Cyprus recorded a surplus in the first quarter of 2016 after three years of hard work, substantial fiscal consolidation, restructuring of the banking sector and structural reforms. Cyprus exited its economic adjustment programme ahead of its official expiration date, unemployment rates have been steadily decreasing, and it is expected that this will be a record year for tourism in Cyprus, contributing to a Budget surplus.
The Cyprus real estate market has also become much more attractive to foreign investors. 2015 and 2016 saw a number of legislative changes which added to this attraction, including reduction – and in some cases abolition – of transfer fees, reductions of immovable property taxes and more. New property legislation was also passed in 2015, giving protection to buyers in Cyprus by allowing owners to apply for their own title deeds. Additionally, interest rates on housing loans have been falling.
Following 2015 and moving into 2016, there have been significant changes in tax laws. In July 2015, the Cyprus House of Representatives voted into law a number of draft laws that had been submitted by the Cyprus government in an effort to implement the new provisions of the EU Parent-Subsidiary Directive. These new and revised laws also aimed at simplifying the tax regime and making it more attractive, fair and effective, thus stimulating economic activity and attracting inward investment. Any of the amendments not voted into law during July were enacted at a later stage during December 2015. The most important tax law changes enacted during 2015 have been summarised below.
Further amendments in 2016 were made specifically in relation to immovable property taxes which have been reduced to 25% of the total tax arising using the current rates, whilst a full abolition of the tax will be applied in 2017. The tax will continue to be calculated on the total value of the immovable property owned using the 1980 prices.
Profits and losses arising from currency exchange rate fluctuations are disregarded for tax purposes with a retrospective effect from January 1 2015. Entities trading in foreign currencies or foreign currency derivatives may irrevocably elect to be taxed on the basis of only realised profits or losses.
The definition of the term "Republic of Cyprus" has been amended to explicitly include the territorial sea, the contiguous zone, the exclusive economic zone and the continental shelf of Cyprus. The definition of "permanent establishment" has also been amended to include all activities pertaining to the exploration and exploitation of the seabed in the exclusive economic zone. The gross income earned from such activities by persons who are not Cyprus tax residents or do not have a permanent establishment in Cyprus will be subject to a 5% tax.
Dividends received by Cyprus-resident companies from abroad are no longer exempt from corporate income tax if the payment of the dividend is a tax-deductible expense for the company paying the dividend under the laws of the country in which it is resident. Nor is there any longer an exemption from corporate income tax for dividends received under an arrangement that has been put in place with the main purpose of obtaining a tax advantage and that is not based on valid commercial reasons reflecting the underlying economic reality. With effect from January 1 2016 such dividends are taxed as normal business income subject to income tax and are exempt from Special Contribution for Defence (SDC).
The new tax incentive provides for no capital gains tax to be paid on properties sold that were acquired between July 16 2016 and December 31 2016.
For the first time the concept of a non-domiciled individual has been introduced in Cyprus's tax law. Until recently, SDC was paid based on the rule of whether a person was a Cyprus tax resident or not (183 days rule). However, with the new law, if a person who is considered to be a Cyprus tax resident can prove that he is not domiciled in Cyprus, he will no longer be liable to SDC. This would mean an exemption from the current tax rates of SDC which are 30% on bank deposit interest, 3% on rental income and 17% on dividends received from a Cyprus company. The intention of this new law is to attract high net worth individuals to relocate to Cyprus. This is very likely when considering that the main source of income of such individuals would be dividends that will no longer be taxable under SDC for non-domiciled persons, and as always will not be taxed under income tax neither.
Notional interest deduction is achieved through the deduction of a "notional" (i.e. theoretical) interest expense from the taxable income. As of January 1 2015, this notional interest deduction can be set against any income generated by the company during the specific tax year.
The notional interest deduction will be equal to the interest yield of the 10-year government bond yield of the country in which the new equity is invested, increased by 3% (the minimum rate is the yield of the Cyprus 10-year government bond increased by 3%). The bond yield is the one applicable as of December 31 of the tax year preceding the relevant tax year. New equity is considered to be any new issued share capital and share premium, provided that it is paid in full either in cash or in kind. It is important to note that the notional interest deduction cannot exceed 80% of the taxable income of the company and it cannot be brought forward to reduce taxes of future years.
Up to early 2015, income tax law provided for a 20% exemption from income tax for a period of three years for any remuneration from any employment exercised in Cyprus by an individual who was not resident in Cyprus before the commencement of employment in Cyprus, subject to a maximum exemption of €8,550 ($9,650). With effect from the 2015 tax year and onwards, the exemption is extended to five years, but it will be available only until the year 2020.
Furthermore, the law also provides for a 50% exemption from income tax on remuneration from any employment exercised in Cyprus by an individual who was not resident in Cyprus before the commencement of employment. The exemption applied was for five years, provided that the annual remuneration exceeded €100,000. The period of five years has now been extended to 10 years.
As per the amended tax law only 20% of IP activity losses are accepted as a tax allowable expense.
Up to 2015, group loss relief was allowed only between Cyprus-resident entities (minimum 75% shareholding). In order to align the loss relief provisions with the decision of the European Court of Justice in the Marks & Spencer case, the law has been amended so that a subsidiary company which is tax resident in another EU member state can surrender its taxable losses to another group member company tax resident in Cyprus. The aforementioned applies provided that the subsidiary has exhausted all means of surrendering or carrying forward the tax losses in its member state of residence or to any intermediate holding company.
Cyprus does not have specific transfer pricing rules in its domestic legislation, but the arm's length principle is incorporated into income tax law. Up to 2015, this arm's length principle allowed the tax authorities to make upward adjustments, imposing additional taxes on profits between related parties. The amended law provides that in such cases where an upward adjustment is made, a corresponding downward adjustment should also be allowed in the books of the related company.
Until recently, capital gains tax was charged only on the sale of immovable property Cyprus. This meant that it was easy to avoid such taxes by placing the property in a Company and selling the Company's shares instead of the actual property. With the new amendments this loophole was eliminated by introducing capital gains tax on the sale of shares in companies that directly or indirectly own property in Cyprus, if the value of the immovable property represents more than 50% of the value of the assets of the company whose shares are sold.
Zoe Kokoni (email@example.com), Eurofast Taxand, Taxand Cyprus
The Cypriot economy is on its way to recovery and the atmosphere has drastically improved following the 2013 banking crisis. Unemployment rates have decreased, tourism has seen record growth and the real estate market has become a main attraction for foreign investors.
The authorities introduced a number of amendments in 2015 to simplify the tax regime, provide incentives, and align with EU directives and case law while making the Cyprus tax regime more attractive.
"The changes made in 2015 have further enhanced the Cyprus tax system, providing attractive incentives in a tax regime that is fully compliant with EU and international standards," said Philippos Aristotelous, a partner at Andreas Neocleous & Co. "In particular, the non-domiciled regime, which provides complete tax exemption on interest and dividends, and the exemptions for new taxpayers, are already helping to attract new investment."
On June 29 2016 Cyprus completed double taxation agreement (DTA) negotiations with India. The countries hope this will further develop their trade and economic links, as well as those with other countries.
"The new agreement is expected to further develop the trade and economic relations between Cyprus and India, as well as with other countries," said Zoe Kokoni, director at Eurofast Taxand. "The agreement is of high economic and political importance and it is expected that it will attract foreign investment in Cyprus."
Cyprus has almost 50 double-tax treaties, most of which follow the OECD model convention and the latest of which was agreed on July 25 2016 with Jersey.
On July 9 2015, the Cypriot House of Representatives voted on prominent amendments to the tax laws, improving the comprehensive and transparent character of the tax system.
Other changes included:
The 'non-domiciled' regime was also introduced in relation to payment of special defence contribution (SDC) taxes. Individuals who are Cyprus tax residents will also need to be domiciled in Cyprus to be liable to SDC.
The country has also been influenced by the OECD's BEPS Project, although how far Cyprus will go with BEPS remains unclear. On December 30 2015, the Cyprus Ministry of Finance announced that its new intellectual property (IP) tax regime would be implemented and new legislation is expected to be passed later this year, aligning with Action 5 of BEPS while maintaining a competitive fiscal framework and ensuring the maximum possible transitional arrangements.
The tax authorities in Cyprus remain cooperative, despite the international changes. "They are friendly. The tax authorities usually are friendly and we don't see aggressive behaviour from the tax authorities," said Therapon Mafkas, head of tax at Baker Tilly Klitou.
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Eurofast is a Regional Business Advisory Organisation employing over 200 local advisors in South East Europe and Middle East through fully fledged subsidiaries in Lefkosia, Athens, Thessaloniki, Sofia, Bucharest, Belgrade, Podgorica, Tirana, Skopje, Zagreb, Pristina, Banja Luca, Sarajevo, Cairo, Alexandria, Tbilisi, Kiev, Moscow, Erbil, Beirut and Tehran.
Every Eurofast office consists of teams ranging from 15-60 advisors with diverse backgrounds and experience including tax, legal, M&A, payroll, accounting and advisory services.
Our services include M&A and transactional advisory, international tax and restructuring, transfer pricing, accounting and payroll services, cross border structuring as well as permanent residency & visas.
Over the company's 25-year history, Eurofast has worked for, and continues to work with, many global brands and leading institutions operating in the manufacturing, retail, airlines and professional services sector.
Eurofast is Taxand Cyprus. Eurofast Taxand provides comprehensive tax advisory services in Cyprus. Taxand provides high quality, integrated tax advice across nearly 50 countries.
Eurofast has been recognized as a leader in professional services. The organization has achieved worldwide market recognition for our exceptional advice, capabilities and innovation.
Eurofast has been acknowledged as a leader in Tax in Cyprus. In the past years, Eurofast has been ranked top Tax Advisors and announced "Cyprus Tax firm of the Year" by ITR which is a true recognition for the valued client work we deliver every day.
In 2016 we were acknowledged by Acquisition International as 'Corporate Adviser of the Year – South East Europe' for our work done in the Region. In 2015, Eurofast has been ranked Tier One Tax Planning Advisor from ITR for the seventh time in a row. In 2014, the organization was recognized for its expertise in M&A. This award was given to us in recognition of the work conducted on a regional level in the field of M&A in countries across South East Europe.
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|Corporate Income Tax||12.5%|
|Capital Gains Tax||20%|
|Net Operating Losses (years)|
|Royalties from, for example, patents, know-how||0%||B|
|Branch Remittance Tax||0%||n.a.|
A A special contribution to the Defence Fund at a rate of 17% is withheld from dividends paid to resident and domiciled individuals.
B A 5% rate applies to royalties paid with respect to films and television. A 10% rate applies to other royalties if the asset for which the royalties are paid is used in Cyprus.
C Effective from January 1 2012, losses can be carried forward to the following five years (previously indefinitely).
Elias Neocleous oversees the tax team of five partners and 31 dedicated professionals at Andreas Neocleous & Co. Although cross-border work is the main focus of the firm, its services also extend to domestic tax, VAT and litigation. It serves mainly international law firms, large international companies, HNWIs and the public sector.
This year, one of the team's largest individual transactions was a successful hostile mandatory public $900 million takeover offer by Joma Industrial Source Corp of CAT Oil, an Austrian-based company. The team assisted its client, Joma, with all aspects of implementation, including the recruitment of suitably qualifies staff and independent directors, establishment of an employee share option scheme and advising on all relevant licensing requirements.
Other significant team members include Andreas Neocleous who continues to be active in tax matters, and Panos Labropoulos with extensive expertise in cross-border mergers, re-domiciliation and restructuring for tax purposes. In 2015 the firm expanded its tax department with the addition of Spyros Joannou as a partner.
The team has followed a strategy of specialisation, supported by investment in technology, knowledge infrastructure and an international network with offices in Moscow, Kiev, Prague, Budapest, Brussels and Sevastopol, Crimea. The firm aims to provide stand-alone advice on all aspects of Cyprus tax law and implementing innovate, tax-effective structures for international transactions.
Andreas Athinodorou is one of the founding partners of Athinodorou & Zevedeou. His main practice areas lie in national and international tax planning, and he worked for one of the Big 4 in Cyprus before starting his own firm. The firm's main focus is on international tax advice but it also specialises in domestic issues.
Other services offered include accounting and financial reporting, auditing and assurance, and tax compliance.
Baker Tilly Klitou's tax department in Cyprus is headed by Therapon Mafkas. The team of two partners and 10 other tax professionals provides guidance to multinationals and local groups of companies on their tax strategies, with the aim to maximise tax planning benefits while meeting all compliance requirements. The firm's areas of expertise includes indirect tax, offering local and international tax planning, corporate and personal tax compliance, due diligence reports, tax rulings and negotiations, and VAT advisory services.
Recently, the firm assisted a client which had constructed a building for rental, hotel accommodation and trading purposes with the VAT input classification, the taxable activities and the exempt activities.
Charles Savva has more than 13 years of experience in Cypriot corporate services and is the managing director of C Savva & Associates. He has a wealth of knowledge including national taxation, international VAT and IFRS-based accounting. The firm specialises in international and national tax planning, VAT, investment funds, financial management and accounting, and financial reporting and audits.
The team offers a number of services specifically for professional intermediary companies to customise solutions. Due to the firm's experience advising on Cypriot tax planning and VAT issues, clients can receive tax reports and opinions, advance tax rulings, due diligence reviews and preparation of annual tax returns.
Tax is a key practice area for well-regarded law firm Chrysses Demetriades & Co. The team of lawyers and accountants provide specialist tax advice and solutions on private and commercial transactions. The firm is active in corporate tax advice for the financial sector, regularly advising banks, companies and institutional investors in M&A, joint ventures, restructurings, asset finance and distribution agreements.
Property and commercial trusts are both prominent areas of advisory work where the team advises on capital gains, stamp duty and VAT. Given the international tax climate, litigation and dispute resolution have become increasingly important and the professionals at the firm regularly advise clients on contentious tax assessments by the authorities and represent them in the courts.
Founding partner Chrysses Demetriades specialises in advice in a range of corporate, commercial and banking transactions. Christos Mavrellis is a senior partner at the firm and heads the company and commercial departments and is the main contact for the tax practice. He specialises in general corporate work, banking, capital markets and private equity transactions.
Consulco's international tax department is headed by Miklhail Sobolev, who has more than 19 years of experience in international tax planning. He is the firm's leading consultant for the Commonwealth of Independent States (CIS) markets and is an author on international tax planning.
The law firm assists a wide range of clients, including multinational companies from across the globe, on M&A transactions and international initial public offering (IPO) work. Key practice areas for the team include tax planning, accounting and VAT, and corporate advisory. A major sector for the firm is the finance industry.
Pieris Markou is the head of tax at Deloitte in Cyprus. The team offers the full spectrum of tax services and has an impressive wealth of knowledge of local tax matters. The team advises a number of professional and business institutions as well as participate in various committees of public organisations and agencies.
Markou has led many tax planning projects for major multinationals and is an active member of the Institute of Certified Public Accountants of Cyprus. Another key tax partner is Antonis Taliotis, who leads the tax practice in Limassol and has more than 20 years of experience. Christos Papamarkides heads the indirect tax service line and has worked alongside the Cypriot tax authorities in formulating local VAT policies for the new oil and gas industry in Cyprus. Alecos Papalexandrou's main focus is advising clients on the set-up, licensing, and operation of Cypriot International Collective Investment Schemes (ICIS) and offers advice across a wide range of industries. Panayiota Vayianou and Agis Agathocleous are also significant members of the team and both advise local and international businesses.
The six-partner practice is at the forefront of legislative and regulatory developments in Cyprus and was involved in the work on a number of tax law proposals in the effort to modernise the framework of the domestic tax system and improve the jurisdiction's competitiveness in attracting foreigners. In 2015, the team engaged in discussions regarding the development of Cyprus's tax regime in the light of the international BEPS initiative, common reporting standards (CRS) and global forum transparency and exchange of information.
Eurofast Taxand offers clients comprehensive tax advisory services and specialises in international tax planning, indirect tax, transfer pricing and international trusts. It also advises on tax-related issues for liquidations, joint ventures, M&A, reorganisations and real estate.
The team comprises 10 partners and 80 professionals, including 11 new hires from the past year. In 2015, the team provided a client with an analysis about direct tax and other related issues created as a result of a possible group restructuring. This included the aspects of back loan taxation effects and applicability, newly introduced notional interest deductions on new equity capital and the specific anti-abuse considerations.
Christodoulos Damianou is the director of the practice and is an international tax consultant and business adviser. He has more than 20 years of experience in local and international tax and works with national and multinational companies. He specialises in structuring and planning, as well as advising on the tax implications of real estate structures, joint ventures and M&A.
Tax is a prominent practice area for EY in Cyprus. The firm offers a full range of tax services, including accounting, performance advisory, tax policy and controversy, transactions tax and VAT. The team is led by Philippos Raptopoulos who specialises in corporate and international tax advice and has a wealth of experience in advising clients on international financial reporting standards (IFRS). He works closely with board member Petros Liassides, who has a wealth of knowledge on accounting and auditing with a background in tax. As the national and international tax markets have seen some recent changes, the team has been aiding clients by emphasising global compliance and reporting, and developing effective operating models.
Grant Thornton Cyprus houses a full range of tax, specialist advisory and outsourcing services to its varied portfolio of international clients. Some of the specialist areas for the firm are compliance, holding companies in Cyprus and company reorganisation.
George Karavis is the firm's tax partner. His key practice area is international tax and has many years of hands-on experience in the application of domestic and international legislation. He is also a chartered accountant and member of the ICPAC. Grant Thornton aims to meet the needs of its clients by delivering cost-effective and efficient service that minimises the tax burden.
Angelos Gregoriades is a senior partner and heads the tax and corporate services practice at KPMG in Cyprus. He is also chairman of the Institute of Certified Public Accountants (ICPAC) and on the board of the internal audit committee of the Cypriot government.
KPMG is one of the largest firms in Cyprus, with more than 750 dedicated professionals working to deliver value and uphold a quality service. The tax team provides Cypriot and international companies with a wide range of services, based on market specialisation which is a strategic advantage of the global firm. The work is also based on technology usage and its international reach. The services offered are aimed at achieving effective compliance with regulation or cost optimisation.
International tax planning is a staple practice area for the large law firm Michael Kyprianou & Co. The firm has offices in Nicosia, Limassol and Paphos as well as international outposts in Malta and Greece. The firm's managing partner Menelaos Kyprianou specialises in tax dispute resolution and arbitration.
Partner Tonia Antoniou's main focus is corporate and financial law and international tax planning and is located in the Limassol office. Lambros Soteriou has extensive knowledge and experience in corporate structuring, taxation and finance.
Theo Parperis is a partner at PwC and heads the firm's tax and legal services. He has impressive experience in tax and statutory compliance for international groups, advising and assisting international clients with group restructuring plans. He provides comprehensive solutions for private clients and high net worth individuals (HNWIs).
The three main focus areas for the tax practice are tax advisory, corporate compliance and indirect tax. Tax advisory services include corporate tax advisory, international tax structuring, tax investigations and accounting. Partner Marios Andreou is in charge of tax advisory.
Corporate compliance encompasses both direct and indirect tax compliance as well as wealth management and Nicos Chimarides is the head of the team. Chrysilios Pelekanos leads the indirect tax team which provides a range of services, including VAT advisory and planning, due diligence, refund requests and customs and excise advice. These services help to maximise VAT recovery, increase margins and ensure groups maximise efficiencies generally with indirect taxes, while improving cash-flow.