Cyprus - Recent tax changes
Earlier this month the Cyprus parliament approved a range of tax changes and incentives as part of a package of measures to improve the attractiveness of Cyprus to foreign investors and foreign businesses. It is intended that these measures will expand and develop the local economy in the present difficult economic climate.
The tax changes will take effect from the 1st January 2012 and cover capital allowances, transfer pricing and a reduced rate of VAT on real estate which we consider below.
Capital Allowances Increased
Assets that are acquired in the three years from 2012 to 2014 will benefit from an increased allowable deduction for wear and tear (depreciation). The increases are significant. For plant and machinery the capital allowances increase from 10% pa to 20% pa and for industrial and hotel premises from 4% to 7%
Group Loss Relief Expanded
A parent company that incorporates a Cyprus registered company can now benefit from a change in the rules that now considers that the new company is part of the parent group for the purposes of loss relief from the year of incorporation. Prior to the change the new company would only be considered as part of the group in its first full year.
Incentives for IP Rights
Two significant changes have been introduced. First, the introduction of a tax exemption of 80% on the profit realised on the sale or use of Intellectual Property Rights. The 80% exemption will be applied to the net profit after deduction of all direct expenses and amortisation. Second, the cost incurred on the acquisition of Intellectual Property can now be amortised in equal sums over a period of five years.
Reductions to Deemed Dividend Distribution
Capital expenditure on plant and machinery and buildings, made in the years 2012, 2013 and 2014 can be deducted to reduce company profits that would otherwise be subject to the Deemed Dividend Distribution provisions.
NB. Companies that are owned by non-Cyprus residents are not subject to the Deemed Dividend Distribution provisions under Cyprus tax law.
Tax Deduction on Interest Expenses
If a Cyprus parent company incurs an interest expense on the acquisition of shares of a company that is a 100% owned subsidiary, the interest expense will now be deductible for tax purposes by the parent company. The deduction will apply whether the shares are acquired directly or indirectly.
In transactions between a Cyprus registered parent company and a subsidiary company in which the parent has a 100% direct shareholding, the requirement of the arm’s length provision will no longer apply. This is subject to the proviso that the requirements for Group Loss Relief described above are satisfied.
In an effort to stimulate the Cyprus property sector the following changes have also been introduced:
a) VAT Reduced to 5% with immediate effect on the construction or acquisition of residential property in Cyprus by individuals who are not ordinarily resident in Cyprus but have purchased the property to use as their residence while in Cyprus. This extends the reduction that already applies to residential properties constructed or purchased by Cypriots and foreigners and used as their permanent residence.
b) Land Registry Fees Exemption on the sale of real estate has now been extended until end December 2012.
We consider that these initiatives will enhance the competitiveness and attraction of Cyprus as a jurisdiction and offshore centre of choice.
If you require any further information or information on the incorporation and use of Cyprus or any other offshore jurisdiction please contact us.