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This
memo covers the following recent tax reforms:
The
Income Tax Law, No. N118(I) of 2002
The
Special Contribution for the Defence of the Republic Law,
No. N117(I) of 2002
The
Capital Gains Tax (Amendment) Law, No. N119(I) of 2002
The
Social Cohesion Fund Law No. N124(I) of 2002
The
Immovable Property Taxes (Amendment) Law, No. N120(I) of 2002
The
Assessment and Collection of Taxes (Amendment) Law, No. N122(I)
of 2002
The
Stamp (Amendment) Law, No. N121(I) of 2002
Introduction
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In July
2002 the Cyprus Parliament enacted a series of new tax reforms
that take effect on January 1, 2003. The aim of such reforms
has been to harmonize the tax Laws of Cyprus with European
Union directives; simplify and modernize the Cyprus tax system,
and also make Cyprus a more attractive international tax jurisdiction.
Significant
changes in the Cyprus tax system include the adoption of residency
rather than source as the basis of taxation, the elimination
of any corporate tax rate difference between offshore and
onshore business enterprises, and the abolition of certain
personal allowances and deductions.
The
Income Tax Law No. N118(I) of 2002
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Main Definitions Introduced
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"Permanent establishment" has the same meaning
as defined in the O.E.C.D. Model Tax Convention on Income
and on Capital with the exemption of "a building site
or construction or installation project, which constitutes
a permanent establishment only if it lasts more than three
(3) months.
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"Resident in the Republic", when applied
to an individual, means an individual who stays in the Republic
for a period or periods exceeding in aggregate 183 days in
the year of assessment and when applied to a company, means
a company whose management and control is exercised in the
Republic; and "non-resident or resident outside the Republic"
will be construed accordingly. No definition however is given
in the Law for the term "management and control".
Income
Taxed Under the Law Back
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(a) Resident
persons (term includes and individual and a company) will
be taxed on the income accrued or arising from sources both
within and outside Cyprus.
(b) Non-resident
persons will be taxed on the income accrued or arising from
sources in Cyprus only in respect of:
Income
from any trade, business, profession or vocation carried on
or exercised as far as attributable to a permanent establishment
in Cyprus;
Profits
or other benefits from any office or employment;
Any
pension as a result from a past employment exercised in Cyprus
with the exception of any pension paid out of funds created
by the Government or a local authority;
Rents
from property situated in Cyprus.
Good
will:
under a new provision for both resident and non-resident
persons, goodwill proceeds, reduced by any amount expended
for the purchase of such goodwill will now be subject to income
tax. The law does not however contain a definition of the
term "goodwill".
Exemptions
from Tax (Main New Provisions)
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For both companies and individuals profits from activities
of a permanent establishment (P.E.) situated outside Cyprus
are completely exempt. This exemption will not apply if:
(i) The P.E. directly or indirectly engages in more than fifty
per cent (50%) of its activities in producing investment income,
and
(ii) The foreign tax burden is substantially lower than that
in Cyprus.
Dividends
will be exempted from tax; however, new provisions have been
introduced under the Special Contribution for the Defence
of the Republic Law, 2002 ("Special Contribution").
Gains
by companies and individuals from trading in stocks and shares
are exempted from income tax.
50%
of income from interest derived by a company will be exempt
from corporate tax but the whole interest received or credited
will be subject to the new provisions of the Special Contribution.
Interest derived from ordinary trading activities will only
be subject to the Income Tax Law provisions without any exceptions.
The
whole income from interest derived by an individual will be
exempt from tax but the whole interest received or credited
will be subject to the new provisions of the Special Contribution
for the Defence of the Republic Law. Interest derived from
ordinary trading activities will only be subject to the Income
Tax Law provisions without any exceptions.
An
individual's remuneration from rendering of salaried services
to a permanent establishment outside Cyprus for an aggregate
period of more than 90 days in the year of assessment is exempted
from income tax.
The
20% of the emoluments from any employment which is exercised
in Cyprus by an individual who was not resident of Cyprus
before taking up employment in Cyprus or CY£5.000 whichever
is the lowest. This exemption applies for a period of three
years commencing from the 1st January of the year following
the year of commencement of such employment.
Allowance for Losses
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The
five (5) years limit for carrying forward losses has been
abolished and losses from the year 1997 and onwards can be
carried forward to subsequent years without restriction until
such losses are extinguished.
Losses
incurred from any business carried on outside Cyprus will
be allowed as a deduction from a person's profits accrued
in Cyprus.
The
accrued losses of a business carried on by an individual or
a partnership which has been converted to a company may be
transferred to the company and allowed as a deduction from
the company's profits.
The
restriction of setting off losses from agricultural, animal
husbandry, bird breeding or fishing business against income
from other business or employment income has been removed.
Group
Relief Provisions
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The Group Relief rules, now enacted, provide for group relief
of tax losses among companies of the same group. A company
will be considered as member of a group if:
A
company is at least 75% subsidiary of the other, or
Both
companies are at least 75% subsidiaries of a third company.
A company
will be considered to be 75% subsidiary of another company
if and so long as not less than 75% of its ordinary share
capital with voting rights are owned directly or indirectly
by that other company and that other company is entitled to
not less than 75 per cent of:
Any
profits available for distribution to the equity shareholders,
and
Any
assets of the subsidiary company which would be available
for distribution to its equity holders on a winding up.
Group
tax losses may be set off as long as both companies are Cypriot
tax residents and are members of the same group during the
whole year of assessment.
Only the
loss of any year of assessment of a company can be set off
against the other company's profits of the corresponding year
of assessment. Losses brought forward will not be available
for Group Relief.
Any payment
for acquiring the tax losses will not be taken into account
in the tax computation nor will be considered to be a dividend
or an allowable expense.
Transfer
Pricing Back
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New transfer
pricing regulations have been introduced based on the "arm's
length principles".
Taxation
of Certain Incomes
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The
taxation of insurance companies continues to be the same as
it is under the present Law with the exception that the prohibition
of setting off losses against other income and carrying forward
of losses to be set off from subsequent years has been removed.
The
taxation of pensions of any individual for services rendered
outside Cyprus continues as under the present Law, that is
any sum exceeding CY£2,000 will be, in any year of assessment,
charged to tax at the rate of five per cent (5%) or the individual
may elect to be taxed under the normal rules of the Law.
The
taxation of income from ship management will continue as under
the present Law at the rate of 4,25%.
The
taxation of gross amount of royalties, premiums, compensations
etc. earned from sources within Cyprus by a person not resident
of Cyprus will continue as it is under the present Law i.e.
it will be liable to withholding tax at the rate of ten per
cent (10%) but in case the right is granted for use outside
Cyprus such income will not be liable to withholding tax.
The
taxation of the gross amount of film rentals earned by a non-resident
will remain as before, that is at the rate of five per cent
(5%).
The
taxation of the gross income derived by an individual not
resident in Cyprus from any profession or vocation and the
gross income of public entertainers and athletes will continue
to be liable to withholding tax but the rate of tax is reduced
from fifteen per cent (15%) to ten per cent (10%).
Corporate
Tax Rate Back
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Companies,
except semi - governmental bodies, are liable to corporate
tax at ten per cent (10%) of the chargeable income.
Semi-governmental
bodies are liable to corporate tax at twenty five per cent
(25%) of the chargeable income.
If
the chargeable income of a company or a semi - governmental
body for the years of assessment 2003 and 2004 exceeds one
million pounds it will be liable to additional tax at the
rate of five per cent (5%).
Withholding
Tax on Dividends Back
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Dividends
are exempt from withholding income tax BUT
see special provisions under the Special Contribution
for the Defence of the Republic Law No. N117(I) of 2002.
International Business Companies
(IBCs) - New provisions as from 1 January 2003
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Under
the new Cyprus tax regime as of January 1, 2003, international
business companies, better known as offshore companies will
no longer enjoy preferential tax treatment, by virtue of their
special status.
Main Provisions as a Result of the
Unified Taxation Policy Back
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IBCs
(International Business Companies) will no longer be taxable
by virtue of their registration in Cyprus but instead they
will be considered tax residents if they will be managed and
controlled in Cyprus.
IBCs
will be taxable as any other local companies at the corporate
tax rates prevailing (see above) and they will be entitled
to the new beneficial tax provisions.
IBCs
will, subject to obtaining the relevant permits, be allowed
to derive also income from within Cyprus.
IBCs
will be subject to the provisions of the Social Cohesion Fund
Law and will be required to contribute at the rate of two
per cent (2%) on the gross emoluments of its tax resident
employees working in Cyprus.
50%
of income from interest will be exempt from corporate tax
but the whole amount of interest received or credited will
be subject to the Special Contribution at the rate of 10%.
However, interest from ordinary trading activities such as
banking and financing activities will be considered as trading
income and taxed only at the normal corporate rates prevailing.
Companies
with nil taxation may be established in Cyprus provided that
they are managed and controlled from outside Cyprus but they
will not be entitled to any Double Tax Treaty benefits.
Other
Beneficial Provisions Back
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Dividend income will be exempt from tax provided the direct
holding is at least one per cent (1%) of the share capital
of the overseas company. This exemption will not apply if
the company paying the dividend engages in more than fifty
per cent (50%) of its activities in producing investment income
and the foreign tax burden on the income of the company paying
the dividends is substantially lower than that in Cyprus.
IBCs
will be totally exempt from the Defence Fund levy on dividend
or on deemed dividend distribution provisions.
Profits
from activities of a permanent establishment (P.E.) situated
outside Cyprus are completely exempt. This exemption will
not apply if the P.E. directly or indirectly engages in more
than fifty per cent (50%) of its activities in producing investment
income and the foreign tax burden on the income of the P.E.
is substantially lower than that in Cyprus.
IBCs
holding royalty rights will continue to be exempt from any
withholding tax on royalties payable if the right is granted
for use outside Cyprus.
Profits
from buying and selling shares will be exempt from tax.
Transitional
provisions for IBC's trading at 31.December.2001
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IBCs established in Cyprus prior to 31 December 2001 and during
the year of assessment ending 31 December 2001 derived income
from sources exclusively outside Cyprus, will have the option
to elect to be taxed as before for the years of assessment
2003, 2004 and 2005 at the rate of 4,25% provided that:
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An
irrevocable election is made.
aaa They will continue to derive
income from sources exclusively outside Cyprus.
The
chargeable income will be computed according to the provisions
of the Income Tax Law 2002 before the deduction of allowances
or exemptions provided for interest, dividends, income from
trading in shares, group relief, reorganisation, tax credits
and unilateral relief.
Losses
incurred during any year of assessment up to and the year
2000 will be carried forward and set off against the income
of any assessment year, with a limitation of five (5) years
from the end of the year in which the loss was incurred. Losses
incurring after year of assessment 2000 will be carried forward
without any restriction.
IBCs
that have elected to be taxed at the rate of 4,25% for the
years 2003, 2004 and 2005 will be exempted from the payment
of Special Contribution.
Allowances
and Deductions for Individuals Back
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The
deduction of contributions or premiums paid to:
Widows'
and Orphans' pension fund or schemes established under any
law in Cyprus or comparable law outside Cyprus, or
Pensions,
provident or other society or fund or scheme established in
Cyprus or outside Cyprus, or
Insurance
company under an annuity contract, or
Insurance
company for Pension Scheme or Medical Schemes, or
The
General Health Scheme Law of Cyprus or under comparable law
in force outside Cyprus, or
life
assurance policies made on his or her life but not on the
life of the spouse by the other spouse.
N.B. The premiums payable on life assurance
policies made on the life of the spouse by the other spouse
under the provisions of the old Income Tax Law will continue
to be allowed.
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Will be allowed subject to the previous provision for the
restriction of the above deductions to one sixth of the chargeable
income.
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The deductions for interest of up to £500 paid in respect
of a loan obtained for the acquisition of a dwelling house
remains for the year 2003 only.
Tax
Rates for Individuals
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The maximum rate of 40% is reduced to 30% and the income bands
are increased as below:
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