Dear Clients and Friends,
Earlier this year a number of amendments to the Cyprus tax laws were published in the Cyprus Government Gazette. The main amendments introduced are:
- A tax allowable deduction on corporate equity by way of a Notional Interest Deduction (NID)
- The introduction of the notion of non-domiciled individuals (“Non-Doms”)
- An exemption from tax for personal investment income (dividends, interest and rent) of Non-Doms
Notional Interest Deduction (NID)
This amendment aims increase the attractiveness of equity from a tax perspective and to address issues of excessive use of corporate debt arrangements and their corresponding relevance to thin capitalisation rules.
It introduces an annual tax allowable deduction (NID deduction) for new corporate equity. The NID is available to both Cyprus tax resident companies and Cyprus permanent establishments of foreign companies that carry out a business activity.
The annual NID is calculated as an interest rate on the eligible share capital/premium in a similar way that an interest expense on debt financing is generally calculated. The NID interest rate is defined as being the yield on 10 year government bond (as at 31 December of the prior tax year) of the country in which the investment is made increased by 3%. In any case, the NID interest rate cannot be less than the yield of the 10 year bond of the Government of Cyprus (as at the same time) increased by 3%.
The NID is tax deductible in a similar manner as for actual interest expense but it cannot exceed 80% of the taxable income arising before the deduction. Furthermore the NID is not available in the case of a tax loss. An eligible person can elect whether to take advantage of the notional interest deduction in any given year, either in whole or in part.
New equity may be contributed in cash or in kind and in the form of paid-up share capital or share premium. In the case of a contribution in kind, the new equity may not exceed the market value of the asset. New equity does not include any reserves created as a result of revaluation and also does not include capital from reserves that existed as at 31 December 2014 and are not linked to new assets used in the business.
The NID amendment takes effect as for January 1, 2015 and introduces a number of general anti-avoidance provisions for non-commercial transactions as well as a number of specific anti-avoidance provisions.
Non-domiciled individuals (Non-Doms)
The concept of Non-Doms aims at further encouraging high net-worth individuals to reside in Cyprus by the introduction of this new “non-domiciled” person concept.
In order to appreciate the new provisions of the law it is important to understand the provisions of the law prior to the introduction of the Non-dom concept and in particular the taxation of dividends or “passive” interest received by persons tax resident in Cyprus at the flat rate of 17% on dividends and 30% on interest, irrespective of their domicile status, as part of the Special Defence Contribution (SDC) tax. With this amendment a new concept is introduced to the SDC Law, that of domicile, which provides that the SDC will only apply to a person who is a Cyprus tax resident and domiciled in Cyprus. Thus, individuals who have Non-Dom status are no longer subject to SDC.
Coupled with the income tax exemptions that exist for such income, this amendment means that Non-Doms are exempt from taxation in Cyprus on their dividends and “passive” interest, irrespective of whether such income is earned in Cyprus or abroad and irrespective of whether these persons are in fact resident in Cyprus or not.
For the purposes of the SDC Law an individual has his/her domicile in Cyprus if he/she is either
- originally of Cypriot origin (his/her “domicile of origin” is Cyprus as defined in the Wills and Succession Law) with some exceptions , or,
- Irrespective of (a) above, who has been a resident of Cyprus per the Income Tax Law for a period of at least 17 years out of the last 20 years prior to the tax year of assessment (“deemed domicile”).
Domicile of origin per the Wills and Succession Law is acquired at birth. The above generally means that persons who are not of Cypriot origin and recently chose to reside in Cyprus will be considered as Non-Doms.
For rental incomes, whether from Cyprus or foreign sources, Cyprus tax resident individuals who have non-dom status are now only subject to income tax on rental income.
The Non-Dom provisions take effect from July 16, 2015 and include anti-avoidance provisions which restrict their application, such as in cases where domiciled individuals transfer assets to Non-Doms.
Other amendments to the Cyprus tax law
The remaining amendments introduced are summarised as follows:
- Taxability of widowers’ pension under general tax rules which may reduce the tax cost for individuals (Income Tax Law).
- An exemption for future capital gains tax for properties (land and land with buildings) purchased by the end of 2016 (Capital Gains Tax Law).
- Imposition of special contribution for defence on dividends declared to a company where the interposition of the company in the structure aims at avoiding/minimising the tax cost (Special Contribution for Defence Law)
- A reduction of 50% of the Land transfer fees for any application filed to effect a transfer before 31 December 2016 (Land and Surveys Law)
Additional proposals submitted to the Parliament for voting
A number of additional amendments to the Income Tax Law were submitted to the Cyprus Parliament, which are expected to be voted by the end of the year, include:
- Extension of the definition of the term “Republic” so that any business activities relating to Cyprus’ natural resources carried out within Cyprus’ exclusive economic zone and continental shelf are subject to income tax.
- An extension of the period of the employment income tax exemption for expatriates earning over €100.000 from five to ten years
- Neutral tax treatment for foreign currency exchange differences which do not relate to forex trading
- Extension of the arm’s length principle to include arm’s length downwards adjustments
- Clarification that 80% of losses resulting from the leasing or sale of intellectual property registered in Cyprus are not deductible for tax purposes.
- Extension of the accelerated tax depreciation available on industrial buildings and hotels (7%) and plant & machinery (20%) until the end of 2016.
- The harmonisation of the group relief provisions with European legislation
- The introduction of a fee for the issuance of tax rulings and tax residence certificates
Our partners and consultants are at your disposal for any advice you may require concerning your particular circumstances.