Cyprus Tax Alert - 1 June 2012
Parliament approves tax laws to promote foreign investment
By Pieris Markou, Antonis Taliotis and Paul Mallis
The Cyprus House of Representatives approved a number of changes to the Income Tax Law on 24 May 2012, including the introduction of an intellectual property (IP) regime, accelerated rates of capital allowances on certain asset classes and modifications to the interest deduction and group relief rules. The changes, which are designed to attract foreign investment and stimulate growth, are effective retroactively as from 1 January 2012.
A long-awaited favorable IP regime is introduced that should allow Cyprus to compete more effectively as an IP holding and management location. The definition of patent rights and IP rights has been conformed to that in the Patent Rights Law of 1998, the Intellectual Property Law of 1976 and the Law regarding Trademarks of 1962, thus ensuring that all types of IP will be covered by the new regime and avoiding any uncertainty in this regard. The principal features of the IP regime include the following:
- Eighty percent of the net profits from the exploitation and disposal of qualifying intangibles is exempt from income tax;
- Net profits are calculated after deducting all direct expenditure associated with the production of income from the intangibles (including the unamortized cost of acquisition); and
- A deduction for the amortization of capital expenditure (including the cost of acquisition) in respect of such intangibles is granted on a straight line basis over five years.
Before the approved changes, interest expense incurred on borrowed funds used or deemed to be used to acquire shares was nondeductible for income tax purposes because the shares were not considered to be assets used in the production of taxable income. As amended, there will no limit on the deductibility of interest expense where shares in any wholly owned subsidiary are acquired directly or indirectly, provided the subsidiary does not own assets that are not used in the business of deriving taxable income. To the extent the subsidiary does own assets not used in the business, the limitation on deductibility will apply in proportion to the percentage of assets not used in the business. This amendment is effective in respect of interest incurred on loans obtained for the acquisition of shares acquired on or after 1 January 2012.
The easing of the interest deductibility rules is expected to significantly enhance the attractiveness of Cypriot companies, particularly since losses of one Cypriot company can be surrendered to other Cypriot members of a group of companies for group relief purposes.
The amendments provide that a company incorporated by its parent company during a tax year will be deemed to be a member of the group for group relief purposes for that tax year. Previously, a company was considered to belong to the same group for group relief purposes in a particular tax year only if it was a member of that group for the entire tax year.
Related party transactions
The Income Tax Law gives the Commissioner of Income Tax the power to increase a company’s taxable profits where the Commissioner believes the financial result of a transaction was affected because the parties were related or connected.
The amendments provide that there will not be any adjustments to increase taxable income in connection with transactions between a parent company and its wholly owned immediate subsidiary companies to which the group relief provisions apply (e.g. where there is an intercompany balance between two companies that are part of the same group for group relief purposes). This beneficial change will ensure that from 1 January 2012 the Commissioner will no longer make one-sided transfer pricing adjustments in circumstances where a corresponding adjustment and the availability of group relief would otherwise
make the adjustment tax neutral.
The rate of capital allowances for plant or machinery purchased in tax years 2012, 2013 and 2014 is 20% per annum (increased from 10% and 15% per annum) unless the rates on such assets were higher under the pre-amendment law. For industrial and hotel buildings purchased in tax years 2012, 2013 and 2014, the rate of capital allowances has been increased from 4% to 7% per annum. These changes should encourage corporate investment in plant and machinery and in industrial and hotel buildings.