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3rd Package of Tax Measures
3rd Package of Tax Measures – Tax incentives to boost Cyprus economy
On 6 July 2012 new amendments to the Cyprus tax legislation, which aim to provide various tax incentives for foreign investments, have been published in the Official Gazette of the Republic.
The new changes should enhance the use of Cyprus companies as:
• Group financing/treasures vehicles, and
• For structures involving Intellectual Properties.
A. Income Tax
The following changes are effective as from 1 January 2012
1. Intellectual Property (IP)
• The new amendments of the Income Tax Law provide for a notional deduction of 80% as an expense (exemption) of the profit emanating from IP and of the profit generated from the disposal of IP owned by Cypriot resident companies
• The profit is calculated after the deduction from the relevant income of all direct expenses
• The new legislation covers all patents, copyrights and trademarks
• Capital expenditure for the acquisition or development of IP can be claimed as tax allowable deduction allocated equally in the tax year in which the expenditure was incurred and the four subsequent years (i.e. 20% deduction per year).
As a result of the aforementioned change the effective tax on profits resulting from IP activities could be 2% or lower.
2. Interest expense deductibility
No interest will be disallowed for tax purposes in cases of interest incurred for the acquisition, directly or indirectly, of a wholly owned subsidiary, provided that the subsidiary does not own any assets that are not used in the business. In the case where the subsidiary owns assets which are not used in the business, the interest expense incurred by the parent company which corresponds to such assets will be restricted for income tax purposes.
This provision will apply for the acquisition of shares effected from 1 January 2012 onwards.
3. Group relief
In the case where a company is incorporated by its parent company during a tax year, this company will be considered as being a member of the group for the whole tax year. In such case, the company will be able to claim group relief for that tax year (i.e. since its incorporation). Prior to the amendment the parent and the subsidiary companies should have been members of the group for the whole of the year of assessment in order to be able to claim group relief.
4. Capital allowances
Property and equipment acquired during the tax years 2012, 2013 and 2014 will be eligible to claim capital allowances at the rate of 20% (excluding assets which are eligible for a higher annual rate of capital allowances)
Industrial and hotel buildings acquired during the tax years 2012, 2013 and 2014 will be eligible to claim capital allowances at the rate of 7%
5. Contributions to Funds
The contributions made by an individual to Pension Funds, Provident Funds or any other Insurance Funds that have been approved by the Commissioner of Income Tax, will be treated as deductible in calculating his taxable income.
B. Special Defence Contribution
The following change is effective as from 1 January 2012
1. Deemed Dividend Distribution provisions
The cost for the acquisition of property, equipment or buildings (excluding private motor vehicles) during the tax years 2012, 2013 and 2014 will be deducted from the accounting profits for the purposes of calculating the deemed dividend distribution.
1. VAT on private aircraft
According to the amendment to the legislation, a taxable person that imports in Cyprus an eligible aircraft from a place outside the EU, should not have the obligation to pay import VAT at the time of importation. Such VAT should be paid when the taxable person importing the eligible aircraft submits the VAT return relating to the period when the importation of the aircraft was made. The amendment covers eligible aircrafts which are intended to be used for business purposes.
In practice no VAT is actually paid because the taxable person will deduct in the VAT return the VAT input (VAT on purchase/import eligible to claim back) from the amount of VAT output that is payable.
The Commissioner of VAT reserves the right to request the payment of a guarantee of value not exceeding the import VAT payable.
2. Extension of the application of the 5% reduced VAT rate on residential property to non-EU citizens, applicable as from 8 June 2012
The Cypriot VAT authorities issued on 12 June 2012 circular number 167 with regards to the reduced VAT rate of 5% imposed on the purchase or construction of residential property to be used as the main and permanent residence of an eligible individual. According to this circular, the legislation has been amended so that application of the reduced VAT rate of 5% is extended to cover as well qualifying properties of eligible individuals who are not citizens of an EU member state.
The above amendment covers individuals that reside in the Republic of Cyprus for any time period and use the residence (for which they are applying for imposition of the reduced VAT rate of 5%) as their main and permanent place of residence for the time period they are in Cyprus.
The above amendment does not cover individuals who purchase or construct residence in Cyprus that is also used for investment purposes, or as a letting property, or as part of any other economic activity.
Contacts for tax enquiries:
Constantinos Demetriou (Head of Direct Tax Compliance): email@example.com
Petros Loizou (Direct Tax Compliance): firstname.lastname@example.org
Nicolas Manoli (Direct Tax Compliance): email@example.com
Phivos Kashioulis (in charge of Indirect Tax (VAT) Compliance): firstname.lastname@example.org
Efremis Pavlou (Indirect Tax (VAT) Compliance): email@example.com