CYPRUS TAX UPDATE

On 10 December 2015 the remaining changes to the
income tax and the capital gains tax laws aiming
to improve the tax system of Cyprus and make it
more attractive to both the local and international business
community were voted. The changes came into effect with
their publication in the official gazette at the end of 2015.
These changes are summarized below.

INCOME TAX LAW

1. Amendments to income exempt from tax

Effective from the 2015 tax year exchange differences, both gains and
losses, and irrespective of whether they are realized or unrealized 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 products.
However such companies will be able to may make an irrevocable election
not to be taxed on unrealized gains or losses, and to be taxed only when such
gains or losses are realized.

2. Group loss relief

In order to align the Cypriot tax laws with the European Court of
Justice’s decision in the Marks & Spencer case, the law is 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 the means
of surrendering or carrying forward the losses in the member state of
residence of the subsidiary or to any intermediary holding company. The
losses surrendered must be calculated on the basis of the Cypriot tax laws.
The law has also been amended to allow, for the purposes of considering whether two companies are members of the same group, the interposition of holding
companies established in (a) another EU member state, (b) in a state with which Cyprus has concluded a double tax treaty or (c) in a state which has signed the OECD multilateral convention for exchange of information. These provisions apply as from the tax year 2015.

3. Anti-avoidance provisions for hybrid instruments and artificial transactions for dividends Up to now, dividends were exempt from corporate income tax and subject to conditions also exempt from defence tax. As from 1 January 2016 the following will apply:

i. Where dividends received by a Cypriot company from a company located outside Cyprus are treated as tax deductible expense in the country where the company paying the dividend is located (“hybrid instruments”) they will no longer be exempt from income tax, but instead will be taxed as normal business income subject to income tax at the standard rate of 12.5%.

ii. In addition, the tax law has been amended so as to incorporate into Cypriot tax legislation the amendments to the EU Parent / Subsidiary Directive whereby the Directive does not apply in cases where between the dividend paying company and the dividend receiving company there is 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 Directive, are not genuine, having regard to all relevant facts and circumstances. 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.

4. Exemptions of income from first employment in Cyprus

i. Previously 20% of the income from employment in Cyprus of a person who was not tax resident of Cyprus during the tax year immediately preceding his employment was exempt from taxation for a period of three years. The maximum amount of the exemption is €8.550 per annum. This exemption is now extended for the first five years, but the exemption can only be claimed until the year 2020.

ii. The 50% exemption of the income from employment in Cyprus that exceeds €100.000 is extended from 5 to 10 years. The exemption is available for all employment commencing after 1 January 2012 provided the person was not tax resident of Cyprus during the year immediately preceding his employment. For employments which start after 1 January 2015, an individual will be entitled to this benefit, only if he was not tax resident of Cyprus for any three out of the last five tax years prior to the commencement of his employment in Cyprus and provided also that he was not tax resident of Cyprus the previous tax year. The exemption is granted for any tax year that his income from employment exceeds €100.000 per annum, irrespective of whether the income drops below €100.000 in any year, provided that when the employment started the income exceeded €100.000 and provided the Commissioner is satisfied that the increase/decrease in the annual income is not made for the purpose of obtaining this tax benefit.

iii. It will no longer be possible to obtain benefit under both exemptions, a matter that was in dispute since the schemes were introduced.

5. Increased annual allowances for capital expenditure

Under the existing law, increased annual allowances are granted for new expenditure incurred in the years 2012, 2013 and 2014 for plant and machinery (20% instead of 10%) and for new industrial buildings and hotels (7%
instead of 4%). These provisions are extended to cover expenditure incurred in the years 2015 and 2016.

6. Related party transactions

The Commissioner has the right to adjust the value of transactions between related parties, if such transactions are not carried out on an arm’s length basis. Adjustments made to one contracting party were not required to also be made to the other contracting party, creating a mismatch. The law is amended so this anomaly is corrected and in case of an adjustment in the income of the one
party, a corresponding deduction should be given to the other party to the transaction. This provision applies as from 1 January 2015.

7. Losses from IP

Clarification that as 80% of income arising from the exploitation of qualifying IP is exempt from taxation only 20% of the losses arising from the exploitation of such IP can be carried forward or offset against income from other sources.

8. Anti-avoidance provisions for re-organizations

A number of anti-avoidance provisions are introduced with effect from 1 January 2016, which will give the right to the Tax Commissioner to refuse to accept tax free reorganizations, if the Commissioner is not satisfied that there were real commercial or financial reasons for the reorganization and he determines that the main purpose or one of the main purposes of the reorganisation is the reduction, avoidance or deferral of payment of taxes.

9. Fees for issuing certificates/rulings

Administrative provisions allowing the Commissioner to charge fees for the issuing tax rulings have been introduced. The amount of fee will be disclosed by the Commissioner at a later date.

10. Offshore activities

i. The definition of the term “Republic of Cyprus” now includes specifically and clearly the territorial sea, the exclusive economic zone and the continental shelf of Cyprus.

ii. The definition of the term “permanent establishment” has been amended to include all activities for the exploration and exploitation of the seabed in the exclusive economic zone, as well as services related to such exploration or exploitation activities. As from 1 January 2016, non Cyprus resident persons providing such services will be subject to tax at the rate of 5%.

1. Capital gains from sale of shares in property companies

Up to 31 December 2015, capital gains tax was chargeable on the disposal of immovable property located in Cyprus or on disposal of shares of companies, which directly own immovable property located in Cyprus. Effective from 1 January 2016, gains from the sale of shares in companies which indirectly own immovable property in Cyprus by holding directly or indirectly shares in a company which owns immovable property located in Cyprus, will also be subject to capital gains tax. This will apply only in case the value of the immovable property represents more than 50% of the value of the assets of the company whose shares are sold.

The gain to be taxed will be calculated only based on the market value of the immovable property, which is held directly or indirectly.

2. Trading gains from sale of shares of property companies

To date if a company sold shares of companies that owned immovable property in Cyprus and those sales were considered to be transactions of a trading nature, they were outside the scope of capital gains tax and also exempt under income tax since any gains from the sale of qualifying securities are exempt from income tax. Under the new legislation, such gains which are exempt from income tax
would now be subject to capital gains tax.