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New tax changes attract foreign investment. Tax Alert, August 2015
The House of Representatives voted on the 9th of July 2015 a number of significant tax law bills into laws in an effort to modernize the Cyprus tax system and further enhance Cyprus’ competitiveness in attracting foreign investments. The above provisions have come into effect on 16 July 2015, which is the date they were published in the Official Gazette.
The main amendments relate to:
- Special Contribution for Defence Law
- Capital Gains Tax Law
- Income Tax Law
Special Contribution for Defence Law.
The new amendment introduces the concept of the “non-domiciled” person. This means that individuals that are not domiciled in Cyprus will not be subject to defence tax law.
Defence tax is only applicable on Cyprus tax residents who are also domiciled in Cyprus. Cyprus tax residency for individuals is determined by the number of days each person spends in Cyprus on each calendar year (183 days).
Prior to the amendment, defence tax was applicable on those who were Cyprus tax residents, and was applied on certain types of worldwide income (e.g. 17% on dividends, 30% on bank deposit interest, 3% on rental income).
An individual is considered as domiciled in Cyprus by way of domicile of origin or by domicile of choice. It is also noted that an individual who has spent 17 out of the last 20 years as a tax resident of Cyprus will be considered to be domiciled in Cyprus. Furthermore, an individual who has Cyprus as domicile of origin shall be considered NOT to be domiciled in Cyprus provided he was not a Cyprus tax resident for at least 20 years before the year he becomes tax resident in Cyprus.
New Capital Gains Tax exemption.
A significant change is the waiver of the 20% capital gains tax on the profits from the sale of immovable property either lands or buildings , if the sale takes place between the date the law comes into effect and 31 December 2016.
Further land transfer fees are dropped by 50% for transfers that take place from the date of enactment of the new law up to 31 December 2016.
Notional interest deduction on equity introduced
As from 1 January 2015, companies will be entitled to a notional interest tax deduction on ‘new equity’. New equity means funds or in-kind payments introduced into the share capital of the company after 1 January 2015 and which have actually been paid and used for the operations of the company. This interest will be calculated based on the effective interest earned on the 10 year government bond yield of the country in which the new equity is invested plus 3%, with the minimum rate being the equivalent 10 year bond yield of Cyprus plus 3%. This notional expense deduction will be tax deductible to the extent that it relates to business assets and cannot exceed 80% of the taxable income of the company for the year.