October 2015 Cyprus edition INTERNATIONAL FOCUS New legislation opens Cyprus for more business 2 Cyprus citizenship and residency schemes 4 BEPS Action Plan 5 Follow us on LinkedIn and Twitter to access our latest videos, blogs and thinking.
New legislation opens Cyprus for more business Back in January we looked at the need for substance in Cyprus when seeking to benefit from the interest, royalty or dividend provisions in the articles of the OECD Model Double Taxation Convention, which provides the basis for most of the Republic s extensive tax treaty network. Now, following the much anticipated introduction of new tax legislation, aimed at attracting both foreign enterprises and wealthy individuals to Cyprus, the Republic is once again demonstrating that it is open for business. Here is a summary of the notable provisions enacted by the House of Representatives on the 9th July 2015: New Tax Rules for Non-Domiciles Cyprus introduced much anticipated legislation regarding non-domiciled persons which provides that such persons resident in the Republic are no longer liable to pay what is known as a Special Defence Contribution (SDC) on certain types of worldwide income from dividends (17%), bank deposit interest (30%) and rental income (3%). According to the Interpretations in Part I of the Cyprus Income Tax Law 2002, residency for individuals in Cyprus is determined by the number of days each person spends in the Republic during each calendar year (183 days)*. Prior to the new legislation, all residents were subject to SDC. According to the Cyprus Wills and Succession Law Cap. 195, an individual is considered as domiciled in Cyprus by way of domicile of origin (i.e. at birth) or by domicile of choice. Additionally, an individual who has spent 17 out of the last 20 years as a tax resident of Cyprus will be considered to be domiciled in Cyprus. However an individual who has Cyprus as a domicile of origin shall be considered NOT to be domiciled in Cyprus provided he has not been a Cyprus tax resident for at least 20 years before the year he becomes tax resident in Cyprus. Subject to certain anti-avoidance provisions, such new legislation is intended to attract a greater number of high net worth individuals to Cyprus, where it is hoped they will ultimately base their operations and achieve greater benefit from its competitive tax regime and international treaty network....cyprus is once again demonstrating that it is open for business. Changes to the Current Rules on Personal Income Tax Reduction for Expatriates Individuals who were not previously resident* in the Republic and take up residency in Cyprus for work purposes are entitled to the following reduction as long as their annual salary is greater than 100.000: * Resident in the Republic, when applied to an individual, means an individual who stays in the Republic for a period or periods exceeding in aggregate 183 days in the year of assessment. For the purposes of calculating the days of stay in the Republic i. The day of departure from the Republic shall be deemed to be a day outside the Republic ii. The day of arrival in the Republic shall be deemed to be a day in the Republic iii. The arrival to the Republic and the departure from the Republic shall be deemed to be a day in the Republic iv. The departure from the Republic and the return to the Republic in the same day shall be deemed to be a day outside the Republic Page 2
50% of the salary earned in Cyprus is exempt from income tax for a new period of ten years (extended from the previous five year period) If the individual s annual salary earned in Cyprus is less than 100.000, tax is capped at whichever is the higher of 8.550 per annum or 20%, a reduction which is valid for three years, with a proposal to increase this to six years. These new measures for expatriate individuals not only provide a greater incentive to re-locate to Cyprus but also encourage the setup of international operations in the Republic, with the additional bonus of being able to offer competitive packages to skilled professionals from overseas, who will undoubtedly find Cyprus low personal tax rates and affordable Mediterranean lifestyle very appealing. Notional Interest Deduction Further to the new tax rules for non-domiciles and high-earning expatriate individuals, the 9th July provisions introduced a Notional Interest Deduction regime, aimed at encouraging investment into corporate structures, and thus reducing excessive debt financing. Such changes, aimed to further improve Cyprus growth prospects, will align the Republic s system with that of a number of other EU jurisdictions which have successfully introduced similar legislation. According to the new law, corporate entities (including permanent establishments of foreign companies in Cyprus) will be entitled to a Notional Interest Deduction (NID) on new equity which has been introduced to a business on or after 1 January 2015; with the NID being a multiple of a reference interest rate ¹ and such new equity. Notably, NID granted on new equity cannot exceed 80% of the taxable profit before allowing the NID, and is not available in the event of losses. In essence, the NID regime will reduce the effective tax rate to as little as 2.5%, where such new equity, within certain parameters and whilst observing specific anti avoidance provisions, has been utilised in carrying out an entity s business, such as group finance operations. Additionally, the introduction of new equity to Cyprus tax resident companies will undoubtedly attract investment into the local economy and thus encourage growth. Advantages of Cyprus as a prime location for group financing include: One of the lowest headline tax rates in the EU 12.5% Over 40 double taxation conventions based on the OECD Model EU membership and subsequent access to EU Directives and EU Treaty freedoms No thin capitalisation rules No withholding taxes on dividend, royalty or interest payments from the Republic... the introduction of new equity in to Cyprus tax resident companies will undoubtedly attract investment into the local economy and thus encourage growth. Amendments to Capital Gains Tax Law The Capital Gains Tax (CGT Law) has been amended where the disposal of immovable property acquired on an arms-length-basis between 16 July 2015 and 31 December 2016 would be exempt from CGT, irrespective of the date of disposal. As an added incentive, the normal transfer fee payable to the Department of Lands and Surveys on acquisition of immovable property will be discounted to 50% of the standard rate until 31 December 2016. Such measures are aimed at reviving the Cyprus immovable property market, whilst also looking to attract high-net-worth foreign investors with further incentives to re-locate to the Republic. ¹ Calculated on the effective interest earned on the current 10-year bond yield of the country in which the new equity is invested (+3%), with the minimum rate being that of Cyprus (+3%) Our contributor: Richard Melton, Managing Director Jordans Trust Company (Cyprus) Limited T +357 2276 7294 E r.melton@jordans.com.cy Richard joined Jordans Trust Company (Cyprus) Limited in October 2012. Richard has a wealth of experience, with more than a decade in the industry in specialised roles in Gibraltar, Cyprus and Brazil. He is TEP qualified and a leading figure in the global trust and corporate industry. Page 3
Cyprus citizenship and residency schemes There are various reasons that people seek to acquire alternative citizenship or residence. In this article we focus on new legislation introduced in Cyprus, aimed at making the country an ideal place of residence for those looking to relocate. Headline reasons To escape economic or political unrest. To live in a stable country that permits economic prosperity and security for assets and wealth accumulation. To access educational and cultural opportunities for children in the family. To enjoy the quality of life associated with European democratic countries. Why Cyprus? Cyprus is famous for its life-style, weather, cuisine, beauty, history and low crime rate; all which contribute to making it one of Europe s most popular tourist destinations. Cyprus is an EU member-state and is situated in the eastern Mediterranean. Its geographical location means that it is easy to travel directly to airline-hubs in the UK, EU, Russia, and the Middle East on a daily basis. Cyprus competitive corporate tax regime and newly introduced legislation for nondomiciles make it an ideal location for any high net worth investor looking to relocate. 1. Cyprus Citizenship by Investment Under the 2013 amendments to the Civil Registry Laws of 2002-2013 Subsection (2) of Section 111A, any non-cypriot may apply for Cypriot Citizenship through Naturalization by Exception, if one of the following economic criteria are met: Investment of 5m into Government Bonds Investment of 5m into Cyprus real estate or other developments Investment of 5m into Cyprus companies or Cyprus organisations Maintain a minimum fixed deposit of 5m in a Cypriot bank A combination of the above options amounting to 5m Other criteria: Individuals with at least 3m impaired due to the measures implemented after 15th March 2013, may make an additional investment in any of the above, which amounts to the 5m investment requirement. Major collective investments may reduce the above criteria, to a 2.5m investment, if such investments are made into the areas specified above, on condition that the total value of the investment is at least 12.5m. Terms and Conditions In addition to the criteria mentioned above, the Investor must fulfil the following Terms and Conditions: No Criminal Record issued at his/her country of origin or the country of previous residence (if different) Confirmation that the applicant s name is not included in the list of persons whose property has been ordered to be frozen within the boundaries of the European Union Own a permanent private residence in the Republic, with a (fully paid) purchase cost of at least 500.000 plus VAT...an ideal location for any high net worth investor looking to relocate. continued on next page...
continued from previous page... 2. Cyprus Permanent Residency Scheme BEPS Action plan Regulation 6(2) of the Aliens and Immigration Regulations provide that an Immigration Permit (Permanent Residency Certificate) may be issued to Non-EU nationals, thus giving them the right to reside in Cyprus under the following conditions: The applicant must demonstrate proof of purchase of immovable property with a minimum value of 300.000 (noninclusive of VAT) The applicant must demonstrate the deposit in a Cypriot bank account the minimum amount of 30.000 (thirty thousand euros) which will be pledged for more than three years The applicant must provide evidence of secured annual income of at least 30.000 (thirty thousand euros), originating from abroad (increased by 5.000 for each dependent included in the application) Terms and Conditions No Criminal Record issued at his/her country of origin or the country of previous residence (if different) The applicant must NOT intend to be engaged in any employment in Cyprus in any direct or indirect manner Confirmation that the applicant s name is not included in the list of persons whose property has been ordered to be frozen within the boundaries of the European Union The impact of the Base Erosion and Profit Shifting (BEPS) action plan is already being considered by those looking to structure arrangements for the crossborder licensing of Intellectual Property (IP). The modified nexus approach considered by the Organisation of Economic Cooperation and Development (OECD) Forum on Harmful Tax Practices (FHTP) under Action 5 of BEPS and supported by the EU, will allow benefits to be granted only where there is substantial economic activity undertaken in a jurisdiction in which a preferential IP regime exists. Although a clear definition of qualifying expenditure and assets, and their relative treatment, has yet to be provided by the FHTP, jurisdictions such as Spain and Italy, have already announced changes to their current patent box provisions. Under the Action 5 approach, which will enter into force as from 1 July 2016, the advantages currently enjoyed under leading IP regimes, such as those in the UK and Cyprus, will become limited. It is therefore recommended that Groups transferring IP into any patent box regime, should consider taking advice on the impact of the early closure of such regimes. Interestingly, the current guidelines provide for grandfathering which will allow time for transition to a new regime, meaning that a taxpayer will be able to retain the benefits of an existing regime for another five years. Additionally, new entrants to a current regime (i.e. new taxpayers not benefiting from a regime and new IP assets owned by taxpayers already benefiting from a regime) must enter an existing regime no later than 30 June 2016 and, subject to enhanced transparency and anti-avoidance measures, will be able to benefit from its current provisions until its eventual abolition on 30 June 2021. If structured correctly and in a timely fashion, the current Cyprus patent box regime will continue to offer many benefits, which include: An 80% exemption on royalty income and capital gains upon disposal of IP Gross IP income reduced by expenses incurred for the production of IP income Wide range of qualifying IP rights Effective tax rate of 2.5% or less Benefits of EU Directives/membership A large DTA network IP Protection due to Cyprus being signatory to various conventions including the Madrid Protocol. Ask Jordans Jordans Trust Company (Cyprus) Limited is licensed by the Cyprus Securities and Exchange Commission (CySEC) to provide Corporate and Trust administration and management services to our clients. We are also able to provide both domestic and international tax advice. Measures in Cyprus aimed at attracting wealthy foreigners to its shores, including Citizenship by Investment, the Cyprus Permanent Resident Scheme and the recently introduced Non-Domicile Regime, mean that the Republic is now one of the primary locations for international business and people. For further information, please contact our Cyprus Managing Director, Richard Melton on +357 22767 294 or by email: r.melton@jordans.com.cy Disclaimer The information provided in this publication are put forward for further consideration only and are not intended to be acted upon without independent professional advice. Neither Jordans Trust Company Limited nor its associated group companies, nor any employees or directors of these companies can accept any responsibility or liability for any loss occasioned to any person no matter howsoever caused or arising as a result of or in consequence of action taken or not taken in reliance on the contents of this publication.