Cyprus taxes and tax policy year 2011

Tax News – First package of Measures

On 26th of August 2011 the House of Representatives voted as a first package of austerity measures a number of amendments to tax legislation for the purpose of raising revenues and decreasing government spending and for the objective of avoiding entry into the support mechanism.

These changes relate to increasing various taxes, introducing a levy for all companies incorporated in Cyprus, as well as introducing / increasing contributions to pension schemes of employees of the government, local authorities and semi-governmental organizations, and introducing a special levy for two years on the salaries and pensions paid to employees of the government, local authorities and semi-governmental organizations.

In the next few months a second and possibly a third package of additional measures is expected which hopefully should concentrate on further reductions in government spending. The increase in the VAT rate from 15% to 17% is expected to be approved with the second package of measures.

The most significant changes in the tax and company legislation are set out below:

THE INCOME TAX LAW

Increase in the maximum personal income tax rate to 35%

A new income tax rate of 35% is introduced for individuals on taxable income in excess of €60.000.

Tax incentives for the employment in Cyprus of highly paid non Cypriot resident individuals

In order to encourage the establishment or expansion in Cyprus of new businesses, tax incentives are offered for the employment in Cyprus of persons who are not tax residents of Cyprus. In such a case, if the income from employment exceeds €100.000 per annum, a 50% deduction is allowed for such income for the first 5 years of employment. The incentive is granted both to Cypriots and non Cypriots, on conditions that prior to employment in Cyprus such a person was resident outside Cyprus and was not considered as tax resident of Cyprus.

Abolition of exemption from taxation of the President of the Republic and the President of the House of Representatives

The Exemption from taxation of the official emoluments and the pension of the President of the Republic and the pension of the President of the House of Representatives is abolished.

Entry into force

The increase in the personal tax rate will come into effect as from 1st of January 2011, whereas the incentive for new employees will come into force for employments starting as from 1st January 2012.

THE SPECIAL CONTRIBUTION FOR DEFENCE OF THE REPUBLIC LAW

Increase in the rate of defence tax on interest from 10% to 15%

The rate of special contribution for the Defence of the Republic (“defence tax”) on interest received or credited by Cypriot tax residents is increased from 10% to 15%. This applies to both individuals and corporations. In the case corporations, if the interest results from the ordinary carrying on of any business, including any interest closely connected with the ordinary carrying on of the business, it is not subject to defence tax, but instead is subject to corporate income tax. Therefore, financing companies, including companies involved in intra- group financing activities, are not expected to be affected from the change in rate. It should be noted that no defence tax is payable on interest payments to non residents. It should also be noted that this provision applies to interest received by resident individual or corporations, both from sources within Cyprus and outside of Cyprus.

For provident funds defence tax on interest received remains at 3%, as well as in the case of an individual whose total income for the year does not exceed €12.000 (including interest income). The same rate applies to interest received by an individual from Government savings certificates and development stocks.

Note: The rate of 15% for defence tax on interests will be effective on interests received or credited after the 26th of August 2011 and onwards. Interest received or credited before the 26th of August 2011, will be subjected to the previous rate on defence tax on interests in rate of 10%.

Increase in the rate of defence tax on dividends from 15% to 17%

The rate of defence tax on dividends received by a Cypriot tax resident is increased from 15% to 17%. This applies only to individuals, since under the provisions of the legislation companies are generally exempt from the payment of defence tax on dividends.

The increase in the rate also applies when the deemed distribution rules are applied in cases where a tax resident company does not distribute within 2 years at least 70% of its after tax profits.

It should be noted that no defence tax is levied on dividends paid to non resident individuals or corporations. It is also noted that the deemed distribution rules are not applicable in the case where shareholders of a resident company are non tax residents of Cyprus. However, the deemed distribution rules are applicable in the case of Cypriot tax resident company owned by another Cypriot tax resident company, which in turn is owned by non residents. It is expected that shortly such companies will be excluded from the provisions of the deemed distribution rules, therefore there would be significant benefit for such companies in case of inability to distribute an actual dividend.

Note: The rate of 17% for defence tax on dividends will be effective on dividends received after the 26th of August 2011 and onwards. Dividends received before the 26th of August 2011, will be subjected to the previous rate on defence tax on dividends in the rate of 15%.

Entry into force

The Legislation regarding the special contribution for defence of the Republic N.114(I)/2011 is in force as from 31st of August 2011. The new law is published in the official gazette of the Republic dated 31st of August 2011, with Number 4291.

THE IMMOVABLE PROPERTY TAX LAW

The rates applicable for the payment of immovable property tax, which is paid by both individuals and companies on property owned in Cyprus are significantly increased, as well as the threshold as from which taxes are paid is lowered. It should be noted that tax remains levied on the assessed value of the property as at 1 January 1980. The rates are as follows:

Up to €120.000 - 0%
From €120.000 to €170.000 - 4%
From €170.001 to €300.000 - 5%
From €300.001 to €500.000 - 6%
From €500.001 to €800.000 - 7%
Over €800.000 - 8%

The increase will be effective as from the year of 2012.

COMPANIES LAW

As from 2011 an annual levy of €350 is introduced for all companies incorporated in Cyprus payable to the Registrar of Companies. For groups of companies the maximum levy is fixed at €20.000.

The levy for 2011 must be paid by 31 December 2011, whereas the levy for 2012 onwards must be paid by 30 June of each year.

Dormant companies, companies which do not have any assets, as well as companies owning property located in the non Government controlled areas of Cyprus, are exempted from the payment of the levy.

In case where the levy is not paid within the prescribed periods, if the levy is paid within two months from the due date, a penalty of 10% is payable which is increased to 30% if the levy is paid within five months from the due date. If the levy is not paid within five months, the Registrar of Companies will remove the Company from the Registry (something which is expected to restrict the company from filling documents or requesting certificates from the Registrar’s Office). The return of the company to the registry can be affected within two years with the payment of a levy of €500 per annum and thereafter with the payment of a levy of €750 per annum.

THE VALUE ADDED TAX LAW

Under existing legislation, individuals who buy or construct a flat or a house to be used as private main residence are entitled to apply for a refund amounting to about €17.000 from the Government. This provision is replaced with the introduction of a reduced VAT rate of 5% on the purchase or construction of a house or flat to be used a private main residence, provided the area of the property does not exceed 200 square meters (the reduced rate of 5% also applies on the first 200 square meters if the total area of the property does not exceed 300 square meters).

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