RECENT AMENDMENTS IN CYPRIOT TAX LAW
New amendments of Cyprus taxation law have entered into force, in order to make Cyprus more attractive jurisdiction for foreign investors. These changes are expected to further boost the competitiveness of Cyprus as an international financial centre.
The changes will enter into force once the amending laws are published in the Cyprus Official Gazette and will have retrospective effect from 1 January 2012.
The new amendments comprise the following:
INTELLECTUAL PROPERTY RIGHTS (ROYALTIES) TAX
This new amendment will certainly foster the usage of Cyprus Companies for Royalty (IP) structures.
According to the changes, expenses for the acquisition or development of intangible assets (intellectual property rights) is amortised in equal installments over a five year period.
Moreover, 80% of the revenue arising from the exploitation of the intangible assets (including compensation for improper use of the rights) as well as out of any gains which may arise from their sale, will be deemed as an expense, hence only the remaining 20% will be subject to tax. This 80% deduction will apply on the profit after deduction of the amortization and any other direct expenses incurred in earning the profit.
DEDUCTION OF INTEREST EXPENSES RELATED TO ACQUISITION OF SHARES
Any interest incurred in connection with the acquisition of shares in a wholly owned (whether directly of indirectly) subsidiary company will be deductible for tax purposes, irrespective of the tax residency status of the subsidiary company. This change alienates from the previous legislation and practices of the Cyprus tax authorities who treated such interest as non deductable. This will only apply in cases where the Subsidiary own assets which are used in the business. If the contrary (i.e. the subsidiary possesses assets which are not used for the business), the restriction on interest for the Cyprus Holding Company is limited to the amount relevant to the specific assets.
The changes provide for capital allowances for the following assets:
• For all machinery (excluding private saloon cars) and plant acquired during the years 2012, 2013 and 2014, a deduction for wear and tear at a rate of 20% per year (previously was 10%).
• For industrial and hotel buildings acquired during these years a deduction for wear and tear at a rate of 7% per year will be allowed (previously was 4%).
Previously the group relief rules applied only to companies being members of the group for the whole tax year. Now, the changes allow a subsidiary company incorporated by its holding company during the relevant tax year to be considered as member of the group for the whole tax year. As long as the conditions of group relief are satisfied, the “at an arms length” principles (section 33 of Income Tax Law) will not apply for the transactions between the parent and subsidiary company (100% owned by the parent).
DEEMED DIVIDEND DISTRIBUTION RULES
Any capital expenditure incurred on the acquisition of plant and machinery (do not include private saloon cars) and buildings during the years 2012, 2013 and 2014 is deducted from the after tax profits.
In cases where the ultimate beneficial owner (UBO) of a Cyprus company is a non Cyprus tax resident, the deemed distribution rule will not apply.