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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