The new tax measures voted by the House of Representatives on10 December 2015 αre analysed here below.
A. Income Tax Law
1. Exchange differences
According to the amended Income Tax Law, any realized or unrealized foreign exchange difference, losses or gains will be tax neutral. In other words, FX gains will not be taxable and FX losses will not be tax deductible.
Exception to the amended Law applies for persons trading in foreign currencies (including trading in foreign currency derivatives). For persons trading in FX, the Law introduces an option to make an irrevocable election to be taxed only on realized FX differences provided that the 2015 Income Tax return is submitted within the statutory deadline. In case such election is made, any unrealized FX differences will be treated as taxable/tax deductible in the year they are realized.
This amendment is effective as from 1 January 2015.
2. Intellectual Property
As per the existing provisions of the law, an 80% deemed deduction is available on the net profit generated from the business use or disposal of a qualifying IP asset. The law is amended with a retroactive effect as of 1 January 2012 so that in case the IP activities are loss making for tax purposes, only 20% of the resulting net loss can be set-off and carried forward as per the relevant provisions of the law.
As of 1 January 2015, corporate entities (including permanent establishment of foreign companies) will be entitled to a Notional Interest Deduction on equity. It should be noted that in case the NID relates to the acquisition / financing of an IP falling within the scope of the IP Box regime, the notional interest deduction on equity should be regarded as a direct expense for the purpose of calculating the 80% deemed deduction.
3. Amendment to the arm’s length principle provisions regulating the transactions between related parties
To date, Cyprus has not adopted any specific rules regarding transfer pricing or specific transfer pricing documentation requirements but as a general rule, the arm’s length principle is codified in the tax law.
In case the tax authorities make an upward transfer pricing (TP) adjustment increasing the taxable profit of a Cyprus resident company or a PE of a non-Cyprus resident company, then the other party involved in the transaction will be eligible for a corresponding downward transfer pricing (TP) adjustment.
The corresponding TP adjustment will be subject to the provisions of the Income Tax Law with regards to its tax deductibility. Furthermore, if the upward adjustment is calculated upon a loan, financial assistance or a debit balance, the corresponding downward adjustment would be deemed as interest expense and would be subject to the provisions of the Income Tax Law regarding the tax treatment of interest expense.
The above provisions are effective as from 1 January 2015.
4. Implementation of the amendments made to the EU Parent Subsidiary Directive
Currently, any dividends received are unconditionally exempt from Income Tax. In order for the Cypriot Income Tax Law to be harmonized with the amended EU Parent-Subsidiary Directive, the previously unconditional exemption from (Corporate) Income Tax (CIT) on dividends received will not be available as of 1 January 2016 to the extent the relevant dividend is allowed as a tax deduction in the jurisdiction of the foreign paying company. If the dividend exemption is not available due to the above provision, it should be subject to CIT at the rate of 12.50%. In such instance, the dividend should not be subject to the Special Defence Contribution.
The Income Tax Law has also been amended to give the right to the tax authorities to deny the availability of underlying tax relief on dividends subject to tax, in case 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 benefit, are not genuine having regard to all relevant facts and circumstances. An arrangement may comprise more than one step or part. For the purposes of this anti-abuse rule, an arrangement or a series of arrangements shall be regarded as not
genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.
This change is effective as from 1 January 2016.
5. Capital Allowances
The amended Tax Law extents the period for which accelerated depreciation is available to purchases made during the tax years 2015 – 2016
• The rate of capital allowances for any plant and machinery purchased in the tax years 2015 and 2016 has been set at 20%, unless the rate of capital allowances on such assets is higher.
• For industrial and hotel buildings purchased in the tax years 2015 and 2016, the capital allowances rate will be increased from 4% to 7%.
6. Extending the scope of application of the group loss relief provisions
To date, the group loss relief provisions are applicable only between Cypriot tax resident companies. As from 1 January 2015, The Law has been amended in order for losses to be surrendered to a Cyprus Tax resident company by a company tax resident in another EU Member State provided that it has exhausted all the possibilities available for using the losses in its country of tax residency or in the country where its intermediary holding company may be based. In such instance, the tax losses should be calculated based on the provisions of the Cypriot tax laws.
7. Anti-avoidance provisions for reorganizations
General anti-abuse provisions are now introduced in relation to company reorganizations. In case the tax authorities consider that a reorganization is not carried out for valid commercial reasons which reflect economic reality but instead, they are of the opinion that the main purpose or one of the main purposes of the reorganization is to avoid, reduce or defer the incurrence of tax, they have the statutory right to refuse granting the exemptions laid down by the law in relation to reorganizations. The decision of the tax authorities not to grant the reorganization exemption should be adequately substantiated and the taxpayer has the right to object and appeal against such decision.
Furthermore, in order for the tax authorities to safeguard the bona fide nature of the reorganization, they may impose conditions in relation to the number of shares to be issued by the receiving company as well as may request that the shares issued in the course of reorganization be kept by the receiving company for a maximum period of three years, unless the shares are quoted in a recognised stock exchange. In case such conditions are not met, the reorganization provisions do not apply and as such any due taxes are payable either by the transferring or receiving or acquiring company.
The above provisions will be effective as from 1 January 2016.
8. Taxation of hydrocarbon and other related activities
The definition of the terms “Cyprus Republic” and “permanent establishment” is amended to include all activities relating to the exploration and exploitation within Cyprus territorial sea as well as within any area outside the territorial sea, including the contiguous zone, the exclusive economic zone and the continental shelf.
This change is effective as from 1 January 2015.
In addition, the law is amended to introduce the obligation to withhold tax at the rate of 5% on the gross income derived by a non-resident person (having no permanent establishment in Cyprus) in relation to services performed in Cyprus in respect of activities connected with the exploration or exploitation of the seabed or subsoil or their natural resources, as well as in connection with activities relating to the installation and exploitation of pipelines and other installations on the soil, seabed or on the sea surface.
This change is effective as from 1 January 2016.
9. Changes to the taxation of individuals
The current exemption of 20% on employment income exercised in Cyprus, which applies to individuals who were not resident in Cyprus in the year before the commencement of the employment, is extended from 3 years to 5 years provided the employment started during or after 2012. However, this exemption applies for tax years up to 2020 after which it will be abolished.
As of 1 January 2012, 50% of the gross emoluments are exempted from personal income tax for individuals that were not tax residents of Cyprus prior to the commencement of their employment in Cyprus. This deduction applies when income exceeds €100,000 per year. The law is now amended to extend the aforesaid exemption to a period of 10 years commencing from the year of employment.
It should be mentioned that the 50% exemption will not be available to individuals who were Cyprus tax residents for a period of 3 out of 5 years preceding the year of employment. Further, the 50% exemption will not be available to individuals who were Cyprus tax residents in the year preceding the year of commencing their employment.
As per the amended law, the 20% exemption does not apply in case the 50% exemption is also available.
These provisions apply for individuals whose employment commenced on or after 1 January 2015.
B. Capital Gains Tax Law
The Capital Gains Tax (CGT) Law has been amended to bring within its ambit the indirect sale of property. Currently, CGT is levied only with respect to capital nature gains derived from the disposal of immovable property situated in Cyprus as well as from the disposal of shares of companies which own immovable property in Cyprus (unless the shares are listed on a recognized stock exchange or the sale is made in the course of a qualifying company reorganization). The main changes in the law are as follows:
• CGT is 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 of the shares sold is derived from property situated in Cyprus.
• Any trading nature profits derived from the sale of shares of companies which directly or indirectly own immovable property in Cyprus will be subject to CGT in case such profit is exempt under Income Tax Law.
• In the case of disposal of shares which directly or indirectly hold property in Cyprus, the disposal proceeds subject to CGT are restricted to the market value of the immovable property held directly or indirectly by the company which its shares are sold.
• In the case of disposal of property between related parties, the disposal proceeds subject to CGT are determined by reference to the market value of the property sold at the date of disposal.
The above provisions will be effective as from 17th December 2015.
This newsletter has been prepared as a general guide and for information purposes only. It is not a substitution for professional advice. One must not rely on it without receiving independent advice based on the particular facts of his/her own case. No responsibility can be accepted by our firm or our staff for any loss caused by acting or refraining from acting on the basis of this newsletter.