The Cyprus Tax Authority decided to change the current tax regime in relation to profit margins and loans between related parties.
Whom does the change apply to?
From the 1st of July 2017 all loans between Cyprus Tax Resident Companies and their related parties shall be supported by transfer pricing studies prepared by an independent expert and based on OECD principals. The new rule will affect financial transactions between related companies with regards to tax assessment and tax ruling.
The Ministry of Finance in Cyprus announced, in agreement with Russian Government, to abolish the introduction of source-based taxation of capital gains on disposal of shares in property-rich companies.
Disposals of shares in property-rich companies will continue to be taxable only in the country of residence of the person disposing of the shares. This means that gains on disposals of shares will continue to be tax free.
The scheme covers income tax, VAT, special defence contribution, immovable property tax, capital gains tax, stamp duties, special contribution for employees, pensioners and self-employed persons, and inheritance tax.
The repayment scheme introduced allows 54 monthly instalments for tax obligations below €100,000, and 60 monthly instalments where the obligations exceed €100,000. The tax commissioner has been provided with the discretion to rule on discounts on interest and penalties on a case-by-case level.
Interested parties must submit an application within 3 months of the date on which the new law becomes effective. The date of implementation has not yet been determined. Official announcement will follow.
In accordance with the OECD BEPS Action 5, Cyprus has abolished the existing IP box scheme, with effect from 30 June 2016, with transitional rules applying until 30 June 2021 for companies already using the old scheme (applicable with restrictions). The new Cyprus IP box scheme which has been introduced and is effective as from 1 July 2016 provides for a 80% deduction for profits from qualifying IP.
Effective tax of 12.5% on 20% of the qualifying profits as a result
This results in an effective tax of 12.5% (same as corporate tax rate in Cyprus) on 20% of the qualifying profits.
Qualifying IP types include intellectual property assets developed by a person as a result of research and development activities such as patents and copyrighted software. Marketing related IP such as trademarks, image rights and brand names do not qualify.
Cyprus is well established as a favourable jurisdiction in Europe for business structuring and international tax planning. By ensuring proper long-term oriented tax planning and structuring are optimised of the Cyprus Company in the International Tax plan is in place that will provide tax optimisation and thus having a return on investment. Due to the fact, that Cyprus has a distinctive combination of advantages including a unique location, solid legislation and strong professional environment, these factors and more have resulted in Cyprus becoming one of the most attractive countries for the incorporation of International Business Companies (IBCs) in Europe over the last decade.
Management and Control
Principally, all Cyprus Tax Resident companies are taxed on the worldwide income accrued or derived from sources in Cyprus and abroad. A company is considered as a Resident Cyprus company if it is managed and controlled in Cyprus.
Corporate tax
The Corporation Tax in Cyprus is 12.5% which is uniform and it applies on trading profits, making it one of the lowest in Europe.
Taxable losses
If a company incurs a loss during a tax year, then this loss can be carried forward and used for tax relief of next year’s profit. Similarly, in case the company does not make profit then it can utilise the accumulated losses against the first available profits. The offset against the profit must arise during the next 5 years that the losses were created, otherwise this carry forward opportunity will be lost.
EU Directives
Cyprus having EU membership, and therefore use of EU Directives is also allows benefits to other Third countries. Application of some key EU directives are as follows:
1. Merger Directives –Resident and Non-Resident Companies have no taxation obstacles or consequences relating to reorganisation, mergers, divisions, transfer of assets and exchange of shares
2. Parent / Subsidiary Directive – Withholding tax is not paid on dividends and has immediate effect as long as there is 10% minimum shareholding and 2 years of holding. The tax is withheld abroad and the dividend is exempt in Cyprus (subject to conditions)
3. Interest / Royalty Directives – Withholding tax is not paid on the interest to Non–Residents and has immediate effect provided there is 25% minimum shareholding (only in case of royalties) Royalties are subject to corporation tax.
A Convention to avoid double taxation and the prevention of fiscal evasion with respect to taxes on income was signed in Brussels on the 24th of May 2016 and it is based on the OECD Model Convention for the Avoidance of Double Taxation on Income and Capital. The Treaty enters into force as of 1st of January 2017.
Following Taxes are Included:
- Latvian personal and corporate income tax,
- Cyprus personal and corporate income tax, capital gains, special contribution (SDC tax).
The main provisions of the Double Tax Treaty include
Tax withholding rates
- Dividends and Interest: 0% withholding tax will apply to dividend/interest payments to a resident company in the other contracting state that is the beneficial owner of the company. In case where the recipient company is not the beneficial owner of the dividend/interest the withholding tax rate is 10%.
- Royalties: 0% withholding tax will apply to dividend payments to a resident company in the other contracting state that is the beneficial owner of the company. In case where the recipient company is not the beneficial owner of the dividend the withholding tax rate is 5%.
Capital Gains
Income and/or Profits incurred by a Cyprus Resident or the contracting state from the alienation of immovable property situated in Latvia may be liable for tax in Latvia or the contracting state in which the property is situated. Profits derived by a Cyprus Resident from the disposal of shares in a company deriving more than 50% of their value directly or indirectly from immovable property situated in Latvia or any other contracting state may also be taxed in Latvia. Profits derived by a Cyprus Resident from the disposal of shares other than those referred to above will be taxable only in Cyprus being the country of tax residence of the person disposing the shares.
Other important provisions
Article 5 of the DDT – Permanent Establishment – provides for a 9-month period that a building site, construction or assembly or installation project or a connected supervisory or consultancy activity must exist in order to constitute a permanent establishment.
Exchange of Information: Compliant with OECD exchange information provisions.
