Double Tax Treaty signed between Cyprus and Portugal

On the 19th of November 2012  a double tax treaty and protocol have been signed between Cyprus and Portugal. The signing of the tax treaty together with the removal of Cyprus from the Portuguese “black list” (in November 2011) of jurisdictions with privileged tax regimes is expected to encourage investments between the two countries and will effectively reduce Portuguese withholding taxes.

The treaty will enter into force 30 days after the completion of the procedure through which the parties exchange notification of ratification and shall take effect on the 1st January following such date.

Below are some of the most important provisions of the treaty:

• It applies to personal income tax as well as corporate income tax for both States. Furthermore, in the case of Portugal, the treaty applies to surtaxes on corporate income, whilst in the case of Cyprus the treaty applies to Special Defence Contribution and Capital Gains Tax.

• The withholding tax rate on dividends, interest and royalties provided for by the treaty is 10%.

• The sale of shares in property rich companies may be taxed in the State in which the property is located.

• The withholding tax rates can be reduced to 0% under the provisions of domestic Portuguese tax legislation interposed as a result of the relevant EU directives. Under Cypriot  legislation there is no withholding tax on dividends and interest paid to non-residents and where withholding tax on royalties applies, if rights are used in Cyprus, such withholding tax can be reduced to 0% under the EU Interest and Royalties Directive.

New Double Tax Treaty signed between Cyprus and Ukraine

A new DTT  between Cyprus and Ukraine has been signed on the 8th of November 2012 by representatives of the two countries during an official visit of the President of Ukraine Mr Viktor Yanukovych in Cyprus. This treaty is to replace the old treaty with the USSR and it will enter into effect on 1 January following the year in which the parties exchange notifications of ratification.

The most significant provisions of the treaty are highlighted below:

• The withholding tax rate on dividends is 5% if the beneficial owner holds at least 20% of the capital of the dividend paying company or has invested in the acquisition of shares or other rights of the dividend paying company of at least €100,000. In all other cases the withholding tax rate is 15%.

• The withholding tax rate on interest is 2%.

• The withholding tax rate on royalties in respect of any copyright of scientific work, any patent, trade mark, secret formula, process or information concerning industrial, commercial or scientific experience is 5%, and 10% in all other cases.

• Taxing rights with respect to capital gains arising from a disposal of shares (irrespective of the underlying assets of the company in which the shares are being disposed of) or any other movable property is granted to the State in which the person making the disposal is tax resident.

Cyprus removed from Russia's Black List

From the 1st of January 2013 Cyprus will be removed from the Black List of the Russian Federation, according to an official communication made by the Russian Ministry of Finance.

This will have an immediate positive impact on both inbound investment to Russia from Cyprus and outbound investment from Russia to Cyprus and globally.

There are a couple of important advantages:
• With effect from 1 January 2013, dividends paid from Cyprus companies to Russian companies will be exempt from taxation in Russia (subject to the normal holding conditions), benefiting from the Russian participation exemption that does not apply to dividends from countries on the Black List.

• The transactions of Russian companies with Cyprus companies will not be subject to the onerous transfer pricing provisions introduced with effect from 1 January 2013 for countries on the Black List. The standard transfer pricing regulations will continue to apply.

• Other possible Russian provisions being introduced with restrictive implications in respect of payments to companies in jurisdictions on the Black List will not apply to transactions with Cyprus companies.

Double Tax Treaty between Cyprus and Estonia

The double taxation agreement between Cyprus and Estonia has been signed by the two countries' foreign ministers  on October 15 2012, according to the Cyprus ministry of foreign affairs. This is considered to be the first treaty finally signed between the two countries since Estonia rejected the Double Tax Treaty of 1982 (DTT) that was in place between Cyprus and the former Soviet Union. The new DTT is one more addition to the extensive network of DTTs that Cyprus has with more than 45 countries. The new DTT will allow Estonians to use the tax-beneficial Cypriot legal entities for the purpose of investing and paying dividends back into Estonia. Details of the new agreement are not yet available, and it is not yet officially confirmed when it will enter into force. 

Cyprus Permanent Residency - Simplification and Fast response

Now non-EU nationals can enjoy permanent residency in an EU country by buying their dream home in Cyprus. This has been made possible by the Cyprus Government, which has recently announced that non-EU citizens making a minimum investment of €300,000 in property on the Island, subject to certain requirements, will be granted permanent residency through a special immigration visa, being able to enjoy the same advantages as everyone else in Cyprus without having to apply for any permits or renewals.

Cyprus is already renowned as the perfect place to live with its almost year-round sunshine, a relaxed, stress-free lifestyle and a very low crime rate. Cyprus offers an ideal family environment, children are able to benefit from excellent schools and universities, while healthcare and infrastructure are all state-of-the-art. The island also enjoys a favourable reputation as in International Business Centre and gateway to the EU. Many international companies operate offices in Cyprus. Opening a company couldn’t be easier with low personal and business taxation plus the added benefit of tax treaties with numerous other countries.

The criteria for a fast and unilateral decision by the Minister are as follows: 

- Income from abroad of at least 30,000 euro per couple (from income, interest, rentals, dividends, pensions, etc); 

- The purchase of a home or other properties in Cyprus of 300,000 or more and proof of payment of 80% of this amount before application is lodged; 

- Proof of a fixed deposit of 50,000 euro for a minimum of three years in a Cyprus based bank. 

All amounts mentioned above must be proven to have come from abroad. For any applicants who do not meet one of these criteria, their application will be examined by the committee (slower response).

Cyprus Tax Legislation Changes

The tax amending laws voted by the House of Representatives of Cyprus were published in the Government Gazette on 6 July 2012 and have come into effect from 1 January 2012. The main amending laws relate to the intellectual property regime, interest deductibility, group relief and the deemed distribution of dividends. Intellectual property rights • The meaning of patent rights and intellectual property (IP) rights has been amended to coincide with the definition in the Patent Rights Law of 1998, the Intellectual Property Law of 1976 and the Law regarding Trademarks. This ensures that all types of IPs will be covered by this new regime avoiding any uncertainty. • The new law provides for an 80% exemption on the net profit from the exploitation of such intangibles. • The net profit is calculated after deducting from the licensing of the intangibles all direct expenses associated with the production of this income. • The rate of capital allowances on such intangibles has been set at 20% of the cost of acquisition. • Any profit arising from the disposal of such intangibles will also benefit from the 80% exemption. Interest deductibility • No interest expense restriction will apply in cases where shares are acquired directly or indirectly in a wholly owned subsidiary provided that this subsidiary does not own any assets which are not used in the business. • If this subsidiary does own assets that are not used in the business, the restriction of interest will only correspond to the percentage of assets not used in the business. • This amendment is effective in respect of interest incurred on borrowings used for the acquisition of shares acquired on or after 1 January 2012. Group relief provisions • Under the current provisions of group relief a company is considered to belong to the same group for group relief purposes if it is part of that group for a whole tax year. • With the amended legislation, in cases where a company has been incorporated by its parent company during the tax year, this company will be deemed to be a member of this group for group relief purposes for that tax year. Capital Allowances • The rate of capital allowances for any plant and machinery purchased in the tax years 2012, 2013 and 2014 has been set at 20%, unless the rate of capital allowances on such assets is higher. • For industrial and hotel buildings purchased in the tax years 2012, 2013 and 2014, the capital allowances rate will be increased from 4% to 7%. Provident Funds • For the purposes of the Income Tax Law, approved Provident Funds and Pension Funds are those which have been approved by the Commissioner of Income Tax. Special Contribution for the Defense Law • In calculating the profits subject to deemed distribution under this law a deduction will be given for the acquisition of any plant and machinery purchased in tax years 2012, 2013 and 2014. • The definition of plant and machinery is the same as that in the Income Tax Law and it excludes any saloon cars purchased for private use. • This provision will apply for the profits earned in the tax years 2012, 2013 and 2014. 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 31st December 2012.

Cyprus and Poland sign Protocol for the avoidance of Double Taxation

Cyprus and Poland signed on 22 March 2012 a protocol amending the Double Taxation Agreement between the two countries.

The agreement was signed between Cypriot Minister of Finance, Kikis Kazamias and the Ambassador of the Republic of Poland in Nicosia, Pawel Dobrowolski.

The agreement maintains the existing regime for Polish workers on Cypriot ships, approximately 9000 people, who are not taxed and reduces the withholding tax rates in respect of dividends from 10% to 5% or 0% and in respect of interest, from 10% to 5%.

The Agreement has also been extended to encompass a tax information exchange clause based on the provisions of article 26 of the OECD Model Tax Convention.

Cyprus - Increase in the Standard VAT rate from 15% to 17%

Still the second lowest rate in the EU

The standard VAT rate has increased from 15% to 17% for supply of goods and services, as from 1 March 2012. Therefore, all the supplies of goods and services that were taxable with the standard VAT rate of 15%, from 1 March 2012 are to be taxable with 17%.

The supplies of goods and services that fall under the zero VAT rate or are exempt from VAT continue to have the same treatment for VAT purposes even after 1 March 2012. In addition, please note that the change in the standard VAT rate will not affect the reduced rates of 5% and 8%.

The transitional provisions of Article 55 of the VAT Law apply, based on which a taxable person selling goods or providing services has the choice of applying the old VAT rate (15%) or the new VAT rate (17%), but only for certain cases. For instance, when the goods/services were delivered or respectively performed before 1 March 2012 and the payment was made and/or the invoice was issued after 1 March 2012, then the taxable person may apply the VAT rate of 15%.

Despite the above increase of the VAT rate by 2%, Cyprus still enjoys one of the lowest rates in the EU, and combined with its very low indeed corporate tax rate (10%), Cyprus will still be a favorable jurisdiction for establishment of trading and other types of companies.

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