March 30, 2017
We have two new developments this month which we believe are quite important to Cyprus international businesses and individuals who have recently become Cyprus Tax residents. The details of these developments are outlined below.
Abolishment of fixed minimum margins on back to back loans
The current practice of the Cyprus Tax Department to accept pre-agreed minimum margins on back to back loans, on group and related party financing arrangements, will be abolished as from 1 July 2017. From then and onwards, such transactions will be subject to the provisions of Article 33 of the Cyprus Income Tax law which means that all transactions between related parties must be made on an arm’s length basis and in accordance to market prevailing rates.
Going forward, intra-group financing arrangements and their interest rate spreads, should be supported by a transfer pricing study based on the relevant OECD guidelines. This will be required both for purposes of issuing tax rulings as well as for corporate tax assessments. The rationale behind this decision is Cyprus’ intention to be aligned with the provisions of the OECD BEPS Action Plan.
Issue of a Cyprus Tax Residence Certificate to Individuals prior to completion of 183 days of stay in Cyprus
The Cyprus Tax Department has issued a circular which states that individuals will be able to procure a tax residence certificate, proving their Cyprus tax residence, before they have completed 183 minimum days of stay in Cyprus within the particular year.
Individuals wishing to have a tax residence certificate issued before having completed their minimum days of stay in Cyprus, should complete and sign the relevant declaration issued by the Cyprus Tax Department through which they declare their intention to stay in Cyprus for one or more periods exceeding, in total, 183 days in a particular year.
May 12, 2017
Latest Developments in the Cyprus DTT Network
The life cycle of a DTT
“entry into force” (exchange of ratification instruments)
“entry into effect” (usually the year following the year it enters into force)
International Developments – Cyprus DTT’s
Tax Treaty with Switzerland
0%* is applicable for a participation of at least 10% in the distributing company for an uninterrupted period of at least one year.
Domestic rates for withholding tax in Switzerland are the following:
Dividends – 35%;
Interest – 35%;
Royalty – 0%.
Tax Treaty with India
Domestic rates for withholding tax in India are the following:
Dividends – 0% (Dividend Distribution Tax in India at the rate of 16,99%);
Interest – 20%;
Royalty – 10%.
Tax Treaty with Iran
5%* withholding tax on dividends provided that the receiving company holds at least 25% of the share capital in the distributing company, otherwise 10%.
Domestic rates for withholding tax in Iran are the following:
Dividends – 0%;
Interest – 3%;
Royalty – 25%.
5%* is applicable for a participation of at least 10% in the distributing company.
Domestic rates for withholding tax in South Africa are the following:
Dividends – 15%;
Interest – 15%;
Royalty – 15%.
Tax Treaty with South Africa
June 13, 2017
Intellectual Property – The new Cyprus IP Box
Since 2012 Cyprus has had one of the most beneficial Intellectual Property (IPBox) regimes in the world. On 1 July 2016, new IP legislation came into effect so that it is harmonized with the international developments relating to the tax treatment of IP income and the recommendations of the OECD’s BEPS project.
The old IP regime and the rules of transitioning into the new IP regime
The old IP regime provides for an 80% tax exemption from the net profits arising from IP exploitation. The net IP Profit calculation is derived by deducting from IP income, all the direct expenses associated with the production of such income including capital allowances at a 20% rate. Qualifying assets under the old regime were broadly defined and include copyrights, patents, trademarks, service marks, etc. Qualifying income consisted of royalties and gains derived from the IP disposal.
The old regime is being phased out by 30 June 2021 and it will continue to apply until the phase out date, provided that:
The asset qualified under the old regime before 2 January 2016, or
The asset qualified for the benefits of the current regime and was developed or acquired from a related party between 2 January 2016 and 30 June 2016 and such acquisition was not effected mainly for the avoidance of tax, or
The qualifying asset was acquired from a third party or was self developed between 2 January 2016 and 30 June 2016.
The new IP regime
Under the new IP regime, 80% of qualifying profits generated from qualifying assets are considered to be tax deductible expenses whereas qualifying assets are strictly defined as those which are the result of R&D expenditure and for which the person is the economic owner, excluding any IP relating to marketing. The new IP box regime is based on the “nexus approach” which limits the application of the benefit/tax allowance, if research and development is being outsourced to related parties.
Qualifying profits, eligible for the 80% tax exemption depend on the level of R&D expenditure carried out by the taxpayer to develop the qualifying asset.
Qualifying taxpayers, eligible for the IP regime, include Cyprus tax residents, permanent establishments of non-residents and foreign permanent establishments which are subject to tax in Cyprus.
The qualified profits are calculated on the basis of a formula whereby the Overall Income derived from qualifying assets is multiplied by a fraction. The fraction is calculated by adding the Qualified Expenditure with the Uplift Expenditure and the sum is divided by the Overall Expenditure
Overall Income x (Qualified Expenditure + Uplift Expenditure)/Overall Expenditure
The components of the above formula are explained below:
Overall Income consists of the gross profit from the qualified asset (total income less direct expenditure. The Overall Income normally includes:
Royalties or amounts directly related to the use of the asset
Trading income from the disposal of the qualifying asset
Licensing income from the exploitation of the qualifying asset
Amounts related to the insurance or compensation of the qualifying asset
Embedded income resulting from the sale of goods or services or processes which are directly related to the qualifying asset.
It should be noted that capital gains which arise on the disposal of qualifying assets are not included in qualifying profits and they are fully exempt from income tax.
Qualifying Expenditure is the total of all R&D expenses incurred towards the development or enhancement of the qualifying asset. Such expenses include salaries, direct costs, other general expenses associated with R&D activities, R&D costs outsourced to third parties, etc.
Uplift Expenditure is derived by the lower of (a) 30% of the qualifying expenditure and (b) the total acquisition cost of the qualifying asset plus any R&D outsourced to related parties.
Overall Expenditure consists of the qualifying expenditure plus the total acquisition cost of the qualifying asset, plus any R&D costs outsourced to related parties.
It should be noted that under the new regime, all intangible assets are entitled to tax deductible capital allowances over their useful economic lives with a maximum useful life of 20 years.