Annual International Bar Association Conference 2017 Sydney, Australia Recent Developments in International Taxation Republic of Cyprus Venetia Argyropoulou European University of Cyprus v.argyropoulou@euc.ac.cy The news appearing below have been previously submitted by the Author to the International Bureau of Fiscal Documentation and are 2017 of IBFD. News IBFD. Reproduced by permission.
1. INTRODUCTION Following Cyprus s exit from the Financial Assistance Programme, the majority of the tax reforms can be distinguished in to two major categories: 1) those that aim to make Cyprus taxation compliant with international developments and EU Directives and 2) tax incentives offered by the Government to attract investments in the Republic and reestablish the previous (pro-crises) tax system. 1.1 Tax Incentives 1.1.1 Start Up Companies On 27.07.2016, the Council of Ministers approved a package of tax incentives that are believed will greatly boost the start-up sector and innovation in Cyprus. The benefits entailed in the package include: 1) Exemption of the investment from the innovative and start-up companies taxable income up to a 50%. The maximum annual amount to be exempted is 150,000 with a right to transfer/allocate it up to five years afterwards. The investment can be made both via fund or through a Company. 2) Furthermore, the government has broadened the definition of the term innovative firm which was previously criticized as being overly restrictive for only covering firms engaged in specific areas of research and development (R&D), so as to include more fields of technology and innovation. The incentives will be implemented upon the approval of the bill by Parliament. 1.1.2 Immovable Property On July 14 th, 2016, the Cyprus Government introduced the Lands and Surveys Department (Fees and Rights) (Amendment) (No 2) Law. By virtue of which the following amendments were introduced: 1) Primarily, Immovable Property Tax for 2016 will be based on 1980 values but it will be reduced by 75% provided Taxpayers settle their 2016 immovable property tax liability by 31 October 2016. If the liability will be settled between November 1st, 2016 and no later than 31st of December 2016 taxpayers will be entitled to a discount of 72.5%. In case, the liability is settled after 31 December 2016 it will be discounted by 69.75%. 2) Secondly, in case the total liability after any discount is less than 10, such liability will be waived. 3) Lastly it was decided that as of January 2017 the Immovable property tax will be abolished. 1.1.3 Investment in Innovation
The Council of Ministers, has on 27 July 2016, approved an amendment of the Income Tax Law, introducing new tax relief for investors in qualifying small and medium sized innovative enterprises. The amendment to the Income Tax Law (Amendment No. 2 of 2016) was taken in the framework of the Policy Statement for the enhancement of the Business Ecosystem, in order to improve incentives that foster investment in startup and innovative companies in Cyprus (Law 135(I) of 2016) and it added the new section 9A which provides for the following: deduction of the cost of a qualifying investment from the investor's taxable income (up to a maximum amount of 50% of the taxable income or 150,000, whichever is less); The right of allocation and distribution of the discount in a 5 (five) year period. In other words, any cost above the 50 per cent limit may be carried forward for deduction against taxable income of subsequent years, subject to the above limitation. Investment in shares, loans, or granting guarantees to innovative companies. For an investment to be deemed as qualifying, the investee must be a small or mediumsized innovative enterprise doing business in Cyprus which meets the conditions set out in paragraph 5 of article 21 of Regulation (EU) No 651/2014 (namely it must be an unlisted company not operating in any market or, if operational, having operated for less than seven years-unless it is a follow-on investment, requiring an initial risk finance investment which, based on a business plan prepared in view of entering a new product or geographical market, is higher than 50 % of its average annual turnover for the preceding 5 years). To be considered innovative, a company must have spent 10% of its operating capital on research and development in at least one of the last three years, as verified by an external auditor. For startups with no financial history the assessment will be made based on a business plan. Designation as a small or medium-sized innovative enterprise requires the approval of the Ministry of Finance. The new provisions took effect on 1 January 2017 and will continue until 1 January 2020 unless they are extended. 1.1.4 Salaries As of December, 31st 2016 the special contribution applied on the salary of employees and self-employed persons in Cyprus will be terminated; as, on November 5th, 2016 the House of Representatives has voted against the Bills that proposed the continuance of the special contribution. Notably, the special contribution was initially enacted in 2013 as a special measure for the recovery of the Cyprus economy from the financial crisis. 1.2 International Developments 1.2.1 Common Reporting Standard
The Cypriot Ministry of Finance has on 30 December 2016 issued a Decree pursuant to Article 6 (16) of Assessment and Collection of Taxes Law in relation to Country-by- Country Reporting. The Decree transposes into national law, the EU Administrative Cooperation Directive which requires all EU Member States to implement nationally a Country-by-Country Reporting (CbCR) obligation in line with the OECD BEPS Action 13. According to the Degree, multinational businesses with a consolidated turnover of 750 million or more in the financial year starting 1st of January 2016, which have their tax residency in Cyprus, will need to inform the Cyprus tax authorities if same are the ultimate parent entity or the surrogate parent entity in terms of the reporting framework before the end of the enterprise s financial reporting period. Failure to report will result in an administrative penalty of currently 100, which however is expected to be increased in early 2017. 1.2.2 I.P. Box. The Cyprus House of Representatives has on 14th October, 2016 voted an amendment to the Income Tax Law revising the current Cyprus Intellectual Property (IP) regime retrospectively as of July 1st, 2016. The new IP Box Regime aims to be compliant with the relevant OECD recommendations of the BEPS Action 5, without however affecting the beneficial computation of taxable income, which will continue to provide for an 80% deduction of the qualifying income. The new Law defines what constitutes qualifying intangible assets, qualifying profits, overall income and qualifying expenditure, as well as guidelines for maintaining accounting records. In accordance, therewith it is clarified that rights used for the purposes of marketing products and services such as business names, brands, trademarks, image rights etc. will no longer be considered as qualifying intangible assets. Instead qualifying IP assets includes mainly patents, computer software, as well as IP assets which are non-obvious, useful and novel and from which the income of a taxpayer does not exceed 7.500.000 per annum ( 50.000.000 for taxpayers forming part of a Group) in a 5-year period. Additionally, qualifying expenditure will include only the total research and development costs incurred in any tax year wholly and exclusively for the development, improvement or creation of qualifying intangible assets and where costs are directly related to the qualifying intangible assets. A 30% uplift expenditure will be added to this. Furthermore, the new Law provides that taxpayers must retain proper books of account and records of income and expenses for each intangible asset. Notably, taxpayers already benefitting from the existing scheme may continue to claim the same benefits until 30 June 2021, subject to certain conditions regarding assets acquired between 2 January 2016 and 30 June 2016. However, for new arrangements for intellectual property assets developed from 1 July 2016, a modified nexus approach has been introduced. The latter requires for sufficient substance and an essential nexus between the expenses, the IP assets and the related IP income in order to benefit from a patent box regime. Under the nexus approach, the application of an IP regime should be dependent on the level of Research and Development (R&D) activities carried out by the qualified taxpayer. 1.2.3 Profit Margins on Loans The Cyprus Tax Department has on 24 November 2016 issued Circular 2016/15, which clarifies the application of article 33 of the Income Tax Law of 2002 as amended in 2015.
Article 33 allows the tax authorities to adjust transactions between related parties on terms which, in the opinion of the authorities, deviate from those which would apply in similar transactions between independent enterprises, in accordance with the arm s length principle. Initially, article 33 allowed the tax authorities to only make upward adjustments to the taxable profit of an enterprise to adjust in in accordance with an arm s length basis. Following the 2015 amendment, which was effective for the tax year 2015 onwards, downwards adjustments were also allowed in cases where the taxable profits of a resident enterprise or of a permanent establishment of a non-resident enterprise are increased to adjust a transaction with another resident enterprise or permanent establishment of a nonresident enterprise onto an arm s length basis, the taxable profits of the second enterprise or permanent enterprise should be reduced by a corresponding amount. The Circular clarifies that the adjustments based on an arm s length basis may be proposed by the taxpayers concerned, in which case the Tax Department will accept adjustments for inclusion of the notional additional revenue and the corresponding notional cost that restate the transaction concerned onto an arm s length basis. Furthermore, the Cyprus Tax Department (CTD) informed the Institute of Certified Public Accountants of Cyprus (ICPAC) of its intention to terminate the application of the pre-agreed minimum profit margins of 0.125% 0.35% on qualifying intra-group back to back financing arrangements, with effect from 1 July 2017. 1.2.4 Crossborder Tax Rulings On the 16th of August, the Tax Department issued a circular clarifying the process that should be followed for the issuance of Advance Cross Border Rulings in light of the proposed amendment of Council Directive 2011/16/EU. In accordance with the circular Advance Cross Border Rulings means any agreement, notice or other similar mean that relates to the interpretation or the application of laws or administrative acts pertaining to taxation. For a tax ruling to be considered as Advance Cross Border Ruling three conditions should be met: It is issue for and to a particular person, who is the one who has the right to refer to it. It relates to Cross-border Transaction as the term is defined It is issued before the transactions. For the exchange of Advance Cross Border Rulings, the circular lays down a process that should be followed and excludes from the exchange tax rulings issued to natural persons (not operating on a business capacity). 2. TREATY DEVELOPMENTS 2.1.1 DTT between Cyprus and Jersey: This DTT, which was signed on 11 July 2017, provides that dividend, interest and royalty payments will be subject to a withholding tax of 0%. Also, the DTT provides that capital gains from the sale of shares will be taxed in the country of residence of the alienator. The provisions of the treaty with respect to taxes will have effect in both contracting states on or after 1 January following the date the treaty enters into force.
2.1.2 DTT between Cyprus and India: This DTT was signed on 29 June 2017 and will replace the existing treaty which was concluded back in 1994. The new DTT provides that dividend, interest and royalty payments will be subject to a withholding tax of 10%, subject to certain conditions. Also, the new DTT broadens the definition of a permanent establishment (PE), while it also provides for source-based taxation of capital gains arising from the alienation of a company s shares. Investments undertaken before 1 April 2017 will be grandfathered, with taxation rights over gains on the disposal of such shares at any future date remaining solely with the state of residence of the alienator. 2.1.3 DTT between Cyprus and Iran The tax treaty signed between Cyprus and Iran on 4 August 2015 entered into force on 5 March 2017 and its provisions will come into effect as from 1 January 2018.