Changes in Cyprus tax legislation – May 2012
The House of Representive has voted for a number of amendments to the tax laws in order to make Cyprus more attractive for foreign investors.
These changes introduce new rules for the taxation of income from intellectual property rights, increase capital allowances for certain categories of fixed assets as well as allow deduction of interest expenses related to acquisition of shares (provided certain conditions are met).
In addition, in order to encourage investments and discourage distribution of dividends the so called deemed distribution rules have been amended.
Lastly, the VAT law has been amended so as to encourage the acquisition of residential property in the Republic of individuals who are not residing in Cyprus and at the same time provisions of the law whereby no or reduced land registry fees are paid in the case of first sale of property have been extended to 31 December 2012.
Taxation of IP rights
The law introduces an “intellectual property rights box” regime which is somewhat similar to regimes applicable in certain other jurisdictions. The cost for the acquisition or development of the intangible assets (being of a capital nature) is amortised equally over a five year period, i.e. the year of assessment in which the costs have been incurred and the four subsequent years.
The provision shall be applicable for every expenditure for the acquisition or development of intangible assets incurred by a person carrying on a business, including those defined in the Patent Law of 1998 (as amended), in the Intellectual Property Right Law no. 59 of 1976 (as amended) and in the Trademark Law, chapter 268 (as amended). Effectively, this provision covers an extremely wide variety of types and categories of intangible assets.
According to the changes, eighty per cent (80%) of the profit arising from the use of the intangible assets (including compensation for improper use of such assets) as well as out of the profit on their sale is deemed as an expense in arriving at the taxable income.
The 80% deduction would apply on the profit after deducting all direct expenses, such as amortisation of the assets, interest expenses to finance the acquisition or development of the assets, as well as any other direct expenses.
Deductibility of interest expense related to the acquisition of shares
According to the existing Cypriot tax legislation and its interpretation by the Cypriot tax authorities, a Cypriot tax resident company cannot deduct interest expense incurred in connection with acquisition of shares. Under the changes to the tax law interest incurred in connection with the acquisition (directly or indirectly) of shares in a 100% owned subsidiary company as of 1 January 2012 (irrespective of the tax residency status of the subsidiary) shall be deductible for Cypriot tax purposes. This would apply provided that the assetsz of the subsidiary do not include assets not used in the business. However in case the subsidiary possesses such assets, the restriction on interest at the level of the holding company is limited only to the amount relevant to these assets.
Increased capital allowances for capital expenditure
The changes in the law provide for increase capital allowances for certain types of fixed assets:
- for all machinery and plant acquired during 2012, 2013 and 2014, a deduction for wear and tear at 20% per annum will be allowed (increased from 10% per annum)
- for industrial and hotel buildings acquired during 2012, 2013 and 2014 a dedution for wear and tear at 7% per annum will be allowed (increased from 4% per annum).
Profits subject to deemed dividend distribution rules
For the purposes of arriving at the profits subject to the deemed distribution rules, (whereby at least 70% of the after tax profits must be distributed to the shareholders within two years from the year end) any capital expenditure incurred of the acquisition of plant and machinery (exluding private saloon cars) and buildings during the years 2012, 2013 and 2014 is deducted from the after tax profits. The deemed distribution rules do not apply in case the (ultimate) beneficial owners of the Cypriot tax resident company are directly or indirectly not tax residents of Cyprus.
Group loss relief/Transfer pricing adjustment
The changes allow a company incorporated by its holding company during the relevant year of assessment to be considered as being member of the same group for the whole year of assessment for the group loss relief purposes (under existing rules the subsidiary has to be a member of the group for the whole tax year).
The changes also state that the provisions of Section 33 of the law regarding the at an arms’ length principles are not applied on transactions between the parent company and its directly 100% owned subsidiary in case the conditions for group loss relief are satisfied.
Entry into force
The above changes will come into force as of the date of publication of the law in the Official Gazette of the Republic and will have a retrospective effect as of 1 January 2012.
VAT on construction/acquisition of residential properties
The VAT law provisions regarding the application of the reduced rate of 5% on the construction/acquisition of residential property in Cyprus which is to be used as their primary and permanent place of residence, have been extended, so as to include acquisitions by individuals who do not ordinarily reside in Cyprus, but acquire property to be used as their residence whilst in Cyprus. This amendment comes into force as of the date of publication of the law in the Official Gazette of the Republic.
Land Registry Office fees
The law providing for the exemption from transfer fees on sales made after 2 December 2011 in case the immovable property is subject to VAT and 50% exemption in case of first sale, has been extended until 31 December 2012