Changes to the Cyprus Tax Legislation

Changes to the Cyprus Tax Legislation: Over the last few months the Cypriot Government has come to agreement with the private sector on the implementation of certain changes to the existing Cyprus Tax System.  Final changes on the Tax Laws have been voted on the 10^th of December by the House of Representatives in an effort to improve the Cyprus Tax System. The main changes are listed in summary points below relating to income tax and capital gains:

Changes to the Cyprus Tax Legislation – Income Tax

• In relation to Offshore activities, ‘Republic of Cyprus’ definition has been amended to include a wider and more clear range, and as well as the term ‘Permanent Establishment’.
• There will no longer be an exemption from taxation on property rental income applied to Local authorities.
• No Tax will longer be applied on any type of currency exchange differences, with the purpose for the use of funds being irrelevant. Note: This does not apply to companies trading in foreign currencies.
• Dividends received by a Cypriot tax resident company from a foreign company are subject to income tax and exempted from defense tax, in line with the EU Parent/ Subsidiary Directive in order to avoid the benefit of treatment of this dividend as a tax deductible expense in the country where the company paying this dividend is located.
• First Employment income period for income tax exemption has been extended respectively depending on levels of income for individuals employed in Cyprus but were not tax residents the previous tax year, not to be claimed until 2020.
• There has been an increase in capital expenditure annual allowances.

Capital Gains Tax

The law has been changed as follows: whereas tax was only paid on capital gains from disposal of immovable property in Cyprus and on disposal of shares held by companies that own directly immovable property located in Cyprus: Now, Capital gains taxation also covers indirect ownership of immovable property in Cyprus, as well as holding indirectly shares in Companies owing immovable property located in Cyprus. NOTE: This applies only in cases where value of immovable property is more that 50% of company’s assets, whose shares are sold. Also, companies that own immovable property in Cyprus, in cases of sale of their shares, if this is conducted and considered to be of trading nature, not only these gains are exempted from income tax, but now subject to capital gains tax, thus tax free.