Cyprus remains an attractive international business centre

Cyprus/2014

The events that took place in Cyprus during the previous years had created an unprecedented number of speculations, rumours and devastation theories for the economic stability of Cyprus and the future of the island as an international financial centre. As a result of the banking crisis, a number of measures were implemented as a means to reinforce the once tumbling banking system and make it healthier and fundamentally stronger.

Further, despite the turmoil in the banking sector, it is important to highlight that the corporate sector in Cyprus still stands strong as nothing has changed in terms of the benefits available to international businesses when it comes to corporate structuring.

The Cyprus banking crisis is not a barrier for transactions and investments in or through Cyprus.  The use of Cyprus companies in international structures has not been affected and their use is still highly efficient and beneficial. Despite the ambiguity created by the recent developments, the demand for structuring projects and investments with the use of Cyprus companies is still very high and the increase of the corporate tax rate from 10% to 12,5%, did not change Cyprus’s position as a low tax jurisdiction within the EU.

Moreover, the advantages of holding companies – the majority of companies registered in Cyprus- were not affected as the rule of no withholding taxes has not changed. According to the Cyprus legislation there is zero withholding tax on payment of dividends to non-tax residents, while there is a zero capital gains tax for transactions that do not involve immovable property situated in Cyprus.

The extensive double tax treaty network of Cyprus is still in place offering its benefits to the great number of foreign investors in the island and as of 1 January 2014 the bilateral agreements between Cyprus and Estonia, Finland and Portugal have entered into force and as of 28 May 2014 the agreement between Cyprus and Spain. Cyprus companies are still enjoying the tax incentives offered, the full implementation of EU Directives and the high level of confidentiality and secrecy rules that still remain strong. Cyprus Companies, such as financing, holding, trading, royalty (for which the effective tax rate is 2,5% according to the Cyprus IP Box) and more, have not lost their advantageous edge and benefits.

International Cyprus Trusts, which are significantly used for the protection of assets and preservation of family wealth, have provided considerable beneficial tax advantages which have not been altered. Their provisions and their application is still fully effective and in force.

For many years now, Cyprus has achieved and established its title as a solid economic and business model worldwide and the recent developments cannot alter this. The existing legal system, the beneficial tax regime and the qualified professionals that have provided high quality services to local and foreign investors remain intact.

Cyprus, despite all, remains an attractive international business centre.

Changes in Cyprus Tax Legislation

1. Increase of Corporate Tax Rate

Corporate income tax rate increased from 10% to 12,5% as of 1.1.2013

2. Special Defence Contribution on Interest

Special Defence Contribution on interest has increased to 30% from 15% as of 29/04/2013 where such interest is not derived within the ordinary course of business of the company nor is closely connected with the ordinary course of business of the company (in which case it is taxed under the Corporate Income Tax).

Special Defence Contribution at the rate of 17% is imposed on dividend income received from foreign companies in the case where:

(a) More than 50% of the paying company’s activities result directly or indirectly in investment income and

(b) The foreign tax is significantly lower than the tax payable in Cyprus (less than 6,25%).

3. Property Tax

Up to the year 2014 the Immovable Property Tax (IPT) is calculated on the Land Registry’s assessment on the value of the property as at January 1 1980; the tax bands for the year 2014 are as follows:

Your Property Value by Year 1980,  €New Tax Rates

1– 40.0000,6% (€ 75 min)

40.000 – 120.0000,8%

120.000 – 170.0000,9%

170.000 – 300.0001,10%

300.000 – 500.0001,30%

500.000 – 800.0001,50%

800.000  – 3.000.0001,70%

3.000.000 +1,90%

In the case where the overall property owned in the Republic by a person does not exceed €12.500 no property tax is imposed. Further, for the tax year 2014, in the case where the taxpayer settles his obligations by 31 October 2014, a reduction of 15% will be allowed on his tax obligation. However, if the taxpayer fails to settle his obligation by 30 November 2014 a 10% penalty will be imposed.

The Cyprus immovable property tax regime will undergo significant changes as of 2015, as part of the Cyprus bailout. From the year 2015, revised property values will be used to reflect the 2013 prices thus replacing the 1980 values used so far for tax purposes. As such, the new immovable property tax rates for 2015 are expected to be approved by the Cyprus Parliament within 2015.

4. Saving of books and records

For income tax purposes, companies should now keep their accounting records for six years instead of seven, after the end of the tax year to which they relate to. For VAT purposes, the period for keeping accounting records remains seven years.

5. Keeping books and records

Persons, who receive income from dividends and interest, whether originated from sources within or outside the Republic, are obliged to keep accounting records.

6. Provisional tax

The submission of the provisional tax assessment should be made before July 31 of the current year instead of August 1.

Provisional tax payments should be made in two installments instead of three that was applicable until now. The first installment must be paid on 31st July and the second on 31st December of the current year.

7. Carry forward of tax losses

Companies and self employed individuals can bring forward tax losses of the last five years (effective from the tax year starting 1st January 2012). As such, for the tax year ending 31 December 2014, the tax losses that can be claimed against any taxable profits for 2012 are restricted to the tax losses brought forward from 2009 and onwards.

8. VAT

The standard VAT rate has increased from 18% (applicable until 12 January 2014) to 19% as of 13 January 2014.
The reduced VAT rate has increased from 8% (applicable until 12 January 2014) to 9% as of 13 January 2014. This applies to the following categories:

Transport of passengers and their accompanying luggage in the Republic, with civil, intercity and rural taxis and with tourist, excursive and intercity buses.
Restaurant and catering services
Accommodation in hotels and resorts or similar.

VAT returns must be submitted quarterly according to filing period of the taxpayer. The payment of the VAT must be made by the 10th day of the second month following the month in which the tax period ends. Also, taxable persons and companies have the right to request for a different filing period.

A penalty amounting to €51 is imposed for the late submission of the VAT return.

A 10% penalty is imposed for the late settlement of the outstanding VAT payable. In addition annual interest at the rate of 4,5%  is imposed on the outstanding VAT amount. The annual interest rate was 4,75% for 2013 and 5% for 2012.

Zoe Kokoni
Zoe.kokoni@eurofast.eu
Eurofast Taxand, Cyprus