Despite Cyprus’ recent financial bailout by the European Union and the International Monetary Fund (IMF), the country retains the viability of its financial sector, and especially the unique advantages presented by its tax regime.
Primarily, this article purports to examine the benefits presented by Cyprus’ tax regime. It will further analyse changes to Cyprus laws, voted pursuant to the implementation of the Eurogroup’s decision (taken in March 2013). However, the article seeks to ultimately demonstrate that although legislative modifications have been instigated, Cyprus upholds its much-deserved title as an ‘ideal investor’s destination’.
Main Characteristics of the Cyprus Tax System
- Cyprus has the lowest corporate tax rate within the European Union at 12,5 % (at par only with Ireland)
- It has an extensive network of double tax treaties with 50 countries e.g.
– Double Tax Treaty with Russia
– Double Tax Agreement with Ukraine – signed on 08/11/2012 and coming into effect as from 01/01/2014 – in the meantime the DTT with the Union of Soviet Socialist Republics (USSR) applies
- As from 01/01/2013, Russia’s blacklist does not include Cyprus as a non-cooperative tax jurisdiction
– the Protocol signed offers financial viability between the two key players – moreover, transactions between Cypriot and unrelated Russian companies will no longer be subject to the automatic transfer pricing control scrutiny in Russia, as is applied for other jurisdictions included in the blacklist.
- Cyprus offers a particularly attractive Intellectual Property (IP) Regime: -e.g. 80% of net profits1 generated from the disposal of IP by Cypriot resident companies will be exempt from income tax.
Capital Allowances:
- Property and equipment acquired during the tax years 2012, 2013 and 2014 will be eligible to claim capital allowance at the rate of 20%
- In cases of industrial and hotel buildings, acquired during the tax years 2012, 2013, 2014, the capital allowance rate will increase from 4% to 7%
- As of 1st of January 2012, a 50% exemption applies to income of non-resident persons taking up residence in Cyprus to work for employers in the country, and whose annual remuneration is in excess of €100.000 per annum – the exemption applies for a period of 5 years from the year of com- D mencement of employment, applicable from the1st of January 2012.
- Cypriot tax authorities issue written confirmations to taxpayers such as international companies,thus offering certainty, transparency and clarity with regards to the tax treatment of their transactions.
- Ability to register for EU V.A.T in Cyprus, offering extra monetary benefits
Tax Benefits for Holding Companies
Examples include the following:
- Dividends received from Cyprus or abroad are exempted from income tax
- Gains from the sale/transfer of shares/bonds and other securities are exempted from income tax
- Dividends, interests and royalties paid out to non-resident shareholders are not subjected to withholding tax
- Thin capitalisation rules do not exist
- Tax credit for taxes paid abroad is given unilaterally, irrespective of the absence of a double tax treaty
- Interest expenses incurred during acquisition of shares in a wholly-owned subsidiary company, whether it is held directly or indirectly, will be considered as tax deductible expenses, provided the subsidiary does not own assets not used in the business
- Low duties and taxes incurred for the establishment of companies
- Company reorganisations, including intragroup mergers and takeovers that take place within groups, are not subject to any tax consequences
Changes to Cyprus Tax Law
On the 18th of April 2013 the House of Representatives voted a number of bills instigated by the Memorandum of Understanding (MoU), pursuant to the financial assistance given to Cyprus by its lenders (‘Troika’). Changes are summarised below:
Law Amending Income Tax Law
- corporate tax increase from 10% to 12.5% (effective January 1st 2013)
- accumulated losses of a credit institution that transfers its operation to another credit institution will be available to be utilised for a period not exceeding 15 years from the end of the year in which the tax losses were transferred (effective March 25th 2013)
Law Amending Special Contribution for Defence Law
The rate of Special Defence Contribution on interest income will increase from 15% to 30% for companies/individuals (as of April 29th 2013)
- this contribution applies only to Cyprus tax-residents and on interest not originating from their ordinary activities
Law Amending Special Levy on Credit Institutions Law
Tthe special levy introduced on credit institutions operating in Cyprus amounting to 0.11% of their total deposits3 was increased to 0.15% (effective January 1st 2013)
Law Amending Excise Duty Law
Existing legislation for the imposition of excise duty on goods is amended to include a provision for a regular basis revision of the excise rates to ensure real economic value It should be noted that certain media reports have mistakenly referred to an increase in capital gains.
However, this is incorrect since Cyprus does not impose a capital gains tax, except on gains from the disposal of: immovable property situated in Cyprus, and shares in companies in Cyprus which own immovable property in the country. Nonetheless, the exhaustive list of measures contained in the MoU does not negatively affect the advantageous tax regime.
Cyprus’ corporate tax remains one of the lowest within the European Union. Furthermore, impact on Holding Companies – for example – is nominal, especially since profits derived from receipt of dividends from outside Cyprus are exempt from income tax. Moreover, the special defence tax on interest payment will only affect interest received. Arguably, the MoU has reconfirmed the viability of our favourable tax regime, which has been maintained notwithstanding the current economic climate. Cyprus still retains a flexible tax system with huge advantages like tax-free flow of dividends, beneficial exit opportunities and an extensive network of double tax agreements that remain intact.It should further be mentioned that the Cyprus Government announced its intention to introduce a series of new measures to boost growth and to attract investment.
Future tax incentives announced by the Government in June 2013 include:
- 100% tax reduction until 2016 on capital expenditure relating to renewable energy, communication, and research and development
- increased tax deduction, with a minimum of 20%
- on capital expenditure on other assets until 2016
- 25% discount on taxable income paid by employers for each additional employee hired
- incentives relating to the repatriation of capital for foreign investors
- permanent exemptions on corporate profits from deemed dividends reinvested in businesses
- incentives regarding the granting of tax relief to those impacted by the implementation of the Bank Resolution Law
However, it must be emphasised that the abovementioned incentives are still plans to be put into effect and are yet to be formulated into bills.
Misconceptions Set Straight – Cyprus On The OECD Whitelist
An unpleasant atmosphere has been created by recent allegations made against Cyprus regarding money laundering. However, these accusations are unfounded.
Cyprus is in fact on the OECD Whitelist since 2009, exhibiting our commitment to adhere to international and EU Anti-Money Laundering (AML) procedures. Moreover, the Cyprus Securities and Exchange Commission (CySEC) is authorised to diligently monitor companies listed on the Cyprus Stock Exchange, thus ensuring the smooth operation of the investment service market.
Furthermore, the Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering Measures (MONEYVAL) assessments provided over the last 15 years confirm, as did the Basel Institute on Governance report, that Cyprus has robust AML structures which actually outrank those in other European countries.
To conclude, Cyprus’ hugely advantageous tax regime; use of transposed EU Directives; combined with its vital geographic location, excellent air and sea access, well-trained labour force, flexible and modern common law framework; all render the country a stable, legally transparent and attractive location for international investment, and a prime ranking in the list of financial centres worldwide.
Source:Christodoulos G. Vassiliades & Co LLC
Christodoulos G. Vassiliades is the Founder and Managing Director of Christodoulos G. Vassiliades & Co LLC. He has been practicing law since 1984 and specialises in Corporate and M&A, Contract, Commercial, Tax and International Tax Planning, Banking and Finance, and Maritime and Admiralty Law.
