Background
On 9 July 2015, the Cypriot House of Representatives voted on significant amendments to the tax laws, further enhancing the long-established, comprehensive, and transparent character of the Cypriot tax system. The changes serve a number of purposes: promoting economic development by encouraging the introduction of new equity capital as an alternative to excessive debt financing, and encouraging the creation of business substance by offering compelling advantages to individuals from a personal tax perspective.
The Notional Interest Deduction (NID) on Equity
In the years following the banking crisis, the supply of credit by financial institutions had been considerably reduced. In an effort to help the economy return to a growth path, the Government introduced a Notional Interest Deduction (NID) regime on corporate equity.
The NID regime is designed to encourage the introduction of equity capital into corporate structures, effectively de-leveraging the economy and fostering economic growth. It removes the distortion between equity and debt financing by placing the two on a level playing field, since both now attract a tax deduction.
Capital Gains Tax Exemption on Property (to 31 December 2016)
The Capital Gains Tax (CGT) Law was amended to provide an exemption from CGT on gains from the disposal of immovable property acquired between the date the amending law came into force (17 July 2015) and 31 December 2016, provided that:
- The property consists of buildings
- It is acquired from an independent third party
- It is not acquired through an exchange of property or through a donation or gift
50% Reduction of Land Transfer Fees (to 31 December 2016)
Land transfer fees were reduced by 50% for any purchase of property made between the date the law was amended and 31 December 2016. This measure was aimed at reviving the real estate sector.
The Non-Domicile Regime for Individuals
The Special Contribution for the Defence of the Republic Law (SDC) imposes tax on certain categories of income — interest, rents, and dividends — received by persons who are tax residents of Cyprus, subject to any available exemptions. The SDC Law also contains provisions for the deemed distribution of profits of Cypriot tax resident companies where the shareholders are Cypriot tax residents.
An individual is a tax resident of Cyprus if physically present in Cyprus for a period or periods exceeding, in aggregate, 183 days during the calendar year. Under the amendment, an individual is subject to SDC only if he or she is both a tax resident of Cyprus and also considered to be domiciled in Cyprus.
With the introduction of the "non-domicile", or "non-dom", rules, a Cyprus tax resident individual who is not domiciled in Cyprus is effectively not subject to SDC on any interest, rents, or dividends (whether actual or deemed) — regardless of whether such income is derived from sources within Cyprus and regardless of whether it is remitted to a Cyprus bank account or economically used in Cyprus. It should be noted that no tax is imposed on individuals under the Income Tax Law in respect of interest and dividend income.
Meaning of "Domiciled in Cyprus"
The term "domiciled in Cyprus" is defined by reference to an individual who has a Cypriot domicile of origin under the Wills and Succession Law, but it does not include:
- An individual who has obtained and maintained a domicile of choice outside Cyprus under the Wills and Succession Law, provided that individual has not been a tax resident of Cyprus for a period of 20 consecutive years preceding the tax year
- An individual who has not been a tax resident of Cyprus for a period of 20 consecutive years prior to the introduction of the law
- Notwithstanding the above, an individual who has been a tax resident of Cyprus for at least 17 of the last 20 years prior to the tax year is treated as domiciled in Cyprus, and is therefore subject to SDC regardless of his or her domicile of origin
How ASC Can Help
ASC advises corporations on optimising their capital structure through the notional interest deduction, and advises individuals on establishing and maintaining Cyprus non-domicile status to benefit from the exemption from SDC on interest, rents, and dividends. Contact us to review your corporate financing or personal tax position.