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2015.07.31 - Cyprus: Tax law amendments 2015


The Government of Cyprus pays great attention to attracting foreign investments into the national economy, and accordingly - to the development and higher competitiveness of the Cyprus tax system.

In particular, on 16 July 2015 the Cyprus Parliament adopted the amendments aimed at further development of the tax treatment of Cyprus companies and improvement the country’s status as an attractive jurisdiction for business.

Some of the provisions will be finally approved in September 2015, whereas others will come into effect retroactively, i.e. - from 1 January 2015.

  1. Notional interest deduction on capital investments.
    Positive impact on the investment climate in Cyprus will be undoubtedly achieved by the principle of notional interest deduction on the amount of investments made in the Cyprus companies capital after 1 January 2015.
    The notional interest rate is determined by adding 3% to that of the 10-year government bond of the state.
    The notional interest is treated as business expenses and is deductable from the company’s tax base. The deducted amount, however, may not exceed 80% of the company’s taxable profit (i.e. - the company may not incur losses as a result of such deduction).
    Appropriate regulations have been introduced to limit the use of this provision for tax evasion; in particular:
    1. Notional interest may not be accrued on the capital increase resulting from revaluation of the company’s assets that already existed at 31 December 2014.
    2. The deduction may not be used twice. That is, if investments were made through another company and the deduction has already been applied when the contribution in its capital was made, the other company may not take advantage of the deduction.
    3. Furthermore, if the company’s capital was formed by means of debt financing of another company, which in turn declared the interest paid on the loan as its expense, such investment would not be subject to the notional interest deduction.
  2. Foreign exchange (FX) gains.
    In September the Cyprus Parliament will consider the provision, whereby (also retroactively, i.e. -from 1 January 2015) the principle of neutrality of exchange rates is implemented. That is, the gains or losses generated as a result of currency rates fluctuations no longer affect the calculation of the tax base in Cyprus. This amendment simplifies the reporting procedures for Cyprus companies, i.e. -whereas earlier there was a formal accounting profit (or loss) in reports, depending on the exchange rate fluctuations of various foreign currencies, now these fluctuations do not result in any tax charge in case of gains (and also do not allow to deduct losses incurred as a result of such fluctuations).

    This provision is not applicable to professional traders whose main business is trading in currencies, or in currency futures and derivatives.

  3. Detailed provisions for taxation of dividends.
    As is well known, dividends received in Cyprus are not subject to income tax in this country. In view of further harmonization of Cyprus law with the directives of the European Union, in 2016 it is planned to implement income tax on dividends received in the following cases:
    1. Where a foreign company that distributes dividends is granted the right of tax deduction of the amount of such distributed dividends in the country of its location, or
    2. Where there is evidence that the dividends distribution mechanism is an agreement with no real economic substance, and rather was established for the sole or principal purpose of obtaining a tax benefit.

International Overseas Services comments:

For decades, Cyprus is one of the leading holding jurisdictions and has been widely used by the entrepreneurs to enter the EU market, as well as to set up subsidiaries in other countries. The role of Cyprus as a significant holding jurisdiction further increases with the present Tax Law amendments. When harmonizing the national law with the EU general regulations, the Cyprus government at the same time pays great attention to the improvement of attractiveness of this jurisdiction as one of the most effective locations for investment activities and holding operations.

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