of the EU Member States used to monitor intra-community supplies of goods and services and the VAT due.

The VIES return is a monthly electronic return that needs to be submitted within 15 days from the end of the relevant month (i.e. VIES for December 2018 needs to be submitted by 15/01/2019).

  

Penalties

 

Penalty

Late registration

€ 85 per month

Late deregistration

€85 one off

Late submission of VAT return

€51 per return

Late submission of VIES return

€50 per return

Late submission of Intrastat return

€15 per return

Late correction of mistake on VIES return

€15 per return

Failure to issue a lawful receipt

20% of the value of the supply

 

Late payment of VAT

(i) 10% of the payable amount (one off) and

(ii) interest for any complete month for which the amount remains due

Non-settlement of VAT amounts

Interest for every complete month for which the amount remains due

 

Maintenance of books and records

Every person deriving income from the following sources:

- profits or other benefits from any business, or

- dividends, interest or discounts or

- profits or other benefits from any office or employment,

- leasing, intellectual property rights, patent rights,

- remuneration or other profits arising from ownership or

- trade goodwill

is obliged to:

a. issue receipts and invoices, as specified by relevant Regulations. Invoices should be issued within 30 days from the date of the transaction unless a written approval has been obtained by the Commissioner for the purpose of issuing the invoices at a later date. In case where invoices are not issued within the prescribed deadline, a penalty of €100 per month will be imposed.

b. maintain accounting books and records and prepare financial statements in accordance with acceptable accounting standards, that are audited in accordance with acceptable auditing standards, by a person that is eligible to act as an auditor of a company in accordance with the Companies Law.

c. update its accounting books and records within four months from the date of the transactions. In the case where accounting books and records are not updated within the prescribed deadline, a penalty of €100 per quarter will be imposed.

Books and records should be kept for at least six years and be ready to be presented to the Tax Department if requested.

Maintenance of books and records - Individuals

On February 9, 2018 the Cyprus Tax Department (CTD) issued Interpretative Circular 18, Income Tax, interpreting the obligations arising for individuals under the provisions of the Assessment and Collection of Taxes Law to maintain books and records and prepare audited financial statements.

As per s.30 of the Assessment and Collection of Taxes Law, “any person who derives income from the sources prescribed in paragraphs (a) (c) (e) and (f) of subsection (1) of section 5 or in paragraphs (a) (d) and (e) of subsection (2) of section 5 of the Income Tax Law, shall for every year of assessment:

a. Issue invoices and receipts in connection with his transactions and collections as prescribed in regulations issued by the Council of Ministers and published in the Official Gazette of the Republic;

b. Keep accounting books and records, on the basis of which he prepares accounts in accordance with accepted accounting principles, which shall be audited in accordance with accepted accounting principles by a person having a permit to be appointed auditor of a company under the Companies Law”.

Furthermore, only physical persons (individuals) whose annual turnover does not exceed the amount of EUR70.000 shall be exempted from the provisions of the aforementioned paragraph (b).

The Circular clarifies that for the purposes of the exemption, “annual turnover” includes, only the income that accrues from the carrying out of a business activity, irrespective of the nature of the income. If the taxpayer in question derives interest, dividends or rents in excess of the income derived by the carrying out of a business activity, these will be taken into account in his/her total income for the purposes of preparing financial statements for the submission of his/her tax return.

The carrying out of a business activity for the taxpayer in question is an absolute condition for the preparation of financial statements; if the taxpayer in question is an employee or a pensioner, and in above of his/her emoluments deriving from salaried services receives interest, dividends or rents, then the taxpayer is under NO obligation to prepare financial statements under s.30(1)(b) irrespective of his/her total income amount.

It should be stressed that all prescribed books and records would need to be maintained and provided to the CTD upon request in the context of a tax audit. 

 

Stamp Duty

Documents relating to property situated in the Republic or to any matters or issues executed or performed in the Republic are subject to stamp duty. The place where the document is drafted is not relevant. The maximum amount of stamp duty payable is 20.000 per contract.

 

 

Cyprus Tax Law Amended to Allow for Exchange of Information under Tax Treaties

Cyprus amended its domestic tax legislation to incorporate the exchange of information provisions in Article 26 of the OECD Model Tax Treaty and as found in Cyprus tax treaties. These changes should allow Cyprus to bolster its reputation and respectability particularly with respect to being a jurisdiction that fulfils its information sharing obligations and cooperates with other jurisdictions in tackling tax evasion.

The amended legislation allows for the waiver of other legislative secrecy provisions, including that of bank and professional secrecy laws which include provisions for the maintenance of client confidentiality and data protection. However, the right to legal professional privilege is maintained and any information that provided during communications between a professional legal advisor and his/her client may not be disclosed to third parties.

The disclosure of information in the capacity of trustee or nominee of a non-resident person is not covered by this exception. Subject to legal privilege, lawyers as well as accountants will have a duty to disclose when required to do so for the purposes of exchange of information. Please note that the exchange of this information will be in very rare circumstances and it may involve only very substantial investments. The time and effort required makes it worthless to go through the whole process for anything less than very substantial investments. The time and effort required is too much as evidenced by the key provisions below before information can be exchanged.

The key provisions of the new rules include the following:

December 2015 Amendments

The second set of amendments in the provisions of the Cyprus tax legislation aim towards further improving the competitiveness of the tax system of Cyprus.

The second set of draft Bills submitted to the Cyprus Parliament were voted into law on 16 December 2015 and is in addition to the amendments already voted into law in July 2015.

These changes relate to the income tax legislation and the capital gains tax legislation and are summarised below.

A. Corporate Income Tax Law

1. Related party transactions - Introduction of deemed expense

2. Foreign exchange differences

Foreign exchange differences, both gains and losses irrespective of whether they are realised or unrealised, will be completely tax neutralised (i.e. 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 unrealised gains/losses but only be taxed when such foreign exchange differences realise.

The new provisions will apply as of 1st January 2015.

This is a significant development since it simplifies the tax treatment of FX differences. A Company (not dealing in FX trading) would be in a position to estimate its taxable profit more accurately, without any influence from FX fluctuations.

3. 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.

However, as from 1st January 2016 onwards, and in order to comply with the requirements of the EU Parent-Subsidiary Directive (PSD), dividends will only be exempt from income tax to the extent these are not tax deductible by the paying company.

More specifically, if the dividends 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.

4. IP Losses

Under the IP regime, only 20% of the net profit from the exploitation/disposal of qualifying intangibles is taxable. The net profit is calculated after deducting from the license income/gains from disposal, all direct expenses related to the production of this income.

Given that only 20% of IP related profits are taxable under the current IP regime, losses allowed will be limited to 20% of the “eligible” losses of a Company (or a PE).

These losses will be eligible to be surrendered (via group relief) and/or carried forward to subsequent year(s).

The new provision will be deemed to apply as of 1st January 2012.

It is also clarified that the notional deduction afforded in accordance with the newly introduced rules on Notional Interest Deduction (NID), which corresponds to qualifying IPs will be treated as a direct expense in the determination of the taxable profit from the IP.

5. Group Relief

Previously group loss relief was available only for losses incurred by Cyprus tax resident companies. In order to align the loss relief provisions with the decision of the European Court of Justice (ECJ) in the Marks & Spencer case, the law has been amended so that a subsidiary company which is tax resident in another EU member state can surrender its taxable losses to another group member company tax resident in Cyprus, provided the subsidiary has exhausted all means of surrendering or carrying forward the losses in its member state of residence or to any intermediate holding company.

The amount of taxable losses must be calculated on the basis of the Cyprus tax laws.

In order to determine whether two companies are members of a group the law has also been amended to allow the interposition of holding companies established in another EU member state, in a state with which Cyprus has concluded a double tax treaty or in a state which has signed the OECD multilateral convention for exchange of information.

The introduction of these amendments aligns the Cyprus tax laws with recent ECJ decisions and enhance even further the group relief provisions of the ITL.

The new provisions will apply as of 1st January 2015.

6. Anti-avoidance provisions for reorganisations

Corporate reorganisations are exempt from all forms of tax in Cyprus.

The Income Tax Law has now been amended by adding a new article 29A, allowing the Tax Authorities to withhold the exemption if they have sufficient reason to conclude that the reorganisation is not based on valid commercial or financial considerations and that the main purpose or one of the main purposes of the reorganisation is the reduction, avoidance or deferment of payment of taxes. Any such decision is open to objection and appeal in accordance with the provisions of articles 20 and 20A of the Assessment and Collection of Taxes Law.

The Tax Authorities will also have the right to impose conditions in relation to:

the number of shares which can be issued as part of any reorganisation; and

the minimum period for which such shares should be held, which cannot exceed three years.

These restrictions do not apply in the case of publicly listed companies and transfers of shares on death.

The new provisions will apply as of 1st January 2016.

B. Capital Gains Tax Law

1. Capital Gains Tax (CGT) on disposal of shares in multi-tiered structures

Prior to the amendment, CGT was levied on capital gains derived from the disposal of immovable property situated in Cyprus as well as from the disposal of (unlisted) shares of companies which own immovable property in Cyprus.

The amending law broadened the definition of “property” in such a way that CGT is also now imposed on the sale of shares which directly or indirectly participate in other companies which hold immovable property in Cyprus, provided that at least 50% of the market value (MV) of the shares sold is derived from immovable property situated in Cyprus.

In calculating whether the value of the immovable property represents at least 50% of the MV of the shares, any liabilities should be ignored.

The Cyprus tax authorities may not provide information if there is no mutual reciprocity between Cyprus and the other contracting state with respect to the information being exchanged.

Thus, the requesting state must have similar provisions and/or administrative practices for the exchange of information requested from the Cyprus tax authorities.

The Cyprus tax authorities may exercise their powers to collect the information requested only after obtaining the written consent of the Attorney-General of Cyprus.

The Cyprus tax authorities may request information in connection with any person, including a company or partnership that has been dissolved or removed from the register.

The Cyprus tax authorities may request any books, records and other documents, data or information that is found under the possession, control, disposal or jurisdiction of any person.

The requesting state must provide information to the Cyprus tax authorities, including:

o The identity of the person under examination;

o A description of the information requested and the nature and manner in which the requesting state wishes to receive the information from the Cyprus tax authorities;

o The tax purpose for requesting the information;

o The reason for the belief that the requested information is held by the Cyprus tax authorities or found in the possession or under the control of a person within the jurisdiction of Cyprus;

o The name and address of any person who may hold the requested information to the extent the information is made available;

o A declaration that the provision of the information is in accordance with the legislation and administrative practices of the requesting state and, where the requested information is found within the jurisdiction of the state in question, the relevant authorities may obtain the information according to its laws and according to the terms of its ordinary administrative practices; and

o A declaration that the requesting state has exhausted all means at its disposal within its jurisdiction to obtain the requested information, except where resorting to such means would have imposed an excessive burden.

Immovable Property Tax

Under the Cyprus Immovable Property Tax Law, all property owners, regardless of whether they are resident in Cyprus or not, they are liable to pay an annual tax based on the total value of all the immovable property registered in their name.

 

Tax Diary - By the end of each month

- The employer should pay the PAYE (tax) deducted from employees’ salaries for the previous month

- Payment of tax withheld on payments made to non-Cyprus tax residents during the previous month

- Payment of Defence tax deducted from dividends, interest or rent paid in the previous month

31 January

- Submission and payment of special contribution for defence on deemed dividend distribution for the tax year 2016

31 March

- Electronic submission of the income tax returns for individuals and companies preparing audited financial statements for the tax year 2017

30 April

- Payment of the first instalment of the premium tax for insurance companies for 2019

30 June

- Payment of tax balance for 2018 via self-assessment by individuals who do not prepare audited financial statements

- Payment of special contribution for defence in relation to rents, dividends or interest from sources outside of Cyprus for the first half of 2019.

31 July

- Electronic submission of employers’ return for 2018

- Submission by companies of provisional tax assessment for 2019 and payment of the first instalment

- Electronic submission of personal tax returns for year 2018 by salaried individuals

1 August

- Payment of 2018 final corporation tax via self-assessment by individuals and companies preparing audited financial statements.

31 August

- Payment of the second instalment of the premium tax for insurance companies for 2019

30 September

- Electronic submission of personal tax return for year 2018 by individuals who do not prepare audited financial statements

31 December

- Payment of the third and last instalment of the premium tax for insurance companies for 2019

- Payment of the second and final instalment of 2015 provisional tax. Revised temporary tax assessment can be submitted at any time until 31 December 2015

- Payment of special contribution for defence in relation to rents, dividends or interest from sources outside of Cyprus for the second half of 2019

- Submission by companies of revised provisional tax assessment for 2019 and payment of the second instalment

Electronic submission of tax returns

Every person (individual or company) who has an obligation to submit a tax return in accordance with the provisions of the Assessment and Collection of Taxes law must do so electronically.

Administrative penalties

An administrative penalty of €100 or €200 (depending on the specific case), is imposed for the late submission of a tax return or late submission of supporting documentation requested by the Commissioner.

In the case of late payment of the tax due, a penalty of 5% is imposed on the unpaid tax. An additional penalty of 5% is imposed if the tax remains unpaid 2 months after the payment deadline.

Public interest rate

The interest rate applicable on late payment of taxes is set by the Minister of Finance through a Decree and it is applicable for the whole year. The rate for 2019 is 2%.

The applicable interest rates for the previous years are as follows:

Period

Interest rate %

Up to 31 December 2016

9

01/01/2007 – 31/12/2009

8

01/01/2010 – 31/12/2010

5,35

01/01/2011 – 31/12/2012

5

01/01/2013 – 31/12/2013

4,75

01/01/2014 – 31/12/2014

4,5

01/01/2015 – 31/12/2016

4

01/01/2017 – 31/12/2018

3,5

 

http://www.kpsa.com.cy/en/cyprus_information/company_facts.html