Cyprus Introduces Notional Interest Deduction and Non-Dom Rules

Background

On 9 July 2015, the Cypriot House of Representatives voted on significant amendments to the tax laws further improving the long-established comprehensive and transparent character of the Cypriot tax system. The changes serve a multitude of purposes such as promoting economic development by encouraging the introduction of new equity capital as an alternative to excessive debt financing. Moreover, the changes are aimed at encouraging the creation of business substance by offering compelling advantages to individuals from a personal tax perspective. On 9 July 2015, the Cypriot House of Representatives voted on significant amendments to the tax laws further improving the long established comprehensive and transparent character of the Cypriot tax system. The changes serve a multitude of purposes such as promoting economic development by encouraging the introduction of new equity capital as an alternative to excessive debt financing. Moreover, the changes are aimed at encouraging the creation of business substance by offering compelling advantages to individuals from a personal tax perspective.

  
Introduction of a Notional Interest deduction regime on equity

 
Over the last years, the supply of credit by financial institutions has been considerably reduced due to the banking crisis. In an effort to help the economy return to a growth path, the Government has introduced a Notional Interest Deduction (NID) regime on corporate equity. The NID regime is expected to encourage the introduction of equity capital into corporate structures which will effectively result in de-leveraging 2 Global Tax Alert the economy and foster economic growth. The NID will remove any distortions between equity and debt finance by bringing equity and debt into a level playing field since both will be entitled to a tax deduction.

 
Capital Gains Tax exemption on property acquired up to 31 December 2016

 
The Capital Gains Tax (CGT) Law has been amended to provide for an exemption from CGT on gains from the disposal of immovable property which is acquired between the date the amendment law comes 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 donation/gift

 
50% reduction of land transfer fees on property acquired up to 31 December 2016

 
The land transfer fees are reduced to 50% for any purchase of property made between the date the law is amended and 31 December 2016. This measure aims to revive the real estate sector.

 
Introduction of non-dom rules for individuals  


The Special Contribution for the Defense of the Republic Law (SDC) imposes tax on certain categories of income (interest, rents, dividends) received by persons who are considered to be residents for tax purposes of Cyprus, subject to any available exemptions. The SDC Law also includes provisions for the deemed distribution of profits of Cypriot tax resident companies to the extent that the shareholders of such companies are Cypriot tax residents. An individual is considered to be a resident for tax purposes of Cyprus if he/she is physically present in Cyprus for a period or periods exceeding in aggregate 183 days during the calendar year. The SDC law is amended so that an individual will now be subject to SDC if he/she is both a resident for tax purposes of Cyprus and is also considered to be domiciled in Cyprus.   


With the introduction of “nondomicile” or “non-dom” rules, a Cyprus tax resident individual who is not domiciled in Cyprus will effectively not be subject to SDC in Cyprus 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 such income is remitted to a bank account or economically used in Cyprus. It is noted that no tax is imposed on individuals under the Income Tax Law in respect of interest and dividend income.

 
The term “domiciled in Cyprus” is defined in the law as an individual who has a Cypriot domicile of origin in accordance with the Wills and Succession Law but it does not include:

  
(i) An individual who has obtained and maintained a domicile of choice outside Cyprus in accordance with the Wills and Succession Law, provided that such an individual has not been a tax resident of Cyprus for a period of 20 consecutive years preceding the tax year; or  

(ii) 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 years out of the last 20 years prior to the tax year will be considered to be “domiciled in Cyprus” and as such be subject to SDC regardless of his/her domicile of origin.