New Cyprus tax Incentives_The non dom principle

Cyprus parliament 2

Introduction

In July 2015, the Cyprus government submitted a new package of amendment to the tax laws of the Republic to the Parliament for ratification. The amendments aim to modernize the framework of the Cyprus tax system and improve Cyprus’ competitiveness as an international business center by attracting high net worth individuals and international Groups that could locate their regional headquarters in the Republic.

The amendments introduced are as follows:

Notional interest deduction for new equity capital injected in a Cyprus Company

Based on this amendment a Cyprus Company or the Cyprus permanent establishments of foreign Companies will be eligible to a deemed interest deduction from its taxable income on new equity (paid-up share capital and share premium) injected to the Company after January 1 2015. It goes without saying that such capital injection has to be used for financing the Company’s business otherwise this deemed interest expense will not be considered as tax deductible due to other Cyprus tax legislation sections.

The rate for calculation of the deemed interest is is the yield of the 10 year government bond of the state in which the new equity is invested plus a 3% premium, having as a minimum rate the 10-year Cyprus government bond yield plus a 3% premium,.

New equity may invested in cash or as assets contributed to the Company and it is to 80% of the taxable profit

Amendments to the Special Defence Contribution Law

Currently special defense contribution is payable only by Cyprus tax resident individuals and is payable on dividends, interest and rental income earned by the tax resident individual both from sources within Cyprus and outside Cyprus ( for the latter the taxpayer can claim tax credit for taxes suffered abroad in accordance with tax circular 2011/14)

As from 16 July 2015, only taxpayers who are both resident and domiciled in Cyprus are subject to Special Defence Contribution (SDC). Individuals who are resident but not domiciled in Cyprus are exempt from SDC in dividends and passive interest.

For the purposes of determining if an physical person is domicile in Cyprus with regards to citizen of other countries who have relocated to Cyprus, such persons will be deemed to be domiciled in Cyprus if he or she has been a tax resident for 17 or more of the 20 tax years immediately preceding the year of assessment.

In summary, an individual acquires a domicile of origin at birth. It is generally the same as the domicile of the father at the time of birth, and in exceptional cases that of the mother. A domicile of origin may be replaced by a domicile of choice if in actual fact an individual permanently establishes himself or herself in another country with the intention of living there permanently and dying there.

This amendment makes the holding of investments in dividend, shares, bonds by non-Cyprus domiciled individuals more attractive, assuming such persons relocate to Cyprus.

The amendment includes an anti-avoidance provision restricting its application in cases where domiciled individuals transfer assets to related non-domiciled persons in order to take advantage of the changes. It inserts a new article 3(11) into the Special Defence Contribution Law allowing the tax authorities to disregard transfers of assets from any person domiciled in Cyprus to an individual who is not domiciled in Cyprus, and who is a spouse or relative within the third degree of kindred of the transferor.

SDC tax anti-avoidance

The SDC Amendment Law also introduces a new anti-avoidance measure to deal with a common device used to reduce or postpone the payment of SDC tax. It inserts a new article 3(4) into the Special Defence Contribution Law enabling the tax authorities to disregard the interposition of a company without any real business or economic purpose between an individual and a company making profits, if this has been done with the principal objective of reducing or deferring the payment of SDC tax.

Investment in fixed assets used for the purpose of business:

Under existing rules, capital expenditure incurred during the years 2012, 2013 and 2014 qualifies for increased wear and tear allowances. It is proposed that this benefit is also extended for such investment incurred in the years 2015 and 2016.

Senior Staff relocating to Cyprus

Under current law, 50% of the income from employment in Cyprus for a physical person relocating to Cyprus is tax exempted for a period of five years provided that that persons income exceeds €100.000 per annum. . This incentive applies for relocation of physical persons that were not tax residents of Cyprus before, after 1 January 2012.

It is now proposed that the period of the incentive is extended to 10 years.