Amendments to Cyprus Tax Laws

This article will consider the recent amendments to the Income Tax law and Special Contribution for Defence Law (the ‘Tax Laws’) in Cyprus. These amendments were passed on 22nd October 2009 with retroactive effect from 1 January 2009.

The Tax Laws have been amended chiefly on matters concerning open-ended and close-ended collective investment schemes (CISs) and undertakings for collective investments in transferable securities. The amendments provide new benefits for CISs and promote Cyprus further as an attractive location for establishing CISs.

The amendments have smoothened the process of registering and operating CISs as well as clarified the tax treatment on the disposal of securities, dividends, interest and deemed dividend distribution.

DISPOSAL OF SECURITIES
The amendments provide that the profits from the disposal of securities is exempt under the Income Tax Law as units in a CIS are now also considered as “securities” for tax purposes.

INTEREST INCOME
The amendments provide that interest income received by CISs is taxed at the standard rate of corporation tax of 10% after deducting the expenses and is exempt from Special Defence Contribution.
Interest earned by a Cypriot tax resident in the ordinary course of business or in close connection to its business is subject only to income tax. Before the amendments, other sources of interest income were subject to both SDC and income tax (with a 50percent exemption).
Interest earned by a Cypriot tax resident that does not satisfy the above condition is exempt from Income tax and is subject only to Special Defence Contribution at the rate of 10% at source. This means that Defence tax is applied on the full interest income with no deductions as opposed to income tax which is applied at the taxable profit (i.e. after any allowable deductions from interest income are made).

DIVIDEND INCOME

The Tax Laws have been amended by abolishing the minimum 1% shareholding requirement for the exemption of foreign dividends from taxation when received by a Cyprus tax resident. However in order to obtain full exemption, dividends received from foreign subsidiaries must qualify under both of the following:
● The foreign subsidiary (the company paying the dividend) must not be, directly or indirectly, engaged in activities providing passive income greater than 50%.
● Foreign tax burden must not be significant lower than the tax liability in Cyprus. It is speculated that an effective tax of 5% will satisfy this qualification.

DEEMED DIVIDEND DISTRIBUTION
Unit holder Cyprus Tax Residents will be considered to have received a dividend under the Special Contribution for the Defence (SDC) of the Republic Fund at the reduced rate of 3% while previously SDC was charged at the rate of 15% .
Similarly the dividend deemed distributions arising on liquidations shall be now taxed under SDC at the rate of 3%.
Finally redemption of units or other interest in closed-ended or open-ended CISs will not be considered capital reduction for Cyprus tax purposes. Consequently any amounts payable to the investors of CISs will not be considered as dividends and therefore will be exempt from SDC.