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Foreign Investors to Benefit from Positive Changes to Cypriot Tax System
Recent legislation amending both the Cypriot Income Tax Law as well as Special Contribution to the Defence Fund was passed by the Parliament, and subsequently published in the Official Gazette of the Republic last month.
The new amendments, which may prove to be most favourable for international investors given that they enhance the attractiveness of the Cypriot jurisdiction in the international tax arena even further, are in full force and will have retroactive effect as from 1 January 2009. Taxand Cyprus reviews the changes and their impact here.
Financing Companies as well as other companies earning interest, portfolio investors and investors in collective investment schemes shall all benefit from the more favourable provisions incorporated into the legislation of Cyprus.
1. Tax implications on interest income
Interest income received from Cypriot Companies is subject to a tax of 10% either in the form of an Income Tax (allowable expenses are deducted) or Special Contribution to the Defence, depending on the nature of the said interest.
Accordingly, interest income may fall in one of two categories:
(i) Interest income derived in ordinary course of business or closely connected to the ordinary course of business of a Company, which is ultimately treated as income and as such solely subject to the 10% income tax
(ii) Other income, i.e. interest income that is neither derived from the ordinary course of business of a company nor is it closely connected to the ordinary course of a company's business, will only be subject to a Special Contribution to the Defence at the rate of 10% as it is expressly provided that it is fully exempt from the scope of income tax. Prior to the announcement of the amendments, such interest income was also subject to income tax, with a 50% exemption allowed.
2. Participation exemption requirements on dividends received from non-resident subsidiaries
The participation exemption requirements under Cyprus law were further loosened, by the abolition of the 1% holding requirement.
Prior to the amendments to the Special Contribution to the Defence Fund legislation, inbound dividends received by Cyprus Companies from their non-resident subsidiaries were subject to a 15% defence tax unless a holding of at least 1% could be established, irrespective of the fulfilment of the other exemption criteria provided for under the law.
In line with the new amendments to the legislation, portfolio investors can now also benefit from the beneficial provisions under Cyprus law.
3. Collective Investment Schemes
(i) Participations in open-ended or close-ended collective investment schemes
The definition of securities and titles, as further expanded in a circular issued by the Cyprus tax authorities, is deemed to also include units in collective investment schemes. This clarification was also reflected in the revised legislation, providing that gains from the redemption of units or other participations in Collective Investment Schemes constitute a sale or disposal of securities and are subsequently exempt from tax.
(ii) Interest income received by an open-ended or closed-ended collective investment scheme
Interest received by a collective investment scheme is only subject to 10% income tax. Accordingly, any allowable expenses are also deductible. Such interest income does not fall within the scope of Special Contribution to the Defence Fund.
(iii) Collective Investment Schemes
The provisions on deemed dividend distribution applicable in cases of dissolution of companies is also extended to open-ended and close-ended collective investment schemes.
The redemption of units or participations in either open-ended or close-ended Collective Investment Schemes does not constitute a reduction of capital, and as a result distributions deriving thereof are exempt from the 15% special contribution to the defence which would have otherwise been imposed. This provision is most favourable for Cypriot investors, given that non-residents were in any case exempt from such withholding tax obligation.
4. Undertakings for Collective Investments in Transferable Securities (UCITS)
A Cyprus tax resident individual who is deemed to be receiving dividends from UCITS is subject to a Special Defence Contribution of 3% on the amount of the dividend.
The revised legislation enhances the competitiveness of the Cypriot jurisdiction even further. First of all, the attractiveness of Cyprus to portfolio investors is promoted; equally, additional benefits are now available to Cyprus Financing Companies; and last but not least, the establishment of Collective Investment Schemes based in Cyprus is encouraged. Companies holding participations in local or non-Cypriot Collective Investment Schemes can also further benefit from the use of Cyprus as an attractive, favourable and tax efficient jurisdiction.
Your Taxand contacts for further queries are:
T. +357 22 699 222
T. +357 22 699 222