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NEWS ANALYSIS: Cyprus Reforms Tax Code With Echoes Of UK's Non-Dom Regime

Chris Hamblin, Editor, Compliance Matters and Offshore Red, 7 September 2015

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The Mediterranean island of Cyprus was in financial crisis a few years ago. Now the country (the Greek part) is examining ways to attract wealthy foreigners through a reform creating something akin to the UK's non-dom system.

The following article is by Chris Hamblin, editor of Offshore Red and Compliance Matters, sister publications to this one, and is published here because readers serving clients outside, as well as inside, Europe, will be interested in the details. 

The current Cypriot tax regime is more than a decade old and in July the government subjected it to its greatest overhaul ever, with more change to come. Some amendments have been made and others are still in the pipeline. The aim is to restore the fortunes of an ailing offshore centre and attract investment, notably by taking a leaf out of the UK’s book and creating the option of “non-dom” status for high net worth individuals. 

There is now an exemption from taxation on personal investment income, i.e. on dividends and interest, for tax residents who are not domiciled in Cyprus. Up until recently, a natural person who spent 184 days on the island per annum had to pay the “Cyprus Special Defence Contribution” which applied to both Cypriot and "foreign source” investment income if it came in the form of dividends, rent or passive income. This has now been removed.

Another amendment has brought in the “notional interest deduction”, an attempt to persuade overseas investors to inject new equity (shares and share premium) into Cypriot companies by attaching an annual allowable tax deduction to the new equity. 

The idea here is to reduce the importance of debt financing for offshore players. According to reports, a “deemed interest” will be applied to “new equity” injections and will be tax-deductible as long as the company in question has a physical presence on the island. This is in force already. An offshore Cypriot entity can only take advantage of the deduction – capped at 80 per cent of the entity’s taxable profits – as long as it has at least one Cypriot subsidiary. This, too, may be of use to HNW individuals willing to invest in Cyprus.

Immovable property
From now until 31 December 2016, there will be no capital gains tax on gains from the sale of immovable property, as long as that property was not obtained because a bank foreclosed on its previous owner and as long as the property includes buildings. Transfer fees for property in this category have also been slashed by half. Immovable property taxes charged by local authorities will be abolished.

Gains on disposal of shares in companies in which the value of real estate directly or indirectly accounts for 50 per cent or more of the value of the shares will now be subject to capital gains tax.

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