The House of Representatives have passed most of the changes proposed by the Government relating to income tax and the defence tax. Also a numbe of changes have been made to the capital gains tax law and the land transfer fees.
For a number of the proposed changes to the income tax law, the assessment and collection of taxes law, the capital gains tax law and the new immovable property tax law, the House of Representatives deferred the taking of decision until the House reopens in the autumn, so these are examinded in more detail.
The changes introduced by the House of Representatives, mainly grant incentives and tax benefits in an effort to bring new business opportunities, stimulate the economy and encourage employment.
The bills, (which have been passed almost unanimously by all political parties), are currently being finally drafted to incorporate amendments made during the debate and are expected to be made available during the next few days.
In this Tax Article we summarize the changes introduced (based on the best information available so far) and which relate to the incentives and allowances granted.
A new Tax Article with full details of all the changes passed by the House of Representatives, together with an analysis of the opportunities available as a result of these changes, will be issued as soon as the final bills are made available.
A. INCOME TAX LAWS
1. Exchange differences
Exchange differences, both gains and losses, and irrespective of whether they are realized or unrealized will no longer be taxable/tax deductible, irrespective of the purpose for which the funds in a foreign currency have been used for.
This will not apply in the case of companies trading in foreign currencies and related products. Such companies may irrevocable elect not to be taxed on unrealized gains or losses.
2. Exemptions of income from first employment in Cyprus
(i) Under current law, 20% of the income from employment in Cyprus of a person who was not tax resident of Cyprus during the previous tax year is exempt from taxation for a period of three (3) years. The maximum amount of the exemption is €8.550 per annum.
This exeption is extended for the first five (5) years, but the exemption will only be able to be claimed until the year 2020.
(ii) Under current law, 50% of the income from employment in Cyprus which commences after 1 January 2012 of a person who was not tax resident of Cyprus during the previous tax year is exempt from taxation for a period of five (5) years, provided the income from employment in Cyprus exceeds €100.000 per annum. The period of five (5) years is now extended to ten (10) years.
3. Notional interest deduction on equity
(i) Deemed interest deduction will be allowed on “new equity” funds introduced into a Cyprus tax resident company and which funds are used for the operations of the company.
(ii) Interest will be calculated at a rate which is equal to the effective interest earned on the ten (10) years government bonds of the country where the funds are invested, plus 3%, with the minimum rate the effective interest earned on ten (10) years bonds of the government of Cyprus, plus 3%.
(iii) The deemed interest to be deducted cannot exceed 80% of the taxable income of the company for the year before the deduction of the deemed interet expense.
4. Increased annual allowances for capital expenditure
(i) 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%).
(ii) The period during which the expenditure can be made is now extended to cover expenditure incurred in the years 2015 and 2016.
5. Group loss relief
(i) Under the current provisions of the law, group loss relief can only be given for losses incurred by Cyprus tax resident companies. This means that losses incurred by a member of a group of companies can only be surrendered to another member of the same group, provided that both companies are tax residents of Cyprus.
(ii) In order to align the Cypriot tax laws with a European Court of Justice’s decision in the Marks & Spencer case, the law is amended that a subsidiary tax resident in an 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 of carrying forward the losses in the member state of residence of the subsidiary or to any intermediary holding company.
B. DEFENCE TAX LAWS
Non-domiciled persons not liable to defence tax
1. Defence tax is payable only by persons who are considered to be tax residents of Cyprus (as defined in the income tax laws), which effectively means an individual who spends at least 184 days in Cyprus every tax year. Defence tax is payable on dividends, interest and rental income.
2. The law is amended so that individuals who are not considered to be “domiciled” in Cyprus would be exempt from payment of defence tax on dividends, interest and rents, even if they are considered as tax residents of Cyprus.
3. In the law there are clear provisions on who is considered as non-domiciled in Cyprus for defence tax purposes.
C. CAPITAL GAINS TAX
Capital gains from the subsequent disposal of immovable property acquired between the date the law comes into effect and 31 December 2016 will be exempt from capital gains tax. This covers both land and buildings, but it does not cover property acquired as a result of sale of property in settlement of a debt.
D. LAND REGISTRY FEES
1. For transfers of immovable property to be effected until 31 December 2016 the land transfer fees are reduced by 50%.
2. A number of other changes have been introduced on fees payable on transfers of property between related parties.