Cyprus Tax Update

On the 26th August 2011 the House of Representatives in Cyprus voted on a number of new amendments to the tax legislation which are set out below.

Tax Law Amendments

1. Income Tax Law

A new tax rate has been introduced at 35%, to be imposed on individuals with taxable income greater than € 60.000.

This rate will be effective as from the 1st January 2011, and will therefore be relevant to the tax year of 2011.

Tax incentives will be offered for employment in Cyprus for persons who are not tax residents of Cyprus, with the intention to encourage establishment and expansion of businesses. The incentive may apply to both Cypriots and non-Cypriots providing that prior to their employment in Cyprus they were a resident outside of Cyprus and were not considered to be a tax resident.

For employment income over € 100.000 per annum, there will be a 50% deduction allowed for the first five years of employment.

This incentive will be effective as from the 1st January 2012.

2. Special Contribution Defence Law

The defence tax payable on interest received or credited by a Cyprus tax resident from sources both within and outside Cyprus, has been increased from 10% to 15%, for both individuals and companies.

Financing companies are not affected by this amendment in the law given that interest is earned in the ordinary course of business and therefore subject to income tax, and not defence tax.

The defence tax payable on dividends received by a Cypriot tax resident has increased from 15% to 17%, for individuals..

This rule will also be applicable in relation to deemed distributions, where a tax resident company does not distribute at least 70% of profits after tax, within two years of the financial year to which they relate.

It is noted however that no special defence contribution is imposed on dividends paid to non Cyprus residents and therefore the above amendment does not affect foreign individuals.

These rules relating to Special Contribution for Defence will be effective once the new law has been published in the official gazette of Cyprus.

Furthermore according to the tax circular 2011/10 issued by the tax authorities on 13 September 2011, it is important to note that the deemed distribution provisions are not applicable in the case where shares in a Cyprus company are held indirectly through another Cyprus company by non Cyprus residents.

3. Immovable Property Tax Law

New tax rates together with a lower threshold from which taxes will be paid have been introduced for immovable property tax, for both individuals and companies on property they own in Cyprus.

The new tax bands and applicable rates are as follows: Please click here to see the rates

The increase in rates for immovable property tax will be effective from the 1st January 2012.

4. Value Added Tax Law

Under existing VAT Law, individuals who buy or construct a flat or a house to be used as private main residence are entitled to a refund of VAT from the Government for the amount of up to €17.000. This will now be replaced by a reduction in the VAT rate at 5% on the purchase or construction of a flat or a house to be used as private main residence, with the provision that the property is not greater than 200 square meters.

If the total area of the property is greater than 200 square meters but does not exceed 300 square meters, a reduced rate of 5% can be applied to the first 200 square meters.

This reduced rate of VAT will be effective from the 1st November 2011.

The Companies’ Law

A fixed levy of €350 per annum will now be imposed on all Cyprus companies, payable to the Registrar of Companies. For a group of companies this levy will be capped at € 20.000.

The levy will not apply to:

1. Dormant companies (companies which do not own any assets)
2. Companies that own property in a territory not controlled by Cyprus Government

For the year of 2011, this levy will be payable by the 31st December 2011. For each subsequent year the payment date will be the 30th of June that year. No levy will be imposed during the year of registration of the company.

Late payment of the levy will result in penalties being incurred by the company as follows:

1. 10% penalty for up to 2 months delay
2. 30% penalty for 2 to 5 months delay
3. Possible removal from the register will result for non-payment

If a company that has been stricken-off by the Registrar of Companies and is then reinstated within 2 years of its strike-off a penalty of € 500 per annum will be incurred (in addition to the outstanding amount of the levy due). If the company is reinstated after the 2 year period has elapsed the penalty will be at € 750 per annum.