Cyprus introduces Notional Interest Deduction regime and non-domiciled rules
Amendments to the tax laws
On 9 July 2015, the Cypriot House of Representatives voted on significant amendments to the tax laws further improving the long-established comprehensive and transparent character of the Cypriot tax system.
The changes serve a multitude of purposes such as promoting economic development by encouraging the introduction of new equity capital as an alternative to excessive debt financing. Moreover, the changes are aimed at encouraging the creation of business substance by offering compelling advantages to individuals from a personal tax perspective.
The changes made will further improve Cyprus’ international competitiveness as a location of choice for multinational companies doing business in Central South Europe, the Commonwealth of Independent States (CIS), the Middle East, and North Africa.
The changes made in the tax laws are the most significant since the introduction of the current tax regime in 2003. It should be mentioned that the changes represent a coordinated initiative between the Government and various stakeholders.
The Government has ensured that the changes made are aligned with global and European Union (EU) developments in the field of corporate taxation and that the new tax measures will be fiscally viable without resulting in a reduction of tax revenues.
The NID will remove any distortions between equity and debt finance by bringing equity and debt into a level playing field since both will be entitled to a tax deduction. As per the amended law, corporate entities (including permanent establishments of foreign companies) will be entitled to a NID on equity. The NID will equal the multiple of the “reference interest rate” and the ‘’new equity’’ held and used by a company in the carrying on of its business activities. Both terms are defined in the law:
The NID regime is considered an interest expense and is subject to the same limitation rules as interest.
Claim or not to claim the NID?
The law includes both specific and general anti-abuse provisions aiming to:
Capital Gains Tax
The land transfer fees are reduced to 50% for any purchase of property made between the date the law is amended and 31 December 2016. This measure aims to revive the real estate sector. Introduction of non-dom rules for individuals The Special Contribution for the Defense of the Republic Law (SDC) imposes a tax on certain categories of income (interest, rents, dividends) received by persons who are considered to be residents for tax purposes of Cyprus, subject to any available exemptions. The SDC Law also includes provisions for the deemed distribution of profits of Cypriot tax resident companies to the extent that the shareholders of such companies are Cypriot tax residents.
An individual is considered to be a resident for tax purposes of Cyprus if he/she is physically present in Cyprus for a period or periods exceeding in aggregate 183 days during the calendar year. The SDC law is amended so that an individual will now be subject to SDC if he/she is both a resident for tax purposes of Cyprus and is also considered to be domiciled in Cyprus. With the introduction of “nondomicile” or “non-dom” rules, a Cyprus tax resident individual who is not domiciled in Cyprus will effectively not be subject to SDC in Cyprus on any interest, rents, or dividends (whether actual or deemed) regardless of whether such income is derived from sources within Cyprus and regardless of whether such income is remitted to a bank account or economically used in Cyprus. It is noted that no tax is imposed on individuals under the Income Tax Law in respect of interest and dividend income.
Domiciled in Cyprus
The term “domiciled in Cyprus” is defined in the law as an individual who has a Cypriot domicile of origin in accordance with the Wills and Succession Law but it does not include:
1. An individual who has obtained and maintained a domicile of choice outside Cyprus in accordance with the Wills and Succession Law, provided that such an individual has not been a tax resident of Cyprus for a period of 20 consecutive years preceding the tax year; or
2. An individual who has not been a tax resident of Cyprus for a period of 20 consecutive years prior to the introduction of the law.
Notwithstanding the above, an individual who has been a tax resident of Cyprus for at least 17 years out of the last 20 years prior to the tax year will be considered to be “domiciled in Cyprus” and as such be subject to SDC regardless of his/her domicile of origin.
The law includes anti-abuse provisions as per which the tax authorities have the right to disregard the transfer of property made by a person who is domiciled in Cyprus to a relative up to a third degree of kindred who is not domiciled in Cyprus in case such transfer was made with the aim to avoid the imposition of SDC as a result of the introduction of “non-dom” rules.
The non-dom rules are expected to further encourage the relocation of corporate executives and encourage high-net-worth individuals to take up residency in Cyprus. The non-dom rules are effective as of the date of publication in the Official Gazette of the Republic (17 July 2015).
It should be mentioned that the relevant tax bills submitted to the House of Representatives included a number of other amendments which were postponed for further discussion and consultation. These include among others:
The amendments to the Cypriot tax laws provide both individual and corporate investors with a broader scope of options for structuring their investments in Cyprus. Nevertheless, investors should undertake a review of their existing arrangements and structures in order to assess the impact of the changes and ensure their conformity with relevant amendments. Businesses should therefore reconsider their structures in an effort to assess options and consider taking any necessary actions.
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