Cyprus: Latest Tax Updates To Attract International Corporations Investing Through Cyprus

As the year comes to an end, the Cyprus Parliament in its last session before the holidays passed a series of tax updates attempting once again a balancing act between flexibility and tax transparency. Some of the most important provisions passed include the FOREX Neutralisation which targets the significant exchange volatility experienced earlier last year, and anti-avoidance provisions for re-organisations.

• Introduction of deemed expense -Arm’s Length Provisions

Correlative adjustments fall now within arm’s length provisions following an amendment under which, a downward adjustment can be made to the taxable profit of a Cyprus tax resident entity if, by virtue of commercial or business transactions with another related Cyprus tax resident entity, the profits of the latter had increased.

The new provisions are applicable as of January 1, 2015.

• FOREX Neutralisation

As of January 1st, 2015 FOREX gains or losses will be completely tax neutralized regardless of whether these are realized or unrealized provided that such FOREX gains or losses did not result from trading in currencies and related derivatives. Usual trading in FOREX generating gains or losses shall be taxable or deductible accordingly.

• Dividend Taxation

In compliance with the requirements of the Parent – Subsidiary Directive, dividends will only be exempt from income tax to the extent these are not tax deductible by the paying company. The provisions will be applicable from 1st January 2016 onwards.

Accordingly, where the above conditions are not met, the dividend will be taxable under the Cyprus Income Tax Law and will be exempt from Special Contribution for Defence.

Where dividends distributed by a company resident in another Member State are taxable in Cyprus by virtue of the aforesaid law, tax credit will be allowed. It is important to note that credit will not be granted where an arrangement or a series of arrangements having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage, and are thus not genuine having regard to all relevant facts and circumstances. While the amended tax laws provide no definitions of “genuine purpose(s)”, they do allude to arrangements which serve no valid commercial reasons and do not reflect economic reality. It is safe to assume that a commercial justification must be present in order for tax credit to be allowed for the arrangement (or series of arrangements).

• Eligibility of IP Losses

In light of the fact that just 20% of IP related profits are taxable under the current “IP box regime”, losses allowed will be limited to 20% of the “eligible” losses. It is important to note the new provision will be deemed to apply as of January 1, 2012.

The amendments further clarify the notional deduction afforded in accordance with the newly introduced rules on Notional Interest Deduction, which corresponds to qualifying IPs will be treated as a direct expense in the determination of the taxable profit from the IP.

• Alignment of Cyprus tax laws with EU case law on group relief

Cross-border group relief is allowed, as of January 2015 onwards, provided the EU subsidiary has exhausted all other possibilities to use the said losses in its country of tax residence.

Amendments further provide that a Cypriot tax resident parent company will be entitled to group relief with a sub-subsidiary when the intervening company is a company tax resident in another Member State.

• Abusive restructurings come to an end with anti-avoidance provisions

The amending tax law introduces anti-avoidance provisions to target abusive use of restructurings as a means to avoid taxation. Accordingly, under the new provisions the Tax Department has the discretion to refuse granting the tax exemptions provided by law safeguarding the tax neutrality of re-organizations if it is of the opinion that the re-organization in question was not carried out for valid commercial reasons which reflect economic reality. Once more, Cyprus Tax Department requires commercial justification to allow restructurings.

Using its discretion, the Tax Department may render the tax neutrality of a re-organization conditional upon a number of constituents such as the number of shares to be issued and the period for which the shares issued cannot be disposed (maximum period of three years). The new anti-avoidance provisions will apply as of January 1, 2016.

• Oil & Gas exploitation within scope of Cyprus tax

In light of the hydrocarbon exploration underway in Cyprus’ exclusive economic zone (EEZ), amending tax laws clarified these activities would fall within the scope of Cyprus taxation. The definitions of “Republic of Cyprus” and the term “Permanent Establishment” were amended to include offshore activities with regard to the exploitation of natural resources as well as the installation of pipelines and the provision of services related thereto. Additional provisions have been made under which a withholding rate of 5% is imposed on the gross income derived by any person not resident in Cyprus as consideration for services related to oil and gas and other natural resources. Moreover, when the payer is not a Cyprus tax resident but the payment relates to a related party that is a Cyprus tax resident, the related Cyprus tax resident party is responsible for withholding the tax and submitting it to the Tax Department by the end of the month following the month in which the payment was made. The new provisions will apply as of January 1, 2016.

• Extension of accelerated depreciation provisions until 2016

As of 1st January 2015, the existing provisions on accelerated depreciation for plant and machinery and selected buildings are extended to years 2015-2016. Therefore, depreciation provided for tax years 2015-2016 will continue to be at the rate of 20% on plant and machinery (excluding application software and tools for which a higher rate was provided) and 7% for industrial and hotel buildings acquired during the said years.

• Fees for Tax Residency Certificates and Tax Rulings

With effect from 1st January 2015, the Council of Ministers has the right to introduce fees on the issuing of Tax Residency Certificates and issuance of tax rulings.