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New legislation opens Cyprus for more business

Back in January we looked at the need for further substance in Cyprus when seeking to benefit from the interest, royalty or dividend provisions in the articles of the OECD Model Double Taxation Convention, which provides the basis for most of the Republic's extensive tax treaty network.

Now, following the much anticipated introduction of new tax legislation, aimed at attracting both foreign enterprises and wealthy individuals to Cyprus, the Republic is once again demonstrating that it is open for business.

Here is a summary of the notable provisions enacted by the House of Representatives on the 9th July 2015:

New Tax Rules for Non-Domiciles

Cyprus introduced much anticipated legislation regarding ‘non-domiciled persons' which provides that such persons resident in the Republic are no longer liable to pay what is known as a Special Defence Contribution (SDC) on certain types of worldwide income from dividends (17%), bank deposit interest (30%) and rental income (3%).

According to the Interpretations in Part I of the Cyprus Income Tax Law 2002, residency for individuals in Cyprus is determined by the number of days each person spends in the Republic during each calendar year (183 days)*. Prior to the new legislation, all residents were subject to SDC.

According to the Cyprus Wills and Succession Law Cap. 195, an individual is considered as domiciled in Cyprus by way of domicile of origin (i.e. at birth) or by domicile of choice. Additionally, an individual who has spent 17 out of the last 20 years as a tax resident of Cyprus will be considered to be domiciled in Cyprus. However an individual who has Cyprus as a domicile of origin shall be considered NOT to be domiciled in Cyprus provided he has not been a Cyprus tax resident for at least 20 years before the year he becomes tax resident in Cyprus.

Subject to certain anti-avoidance provisions, such new legislation is intended to attract a greater number of high net worth individuals to Cyprus, where it is hoped they will ultimately base their operations and achieve greater benefit from its competitive tax regime and international treaty network.

Changes to the Current Rules on Personal Income Tax Reduction for Expatriates

Individuals who were not previously resident* in the Republic and take up residency in Cyprus for work purposes are entitled to the following reduction as long as their annual salary is greater than €100.000 :

  • 50% of the salary earned in Cyprus is exempt from income tax for a new period of ten years (extended from the previous five year period)
  • If the individual's annual salary earned in Cyprus is less than €100.000, tax is capped at whichever is the higher of €8.550 per annum or 20%, a reduction which is valid for three years, with a proposal to increase this to six years.

COMMENT:

These new measures for expatriate individuals not only provide a greater incentive to re-locate to Cyprus but also encourage the setup of international operations in the Republic, with the additional bonus of being able to offer competitive packages to skilled professionals from overseas, who will undoubtedly find Cyprus' low personal tax rates and affordable Mediterranean lifestyle very appealing.

Notional Interest Deduction

Further to the new tax rules for non-domiciles and high-earning expatriate individuals, the 9th July provisions introduced a Notional Interest Deduction regime, aimed at encouraging investment into corporate structures, and thus reducing excessive debt financing.

Such changes, aimed to further improve Cyprus' growth prospects, will align the Republic's system with that of a number of other EU jurisdictions which have successfully introduced similar legislation.

According to the new law, corporate entities (including permanent establishments of foreign companies in Cyprus) will be entitled to a Notional Interest Deduction (NID) on new equity which has been introduced to a business on or after 1 January 2015; with the NID being a multiple of a ‘reference interest rate'¹ and such ‘new equity'.

Notably, NID granted on new equity cannot exceed 80% of the taxable profit before allowing the NID, and is not available in the event of losses.

COMMENT:

In essence, the NID regime will reduce the effective tax rate to as little as 2.5%, where such new equity, within certain parameters and whilst observing specific anti avoidance provisions, has been utilised in carrying out an entity's business, such as group finance operations.

Additionally, the introduction of new equity to Cyprus tax resident companies will undoubtedly attract investment into the local economy and thus encourage growth.

Advantages of Cyprus as a prime location for group financing include:

  • One of the lowest headline tax rates in the EU – 12.5%
  • Over 40 double taxation conventions based on the OECD Model
  • EU membership and subsequent access to EU Directives and EU Treaty freedoms
  • No thin capitalisation rules
  • No withholding taxes on dividend, royalty or interest payments from the Republic

Amendments to Capital Gains Tax Law

The Capital Gains Tax (CGT Law) has been amended where the disposal of immovable property acquired on an arms-length-basis between 16 July 2015 and 31 December 2016 would be exempt from CGT, irrespective of the date of disposal.

As an added incentive, the normal transfer fee payable to the Department of Lands and Surveys on acquisition of immovable property will be discounted to 50% of the standard rate until 31 December 2016.

COMMENT:

Such measures are aimed at reviving the Cyprus immovable property market, whilst also looking to attract high-net-worth foreign investors with further incentives to re-locate to the Republic.

*'Resident in the Republic', when applied to an individual, means an individual who stays in the Republic for a period or periods exceeding in aggregate 183 days in the year of assessment.
For the purposes of calculating the days of stay in the Republic –
i. The day of departure from the Republic shall be deemed to be a day outside the Republic
ii. The day of arrival in the Republic shall be deemed to be a day in the Republic
iii. The arrival to the Republic and the departure from the Republic shall be deemed to be a day in the Republic
iv. The departure from the Republic and the return to the Republic in the same day shall be deemed to be a day outside the Republic

1 Calculated on the effective interest earned on the current 10-year bond yield of the country in which the new equity is invested (+3%), with the minimum rate being that of Cyprus (+3%)

 

Author:

Richard Melton


Richard Melton

Managing Director
T: + 357 22 767294
E:  r.melton@jordans.com.cy





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Disclaimer
The information provided in this publication are put forward for further consideration only and are not intended to be acted upon without independent professional advice. Neither Jordans Trust Company Limited nor its associated group companies , nor any employees or directors of these companies can accept any responsibility or liability for any loss occasioned to any person no matter howsoever caused or arising as a result of or in consequence of action taken or not taken in reliance on the contents of this publication.

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