17 10 2012

Changes to the tax legislation of the Republic of Cyprus

The Parliament of the Republic of Cyprus again adopted another amendment to the tax law in order to increase the competitiveness of the tax system for international business and attract new investments in the country.

Most of the changes are rather elaborates on the importance to avoid possible inaccuracies in the interpretation of the law in the taxation of certain types of transactions. In general, the changes can be considered very favorable for investors.
The amendments affected the following areas:
- Taxation of income from use of intellectual property;
- Taxation of interest transactions;
- Taxation of transactions between related companies;

The most significant change relates to intellectual property rights, which includes the regulation of the relations that relate to income from the use and sale of trademarks, patents, copyrights, and other intangible assets. So, first, 80% of revenue derived from the use of intellectual property (royalties) are exempt from tax, and second, 80% of revenues generated from the sale of intellectual property are exempt from taxation.

Thus, the effective rate in this case cannot exceed 2% of such income.

    Before the changes take effect any loans between Cypriot company and its wholly owned subsidiaries under a single holding company had to have the interest rate in accordance with Article 33 of the Income Tax Act, the relevant market level. Now, after the amendment of the Act, the provisions of Article 33 shall not apply in such situations, and this means that these loans can now be interest-free, provided that the company receiving the loan is a 100% subsidiary of the direct lender.
In addition, the lifting of the ban amendment secured to deduct the cost of non-taxable income.
    The principle of "arm's length" in operations between related companies is no longer applicable to the relationship between companies and their wholly owned entities.