The proposed changes fall under three main headings: stimulating economic activity and investment in real estate; increasing competitiveness and aligning domestic legislation with EU directives; and, attracting high-net-worth individuals and high-earning employees.
In order to stimulate the property market, the fee payable on transfers of immovable property will be halved until December 31 2016. In addition, any future gain on the disposal of immovable property acquired in the period beginning on the date the law becomes effective and ending on December 31 2016 will be exempt from capital gains tax.
The accelerated tax writing-down allowances on plant and machinery and industrial and hotel buildings will be extended until December 31 2016.
In order to implement the latest changes to the EU Parent Subsidiary Directive, after December 31 2015, the existing exemption from Cyprus income tax on dividends received by Cyprus-resident companies will not be available in cases where the dividend was allowed as a tax deduction in the jurisdiction of the paying entity, or where the arrangement is a sham.
In addition, the group loss relief provisions are to be amended with retrospective effect from January 1 2015. In this way, group relief is available between companies resident in Cyprus and companies resident in other EU member states.
Cyprus does not have specific transfer pricing rules in its domestic legislation, but the arm's length principle is incorporated into the Income Tax Law. It allows the tax authorities to impose additional taxes on profits or benefits arising from related party transactions. Currently, the only adjustments that can be made are to increase profits, and there is no provision for the corresponding expenses and losses to be compensated. The Law will be amended to tax the profit arising from the transactions between the related parties and to allow a corresponding deduction for the counterparty to the transaction. The government hopes that the adoption of international transfer pricing principles will attract more multinational businesses.
With effect from January 1 2015, companies and permanent establishments of foreign companies are to be given a notional interest deduction (NID) on new equity capital (share capital and share premium) introduced after that date, calculated by reference to the government 10-year bond. The NID will be limited to 80% of the taxable profit before deducting the NID, and no NID will be allowed in the event of losses.
The introduction of the NID is intended to level the playing field between equity and debt finance, as both will be eligible for tax deductions.
Profits and losses arising from currency exchange rate fluctuations will be disregarded for tax purposes apart from gains or losses arising from trading in foreign currencies or foreign currency derivatives. Entities trading in foreign currencies or foreign currency derivatives may irrevocably elect to be taxed on the basis of realised profits or losses.
Corporate reorganisations are exempt from all forms of tax. In order to prevent abuse, it is proposed that the exemption be withheld if the tax authorities consider that a reorganisation is not carried out on valid commercial grounds.
At present, all Cyprus tax-resident individuals are liable to pay Special Contribution for Defence (SDC tax) on rents, dividends and interest. It is now intended to introduce the option for individuals who are resident in Cyprus to obtain exemption from SDC tax if their domicile is elsewhere.
Individuals taking up residence and employment in Cyprus with income from employment of more than €100,000 ($110,000) per annum are at present entitled to a 50% deduction for the first five years of employment. The government intends to extend the period for which the deduction is available from five years to 10.