The amendments in tax legislation

23.05.2012

On Monday 21st May 2012 the Finance Committee of the House of Representatives Cyprus discussed and approved the amendments to the tax legislation. On 24th May these amendments are expected to be voted mainly concerning the following:

(i) Intellectual Property ("IP") regime;

(ii) Improved deductibility of interest expense;

(iii) Αccelerated depreciation on specific fixed assets;

(iv) Deduction for Deemed Dividend Distribution purposes of the cost of acquisition of property, plant and equipment (for years 2012, 2013 and 2014).

On 24 May 2012 the Cyprus Parliament passed amendments passed amendments to the Income Tax Law, the law of Special Contribution for Defence of the Republic and the VAT Law, which enhance the competitiveness and attractiveness of Cyprus for foreign investors.

These amendments in the legislation come into force as from the date of publication in the Official Gazette of the Republic with retrospective effect as of 1 January 2012.

Here are the basic:

Income Tax Law

1. Intellectual property rights

The new law holds that an 80% exemption shall be applied on net profit arising from the exploitation of intellectual property rights and on profit arising on the disposal of such intangible assets.

Herewith, the definition of «intellectual property» and «patent rights» has been expanded according to the definition in the Patent Law of 1998, the Intellectual Property Law of 1976 and the Trademark Law, thus ensuring that all types of Intellectual Property will be covered.

2. Deductibility of Interest Expense

Interest expense by a Cyprus tax resident company incurred in connection with the acquisition (direct or indirect) of shares in a 100% subsidiary (irrespective of the subsidiary’s tax residency) will not be restricted (thus shall be deductible) provided that the wholly owned subsidiary does not own assets not used in the business.

3. Transfer Pricing Provisions

The provisions of Section 33 of the Income Tax Law regarding “arms length transactions” will not apply in the case of transactions between parent and wholly owned subsidiary companies for which the group loss relief provisions as per Section 13 apply.

4. Depreciation Allowances

• Property and equipment purchased during the tax years 2012, 2013 and 2014 will be eligible to claim accelerated tax depreciation at the rate of 20% annually (increased from current 10%)

• Industrial and hotel buildings purchased during the tax years 2012, 2013 and 2014 tax depreciation at the rate of 7% per annum may be claimed (increased from current 4%)

Special contribution for the Defense Law

Deemed distribution

A deduction will be allowed, in the calculation of profits subject to deemed distribution, for all purchases of plants and equipment in the tax years 2012, 2013 and 2014. This provision will be applicable for profits earned in tax years 2012, 2013 and 2014.

VAT LAW

VAT on Construction/Purchase of Residential Property

Individuals who are not ordinary residents in Cyprus but who purchase property in Cyprus for a living during their stay in Cyprus have the right to the reduced rate of 5% on the construction / purchase of residential property in Cyprus.  

Expert’s opinion

The welfare of Cyprus is based almost on its financial sector. After the entrance of Cyprus into the European Union and the introduction in Cyprus the European union currency, income from tourism (and so not too much after the division of Cyprus into two sides and the loss of the North tourism part ) – fall.

The requirements of European Union for tax increasing and maintenance of offshore companies - more hit on the budget.

These amendments are adopted to improve the financial standing and to increase the attractiveness of Cyprus for international business.

The amendment of intellectual property aimed to attract in Cyprus business which is based on intangible assets – it means the possibility of application Cypriot companies as a holders of trademarks, patents and inventions. Recent examples of court decisions (for example in the case of network "Magnet") - show that tax planning with the usage foreign companies enters to a new, more civilized level.

And there is the gift from legislators: releasing of restrictions on the work of related parties (transfer pricing) and deductions for interest payments and accelerated depreciation!

In general, Cyprus is still alive! And the appeal of "The 16th  Republic" is still high!

A ratification of the protocol to the agreement on avoidance of double taxation between Russia and Cyprus, signed by the parties in October 2010, and had aim to reduce the degree of confrontation between the tax authorities and business.

It remains only to wish the Cypriot banks as soon as possible to get out of scrapes with the Greek problems.

On the basis: http://www.parliament.cy/

Lomakina Irina ( the director of Moscow office of Honest & Bright )