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New Laws voted by the Cyprus Parliament
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Important legislative amendments to promote foreign investment
Monday, June 04, 2012
 

 

On 24th May 2012, The House of Representatives, voted a number of new tax incentives in relation to the intellectual property regime, interest deductibility, group relief and the deemed distribution of dividends. These incentives create great prospects for Cyprus to become a preferred intellectual property holding jurisdiction and to improve its position as a location for financing companies.

 

Moreover, they also make Cyprus attractive for the importation of private aircraft in the EU when used for business purposes and enable the acquisition of new private residence at the reduced VAT rate of 5%.

 

These changes are effective from 1st January 2012.

 

Income Tax (IT)

 

Intellectual property rights

With the introduction of the new Intellectual Property (IP) regime in Cyprus the Companies will have substantial tax exemptions from income related to IP.

·        The definition of IP includes all intangible assets, including copyrights, patents and trademarks.

·        80% of any income generated from IP owned by Cypriot resident companies (net of any direct expenses) will be exempt from income tax.

·        80% of profit generated from the disposal of IP by Cyprus resident companies (net of any direct expenses) will be exempt from income tax.

·        The rate of capital allowances on such intangibles has been set at 20% of the cost of acquisition (straight line method).

 

Deductibility of interest expense

With the introduction of this amendment Cyprus Holding Companies will be more attractive because the interest will now be an allowable expense for tax purposes. Such interest expense can be used in group structures for group relief purposes.

·        Interest expense incurred for the direct or indirect acquisition of the entire share capital of a subsidiary company will be treated as deductible for income tax purposes provided that the subsidiary company does not own any assets that are not used in the business. Loans receivable are deemed to constitute assets that are used in the business.

·        If this subsidiary does own assets that are not used in the business, the restriction of interest will only correspond to the percentage of assets not used in the business.

·        Shares acquired before 1 January 2012 which previously attracted restriction of interest for seven years will remain under the 7-year rule after 1 January 2012.

 

 

Group relief

·        Under the current group relief provisions a company is considered to belong to the same group for group relief purposes if it is part of that group for a whole tax year.

·        With the amended legislation, in cases where a company has been incorporated by its parent company during the tax year, this company will be deemed to be a member of this group for group relief purposes for that tax year.

 

Arm’s length transactions

With the introduction of this amendment, routine tax adjustments previously imposed under section 33 which did not necessarily eliminate the tax avoidance of companies will be avoided.

·        Arm’s length rules do not apply to transactions between a Cyprus resident parent company and its 100% direct Cyprus resident subsidiary.

 

Capital Allowances

With the introduction of this amendment in the Income Tax Law, along with the change in the Special Defence Contribution (see below) should encourage corporate investment in plant and machinery, industrial and hotel buildings.

·        The rate of capital allowances for any plant and machinery purchased in the tax years 2012, 2013 and 2014 has been set at 20%, unless the rate of capital allowances on such assets is higher.

·        In the case of industrial and hotel buildings which are acquired during the tax years 2012, 2013 and 2014, tax depreciation at the rate of 7% per annum may be claimed.

 

Provident Funds

·        Contributions made to Pension Funds, Provident Funds or any other Insurance Funds will be treated as deductible in calculating the taxable income of an individual provided that such Funds are approved by the Commissioner of Income Tax.

 

Special Defence Contribution (SDC)

 

Deemed Dividend Distribution provisions

·        In calculating the profits subject to deemed distribution under this law a deduction will be given for the acquisition of any plant and machinery purchased in tax years 2012, 2013 and 2014.

·        The definition of plant and machinery is the same as that in the Income Tax Law and it excludes any saloon cars purchased for private use.

·        This provision will apply for the profits earned in the tax years 2012, 2013 and 2014.

 

Value Added Tax (VAT)

 

Payment of VAT on aircrafts which are not used by airline companies to carry passengers for a reward

·        With the new amendments, the importation of aircraft from a place outside the European Union which will not be used by an airline undertaking international transportations of passengers for a reward is made without the need of actual payment of VAT on importation. This applies when the importer is a taxable person and the importation takes place within the context or for the promotion of his business activity.

·        The VAT arising upon importation will be simply reported in the VAT return of the taxable person. In this way no cash outflow will be created as a result of the importation of the aircraft in Cyprus. The Commissioner has the right to demand the placement of a guarantee by the importer. The amount of the guarantee shall not exceed the amount of the VAT that is chargeable on the importation of the aircraft.

·        It is noted that the importation of aircraft that is used by an airline engaged chiefly in international transportation of passengers for a reward continues to be subject to VAT at the zero rate.

 

VAT imposed on the acquisition and/or construction of new houses for primary residence

·        With the current amendment VAT is imposed at the rate of 5% on the acquisition and/or construction of residence which is used as a primary and permanent place of residence in Cyprus by an eligible person.

·        Eligible person is any individual who fulfills the following criteria:

1.      has completed 18 years of age at the time of submission of his application,

2.      acquired the residence for use as the primary and permanent place of residence within the Republic of Cyprus,

3.      does not have any other residence in Cyprus, which he has acquired with the imposition of the reduced VAT rate,

4.      in case he has received any grant for the acquisition of residence based on the relevant Law for Special Grant (purchase or construction of residence) he has returned such grant in line with the provisions of the aforementioned Law.

·        The amendment in question comes into force as of 1 April 2012.

·        With the current amendment the charging of VAT at the rate of 5% is extended to:

1.      to persons who are not citizens of the European Union,

2.      to persons who have their primary and permanent place of residence outside Cyprus when they use the residence in question in Cyprus as their place of residence when they are located in Cyprus,

3.      to residences which are constructed on government land by a refugee to whom a license to use the government land is granted and on which he has constructed the residence in his own expenses

4.      to a residence which is constructed on government plot which is granted through a leasing contract with preferential conditions to a family with no sources of income, and

5.      to a residence which is constructed on a building land that belongs to a person related to that person who constructs it, up to a fourth degree relation

·        The reduced rate of 5% applies for the first 200 square meters of residences of total covered area of up to 275 square meters. In the case of families with more than 3 children the allowable total covered area increases by 15 square meters per additional child beyond the three children.

·        The reduced rate on the acquisition/construction of residences is imposed only after receiving a certified copy of the application submitted by the eligible person to the VAT Commissioner.

·        The procedure for obtaining the certified copy from the VAT office and the conditions for return of the VAT in the case of termination of the use of the residence as a place of residence remain the same.

 

 

Should you require more information regarding the above amendments please to do not hesitate to contact us at: info@istosglobal.com


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