Background
2022 opened with the government of Cyprus announcing that it was to proceed with the first major tax reform of the Cyprus system in 20 years. This followed on from several speeches made by the former Finance Minister, Constantinos Petrides, during the latter part of 2021 and against the background of the proposed global introduction of a minimum corporate tax rate of 15 % . Petrides suggested that the objectives of reform in Cyprus, besides simplification, greater equality and transparency, was the development of a sustainable economy and linked to that a sustainable environment. This dovetailed with the announcement of a new government action plan intended to attract ‘sustainable industries’ and specifically those in the areas of high-technology, innovation, pharmaceuticals and shipping. Foreign interest owned companies were also to be targetted. Tax incentives formed an important part of the plan and were also viewed as a means of offsetting any possible negative impacts of a rise in corporate tax rates from 12.5 to 15% which would mainly affect multinational entities. The majority of these were tax incentives which, along with upgrades to immigration law and the opening of a Business Facillitation Unit, were introduced during 2022.
Defining a sustainable economy
The Cyprus government has an established record of seeking to encourage foreign direct investment into the country in order to diversify its economy. The tax system has played an important role in these efforts and consequently the Cyprus tax regime has evolved into being one of the most attractive in Europe for individuals, investors and businesses. It currently offers one of the lowest corporate tax rates (12.5%) and the country can boast of a network of more than 60 double taxation agreements. In certain instances in the past, the country has promoted tax incentives and other schemes which, whilst they performed a ’quick fix’ of the economy by bringing in foreign funds, did little to to build a solid base from which stable and sustainable economic growth could be achieved. However, in the past two decades a general concensus has emerged that the future of the island lies in the construction of an internationally tax compliant, diversified, highly skilled, high-technology and high value economy. Success in achieving this would equate to building a sustainable economy offering good living standards for citizens. The progress to date is outlined below.
Tax compliance
Cyprus recognises that if it wishes to attract high quality professionals, investors and businesses to its shores it must establish itself as an internationally tax compliant and fully transparent jurisdiction.
A member of the EU since 2004, Cyprus bases its tax policy on offering an internationally competitive tax environment that is fully compliant with international best practice and the highest standards of transparency and fairness. Cyprus tax legislation is fully compliant with the EU Acquis Communautaire and EU Directives, and with the code of Conduct for Business Taxation and against harmful tax competition. Cyprus has always been an early complier with OECD and other international initiatives and features on the OECD ‘White List’ of tax jurisdictions.The EU Anti-Tax Avoidance Directives ATAD I and ATAD II entered into force in June 2020 and were applied retroactively as from 1 January 2020 (except for the reverse hybrids provisions which came into effect from 1 January 2022). The proposed ATAD 3 ‘Unshell’ Directive will, once adopted by the European Council also be implemented in line with the timetable laid down for Member States.
Cyprus was also one of the initial 68 signatories to the Multilateral Convention on Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (‘BEPS’). New and updated double tax agreements are aligned with the latest OECD standards and, on 21 February 2021, in line with the 4th and 5th Anti-Money Laundering Directives, the process of collecting beneficial ownership information for the different UBO registers began. These registers are now operational although public access was put on hold following a judgment deliverd by the European Court of Justice last November 2022 ruling accessibility of the UBO registers to any member of the general public as invalid.
Diversity
In 1960 the economy of a newly independent Cyprus was highly vulnerable and dependent on agriculture and package holiday tourism. Successive governments have strived to diversify and grow the country’s economy by being innovative and generating plans focusing on the attributes that Cyprus does have, namely: A geographic location which is at the intersection of three continents; A young, well-educated population with many people fluent in English as well as Greek; A legal system based on common law, and, a stable tax and political system.
The first stage in this process was the promotion of Cyprus as a shipping and trading centre. Following this, the dissolution of the USSR in the late 1990s resulted in Cyprus becoming a portal for investment funds flowing into and our of the former USSR and Eastern Europe. Becoming a member state of the European Union (EU) in 2004 and of the Eurozone in 2008 highlighted Cyprus as a law abiding low tax economy compliant with EU laws. This led to Cyprus expanding as a portal for cross-border investment from eastern European, Middle-Eastern, Asian and African nations all seeking a gateway into the EU and vice versa promoting a corresponding boom in professional services. Finally, the economic crisis of 2009-13 exposed the weakness of many financial institutions which were vastly overexposed to the Greek market and the property sector. Assistance from the EU was conditional on Cyprus instituting significant regulatory and structural reform. This included rationalization of the banking sector via insolvency, merger and acquisition and, a privatization requirement for many key industry sectors including telecommunication and marine ports. Privatization was a new concept for Cyprus and spawned new avenues of work and new businesses through new allies.
High value
Within the past decade foreign direct investment policy has matured and the Cyprus government has successfully sought to target more specific types of business and investments for entry into the country. This has resulted in tax policies that favour high quality, businesses and business sectors such as multi-nationals, shipping, pharmaceutical, fintech, gaming and digital marketing corporations.
Cyprus provides an ideal environment for group holding and finance companies, offering tax neutral flow of dividends from Cyprus to non-tax resident individuals andentities that are not within the list of EU non-cooperative jurisdictions for tax purposes while there is a full participation exemption and no tax on capital gains apart from gains derived from the direct and indirect sale of real estate in Cyprus. The network of double taxation agreements provides excellent safeguards vis-à-vis double, or no taxation and unilateral relief is available for taxes paid overseas if no double taxation agreement applies. The EC Merger Directive has been fully adopted and therefore mergers and approved restructurings can be carried out with full exemption from any form of taxation in Cyprus.
Tax incentives for tax compliant, diverse, high quality businesses.
For several years Cyprus has been introducing tax incentives designed to attract high quality, innovative and niche businesses and professionals to its shores. Incentives and amendments introduced as part of the new foreign investment strategy build from these. The key incentives currently in place are summarised below.
A. IP Box Regime – the Cyprus IP Box regime supplements a robust IP legal protection framework by offering tax benefits relating to expenditure arising from research and development (R&D) of a Cyprus company including where that R&D is outsourced to another Cyprus company. It has been approved as being fully compliant with EU standards. Its principal highlights are:
- 80% of the qualifying profit earned from the use of qualifying intangible assets may be deducted from overall taxable profits. Applying the current Cyprus corporate tax rate of 12.5% to the remaining 20% produces an effective tax rate of just 2.5%.
- As of 1 January 2020, taxpayers disposing of their IP assets have no obligation to prepare a balancing statement. Therefore a (capital nature) disposal of an IP asset, should not trigger any Cyprus tax implications.
- All intangible assets (excluding goodwill), irrespective of whether they are qualifying assets or not, are eligible for tax amortisation (capital allowances) over their useful economic life subject to a maximum limit of 20 years. The taxpayer also has the option not to claim capital allowances in a given year. Where this is the case, capital allowances that have not been claimed in a year are claimed over the remaining useful life of the asset.
B. Personal Tax incentives. These focus on two main objectives. Firstly they are designed, along with lifestyle factors and various government measures, to attract the necessary high earning and highly skilled executives and personnel to exercise employment in Cyprus. Secondly they seek to encourage investment in sustainable industries and innovation. The salient incentives are:
- From 1 January 2022 a 50% deduction from taxable income of remuneration for first employment exercised in Cyprus. This applies to those individuals with an annualised employment remuneration exceeding EUR55,000 who were not residents of Cyprus for a period of 10 consecutive tax years immediately prior to the year of commencement of the employment in Cyprus. This is a once in a lifetime exemption which lasts for a period of 17 years.
- From 26 July 2022 a 20% deduction from remuneration for first employment exercised in Cyprus to an annual maximum of EUR 8550. This applies to individuals who immediately prior to the commencement of their employment in Cyprus were not a resident of Cyprus for a period of at least 3 consecutive tax years and were employed outside of Cyprus by a nonresident employer. The exemption applies for a period of 7 years, starting from the tax year following the tax year of commencement of employment. Individuals who have been granted the above 50% exemption are not eligible for this exemption.
(Individuals that were eligible to claim the 20% or 50% exemptions that applied prior to 1 January 2022 may continue to claim the said exemption for any remaining period if they are not eligible to claim the exemption for employments commencing as from 1 January 2022. The 20% and 50% exemptions that applied previously were available for a total period of 5 or 10 years respectively for each individual).
- Subject to conditions all expenditure of revenue nature for scientific research and for R&D, is treated as an allowable deduction from taxable income. For expenditure incurred in years 2022, 2023 and 2024, the deduction is set at 120% of the total qualifying expenditure.
- Subject to conditions any amortisation of expenditure of capital nature for scientific research and for R&D, is allowed in full allocated over the lifetime of the asset (maximum 20 years). For expenditure incurred in years 2022, 2023 and 2024, an additional 20% uplift is permitted.
- From 1 January 2017 and applicable up to 31 December 2023 a deduction from taxable income is available for the amount invested each tax year in approved innovative small and medium sized enterprises (either directly or indirectly and subject to conditions). The benefit is restricted to 50% of the taxable income as calculated prior to the deduction (subject to a maximum of €150.000 per year)
C. Corporate Tax. These focus on promoting Cyprus as a tax friendly but fully transparent tax jurisdiction with specific advantages for those engaged in R&D and innovative products. Since the economic crash they have also sought to encourage companies to build a strong capital base with strong economic substance foundations. It should be noted that from 31 December 2022 any company incorporated in Cyprus will be regarded as ‘tax resident’ in Cyprus unless it can demonstrate that it is tax resident in another jurisdiction. Companies which are managed and controlled in Cyprus are automatically tax resident in Cyprus.
- Cyprus currently applies a 12.5% flat rate of corporation tax which is one of the lowest in the EU. This is likely to rise to 15% in the future but combined with other measures planned the net effect of this rise on the corporate tax burden is expected to be neutral. The increase to 15% is expected to have an impact on multinationals exceeding a year turnover of EUR750 mio.
- From 1 January 2015 (subject to anti-avoidance provisions) new equity introduced into a company in the form of paid-up share capital or share premium may be eligible for an annual notional interest deduction (NID). The annual NID deduction is calculated as the new equity multiplied by the NID interest rate. The relevant interest rate is the yield on 10 year government bonds (as at December 31 of the prior tax year) of the country where the funds are employed in the business of the company plus a 5% premium. The NID deduction cannot exceed 80% of the taxable profit derived from the assets financed by the new equity.
- Benefits derived from IP Box regime.
- Applicable up to 31 December 2023, and subject to conditions, a deduction from taxable income of 50% of the amount invested, either directly or indirectly, each tax year (maximum EUR 150,000 per year) as from 14 February 2022 in approved innovative small and medium sized enterprises.
D. Business Sector Specific.
- Cyprus has for many years successfully strived to be recognised as a major shipping centre. A key factor in this success has been the existence of a tonnage system of taxation. The application of the tonnage tax system is compulsory for owners of Cyprus flag ships and optional for owners of non Cyprus flag ships, charterers and shipmanagers. Those who choose to enter the Tonnage Tax regime must remain in the system for at least 10 years unless they have a valid reason to exit such as disposal of their vessels and cessation their of activities. In essence the system offers full exemption to ship owners, charterers and ship managers from all profit taxes and instead imposes tonnage tax on the net tonnage of the vessels. A major boost was provided to the sector when the EU gave its approval, valid until 31 December 2029, to an updated scheme.
- Audio visual. For small companies and individuals a 20% deduction from taxable profits for eligible infrastructure and technological equipment expenditure in the audiovisual industry(10% for medium companies).
Policy results.
The past decade has seen Cyprus growing a solid reputation as a both a technology and headquartering hub. International giants such as Microsoft, Oracle, SAP, and IBM have had their headquarters in Cyprus for many years, supporting the technological development of the country. Other international names such as NCR, Kardex, Wargaming, 3CX, TSYS, Amdocs, Exness, Bolt, Melsoft Games, Kyndryl, and Nexters have also migrated to the island. Cyprus is now viewed as a ‘crypto friendly’ market offering a regulated environment for investors seeking to securely and efficiently trade cryptocurrencies through exchanges overseen by the Cyprus Securities and Exchange Commission. The anticipated implementation of DAC7 will bolster this perception. The shipping sector has also scored some notable ‘wins’ including international cruise specialist Royal Carribean.
More remains to be done, however, to complete the comprehensive overhaul promised by the Ministry of Finance. These delays largely relate to the introduction of ‘green’ taxes targetting fossil fuels and carbon emissions. Plans to introduce such taxes have been understandably derailed by events in Ukraine which have caused significant cost of living rises for all citizens. The Ministry has suggested that introduction of the taxes is delayed in the national interest rather than dropped. It should also be noted that other government schemes and tax incentives have resulted in strong growth in the renewable energy sector.
Moving forward the Tax Authority is working towards further simplification of administration of the tax system by introducing a single tax platform for all users to replace the current Taxisnet and Tax Portal sites. Phase 1 of this project, which concerns VAT registered companies and individuals, has already gone live.
The response to the governments new foreign investment strategy from the targeted sectors has been positive to date. Despite the difficulties created by the Covid 19 pandemic and the war in Ukraine the long term signs for the Cyprus economy and its tax system appear to be promising.