The second set of amendments in the provisions of the Cyprus tax legislation aim towards further improving the tax system of Cyprus, making it even more attractive to both the local as well as to the international business community. These changes relate to the income tax legislation and the capital gains tax legislation and are summarized below.
Corporate Income Tax Law
Related party transactions - Introduction of deemed expense
As from January 1 2015 onwards, if an adjustment in the income of one party has been made in accordance with the arm’s length provisions of Section 33 of the Cyprus income tax legislation, then a corresponding deduction/expense should be given to the other party of the transaction. Thus, if for example a deemed interest income is imposed on an interest free loan provided by one Cyprus company to another, then a corresponding deemed interest expense should be given to the Cyprus company receiving the respective loan.
Foreign exchange differences
Foreign exchange differences, both gains and losses irrespective of whether they are realized or unrealized, will be completely tax neutralized (ie not taxable/deductible) as of January 1, 2015 onwards. The only exception relates to companies trading in foreign currencies and related products, whereby such companies may elect not to be taxed on unrealized gains/losses but only be taxed when such foreign exchange differences realize.
Anti-avoidance provisions for dividend income
Under the current provisions dividends are exempt from income tax but may be subject to taxation under special contribution for defence tax. As from 1 January 2016 onwards, dividends will only be exempt from income tax to the extent these are not tax deductible by the paying company. More specifically, if the dividend income received by a Cypriot company from a foreign tax resident company are not considered as dividends by the latter but instead are treated as tax deductible expenses (ie ‘hybrid instruments’), then the dividends will be taxable under the Cyprus Income Tax Law as normal business income and will be exempt from Special Contribution for Defence.
In addition, the provisions of the EU Parent/Subsidiary Directive have been amended so that it does not apply in cases that there is an artificial arrangement having as a main purpose to obtain a tax advantage. The Cyprus income tax law has been amended to incorporate this change in its provisions.