FSC Report 2012 – Cyprus has the lowest tax regime in the European Union and the system has remained remarkably stable since it joined the EU in 2004 but, with the global financial crisis and particularly the problems in the eurozone, it was inevitable that 2011 would see the government having to make significant changes for the first time. Despite this, the changes that were adopted by and large do not diminish the attractiveness of Cyprus as an attractive jurisdiction for international tax structuring.
Special levy on bank deposits
In April 2011 the House of Representatives enacted a law that provides for the imposition of a new levy on all banks and cooperative credit institutions operating within the Republic of Cyprus. The special levy is imposed at the rate of 0.095% and will be applied on all customer deposits held as at 31 December of the previous year. Interbank deposits are explicitly excluded from the deposits on which the special levy will be applied. This applies to all banks licensed under the Cyprus Banking Law (excluding subsidiaries and branches established outside Cyprus), to branches in Cyprus of banks established in other EU member states or third countries as well as to cooperative credit institutions licensed under the Cooperative Societies Law of Cyprus. The law provides that 42% of the levy for the year 2011 and 2012 will be deposited in a special account with the Central Bank of Cyprus, as a contribution to the Fund for Financial Stability, which will be used to provide financial support to credit institutions. After 2012, the levy will continue to be imposed and calculated on the same basis but all proceeds will be deposited directly to the Fund. The rate of levy is subject to change.
Austerity measures
In August, the House of Representative About the Author of Cyprus also approved a number of amending laws that were presented as a first package of austerity measures designed to increase revenue and reduce expenditure. The measures entered into force upon publication in the government gazette on 31 August. The following are the most significant changes:
A new highest tax bracket for individuals was introduced at a rate of 35% for income above €60,000, effective from tax year 2011. On the positive side, a 50% exemption is to be applied to the income of newly-resident employees who earn more than €100,000 per annum and work for an employer in Cyprus. This exemption will apply, as from 1 January 2012, for a five-year period starting from the first year of employment.
Special Defense Contribution
The rates of the Special Defence Contribution (SDC) were increased although the basis of taxation remains unchanged. Specifically, the SDC on dividends was increased from 15% to 17%. The increase will apply to all dividends arising, accruing or deemed to arise or accrue from 31 August 2011, irrespective of the year to which the dividends relate. This will affect all Cyprus-resident companies that have individuals resident in Cyprus as shareholders. These companies will have to levy the increased withholding tax on dividends, as well as on deemed dividends. It will also affect individuals resident in Cyprus that receive foreign dividends, as well as companies that receive foreign dividends that are not exempt as per the participation exemption.
Note however that dividends received by companies are in virtually all cases exempt from tax in Cyprus. The exemption applies if more than 50% of the paying company’s income is – directly or indirectly – earned as trading income (i.e. is income of an active nature) or the foreign tax is above 5%. The abolition in 2009 of the additional requirement for exemption that 1% of the share capital must also be held means that only income that is – ultimately – passive and untaxed will be subject to the SDC in Cyprus.
The SDC on interest was also increased from 10% to 15%. Resident companies have to pay this tax on passive interest income and will be responsible for withholding the tax on interest paid to residents. Interest is however exempt from this tax if it is derived in the ordinary course of business, which would for instance apply to companies that have extended loans to group companies.
This tax is also payable on the 9% notional interest that a company is deemed to enjoy on receivables from directors and shareholders. However, since 2011, notional interest no longer applies in cases where the directors or shareholders are companies. In these cases tax will be due on an arm’s length interest rate.
Companies Law
All Cypriot companies are now subject to a fixed annual contribution of €350 to the registrar of companies. This levy will not apply to dormant companies or companies that do not own any assets. The levy was payable by 31 December 2011 in respect of 2011 and will be payable by 30 June in respect of each subsequent year. For groups of companies the maximum contribution is capped at €20,000. Late payment will result in penalties rising to 30% if paid up to five months from the due date. Failure to pay after five months may result in the company being struck off the Cyprus Registrar of Companies. A declaration must be submitted before year-end if one of the exemptions applies. The charge is not payable in respect of a company’s year of incorporation.
New tax treaties
In 2011 new tax treaties were signed with Germany, Armenia and the United Arab Emirates. The treaty with the UAE has several attractive elements. Firstly, the dividend, interest and royalty articles in the treaty do not include the usual “beneficial ownership” requirement, which enables highly predictable tax planning and makes a Cyprus-UAE structure the ideal EU exit route for these types of payments. In the absence of a treaty Cyprus levies a 10% tax – the SDC referred to above – on royalties paid to non-residents if these are earned on intellectual property (IP) rights used in Cyprus. However under the
UAE-Cyprus tax treaty the taxing rights on the royalty income are assigned exclusively to the state of the recipient – the UAE, where the income is not taxed. Cyprus has a capital gains tax of 20% that applies to real estate located in Cyprus only, but if the shares in a UAE company holding the Cypriot real estate are transferred then this transfer would not be taxable in Cyprus because the common clause regarding taxation of the transfer of shares in real estate companies in the source state is not included in the treaty.
Conclusion
Even after last year’s changes Cyprus still ticks all the boxes as an international financial centre – the lowest corporation tax of Europe, the most generous participation exemption, no withholding taxes except on outgoing royalties paid on rights exercised in Cyprus, no capital gains tax except on real estate located in Cyprus, no tax on gains on trading securities, an attractive regime for establishing collective investment funds and the lowest social security tax in the EU, no controlled foreign corporation laws, no thin capitalisation rules, losses can be carried forward indefinitely, only a general requirement that transactions between related parties are conducted on an arm’s length basis, limited anti-avoidance rules, friendly tax authorities, consistent interpretation of tax legislation by the courts, availability of advance tax rulings at no cost, flexible employment regulation, and attractive tax treaties with India, Russia, the Ukraine, South Africa and soon the UAE.
This article was part of FSC report 2012