Income Tax Law – amendments in December 2015

Tax neutral treatment of foreign exchange differences which do not relate to FOREX trading

According to the amended Income Tax Law, any (realized or unrealized) foreign differences (gains or losses) will be tax neutral, except for gains / losses arising from trading in FOREX. In other words, exchange differences gains will not be taxable and exchange differences losses will not be tax deductible, regardless of their nature (revenue or capital), with the exception of FOREX gains / losses arising from FOREX trading.

For persons trading in FOREX, the law introduces an option to make an irrevocable election to be subject to tax only on realized FOREX differences. In case such election is made, any unrealized exchange differences will be treated as taxable / tax deductible in the year they are realized.

This amendment is effective from 1 January 2015.

Implementation of the amendments made to the EU Parent Subsidiary Directive

Currently, any dividends received are unconditionally exempt from Income Tax. In order for the Cypriot Income Tax Law to be harmonized with the amended EU Parent - Subsidiary Directive, the previously unconditional exemption from Corporation tax on dividends received will not be available as of 1 January 2016 to the extent the relevant dividend is allowed as a tax deduction in the jurisdiction of the foreign paying company. If the dividend exemption is not available due to the above provision, it should be subject to Corporation tax at the rate of 12,50%. In such instance, the dividend should not be subject to the Special Defence Contribution.

The Income Tax Law has also been amended to give the right to the tax authorities to deny the availability of underlying tax relief on dividends subject to tax, in case an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax benefit, are not genuine having regard to all relevant facts and circumstances. An arrangement may comprise more than one step or part. For the purposes of this anti-abuse rule, an arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.

This amendment is effective from 1 January 2016.

Restriction of losses arising from the licensing and / or sale of intellectual property (IP) rights

The Income Tax Law has been amended clarifying the tax treatment of losses for companies qualifying under the Cyprus IP regime. Under the IP regime, only 20% of the net profit from the exploitation / disposal of qualifying intangibles is taxable. The net profit is calculated after deducting from the license income / gains from disposal, all direct expenses associated with the production of this income. According to the amendment, in cases where a company (including permanent establishment of foreign companies) generates a taxable loss, only 20% of such loss will be eligible to be surrendered (via group relief) and / or carried forward to subsequent years. As of 1 January 2015, corporate entities (including permanent establishment of foreign companies) will be entitled to a Notional Interest Deduction on equity. It should be noted that in case the NID relates to the acquisition / financing of an IP falling within the scope of the IP Box regime, the notional interest deduction on equity should be regarded as a direct expense for the purpose of calculating the 80% deemed deduction. The above provisions have been retrospective effect from 1 January 2012.

Introduction of a corresponding downward transfer pricing adjustment on related party transactions

To date, Cyprus has not adopted any specific rules regarding transfer pricing or specific transfer pricing (TP) documentation requirements but as a general rule, the arm’s length principle is codified in the tax law. The law is amended with a retroactive effect as of 1 January 2015 to include provisions for negative TP adjustments in relation to transactions concluded between two entities which are both subject to tax in Cyprus. If the tax authorities make a TP adjustment increasing the taxable profit of one entity, a corresponding (negative) TP adjustment should be made to the taxable profit of the other entity.

Group relief of taxable losses

To date, the group loss relief provisions are applicable only between Cypriot tax resident companies. Such a provision may contradict the EU freedom of establishment and as a result, the law has been amended in order to be aligned with the jurisprudence of the European Court of Justice. As of 1 January 2015, the group loss relief provisions are extended to cases where the surrendering company is registered in and is a tax resident of another EU Member State on the proviso that it has exhausted all possibilities available for using the losses in its respective country of tax residency or in the country where its intermediary holding company has its legal seat. In such instance, the tax losses should be calculated based on the provisions of the Cypriot tax laws.

Extension of accelerated capital allowances

Plant and machinery purchased in 2012 to 2014 benefited from 20% per annum tax depreciation. Industrial buildings and hotels purchased in 2012 to 2014 benefited from 7% per annum tax depreciation.

The amendment extends the period for which accelerated depreciation is available to purchases in 2015 and 2016.

The above amendments are effective from 1 January 2015.

Issuance of tax residency certificates and tax rulings

The Income Tax Law has been amended in order to provide the power to the Cabinet of Ministers to set administrative fees for the issuance of tax residency certificates and tax rulings from 1 January 2015