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AMENDMENTS IN CYPRUS TAX LAW

 

The House of Representative of Cyprus voted on 10 December 2015 on changes to the tax laws.

Income Tax Law

  1. Income exempt from tax
  • Exchange differences, both gains and losses, and irrespective of whether they are realized or unrealized will no longer be taxable / tax deductible, irrespective of the purpose for which the funds in a foreign currency have been used for.

 

NOTE: this will not apply in the case of companies trading in foreign currencies and related products – they shall be taxed only when such gains or losses are realized.

  • Applicable as from the tax year 2015.
  1. Hybrid instruments and artificial transactions for dividends

 

  • In certain cases, dividends received by a Cypriot company from a company located outside Cyprus shall no longer be exempt from income tax, if in the case of Cyprus these amounts received are considered as dividends, while in the country where the company paying dividend is located those payments are treated solely as tax deductible expense. These are considered as “hybrid instruments”. Starting from 1stof January 2016 the dividends received by a Cypriot tax resident company which fall under the definition of “hybrid instrument” will no longer be exempt from income tax, but must be taxed as normal business income and will be exempt from defense tax.
  • Applicable starting from 1stof January 2016.
  1. Loss from using IP Box regime

 

  • Under Cyprus IP box regime an 80% deduction is allowed from the net profit received from the use or disposal of IP rights. If a loss is resulting from the said activities, in this case only 20% of the resulting loss can be offset against income from other sources or carried forward to be offset against income of subsequent tax years.

 

  • Has a retroactive effect starting from the year 2012.

 

  1. Anti-avoidance provisions for re-organizations

 

 

  • Corporate reorganizations are exempt from all forms of tax in Cyprus.

 

  • The law has been amended introducing provisions allowing the tax authorities to refuse to accept tax-free reorganizations if they have enough reasons to determine that the purpose/s of reorganization was reduction, avoidance or deferment of payment of taxes. However, such decision can be objected and/or appealed.
  • Tax authorities will also have right to impose conditions on the number of shares which can be issued as part of reorganization and the period for which such shares should be held (not more than 3 years).

 

NOTE: Not applicable for publicly listed companies and transfers of shares as a result of succession.

  • Applicable starting from 1stof January 2016.

 

Capital Gains Tax Law

  1. Capital gains from sale of shares in property companies

 

  • Gains from sale of shares in companies which indirectly own immovable property in Cyprus by holding directly or indirectly shares in a company, which owns immovable property in Cyprus, will also be subject to capital gains tax.

NOTE: Applicable only if the value of immovable property is more than 50% of the value of the assets of the company which shares are sold.

 

  1. Trading gains from sale of shares of property companies

 

  • Currently, if a company is selling shares of companies which would be considered as transactions of a trading nature and thus falling under the provisions of the income tax laws, any gains from the sale of such shares are exempt from income tax.
  • The law was amended so now such gains shall be subject to capital gains tax.

 

 

  1. Transactions between affiliates

In case if there is a sale of property between related persons, the tax authorities will have the right to replace the sale price declared by the parties concerned with the market value of the property sold, if the selling price declared is lower than the market value.

 

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