Cyprus’s first round of new tax incentives

During  the 54th annual meeting of the Institute of Certified Public Accountants that took place on July 1st, the president of the Republic of Cyprus Mr. Nicos Anastasiades announced his Government’s tax reform plans. Eight days later, on the 9th of July, the Cyprus House of Representatives approved some of these tax reforms. The rest of the proposed reforms that are still pending are expected to be examined and finalized by the House after the summer holidays.

This article briefly describes the main tax changes as these were approved by the House of Representatives and makes a note of the reforms that are still pending approval.

Approved Legislation


  • Notional Interest Deduction on Qualifying Equity

    A Cyprus tax resident company or a Cyprus permanent establishment of a foreign company is entitled as of the 1st of January 2015, a Notional Interest Deduction (NID) that is applied on “new capital” used in the business. The amount of the NID equals the notional interest multiplied by the amount of the “new capital” and this deduction cannot exceed 80% of the taxable income arising before the deduction.

    “New capital” is defined as capital (issued and fully paid up shares and share premium) that has been introduced to the business on or after January 1st 2015. The term does not include amounts that have been capitalized, are a result of the revaluation of movable or immovable property or are derived directly or indirectly from reserves that existed as at December 31st 2014 and which are not linked to new assets used in the business.

    The notional interest is defined as the rate of yield of the 10-year government bond of the country in which the investment is made, increased by 3% with the minimum notional interest being the rate of yield of the 10-year Cyprus Government Bond at December 31st of the preceding tax year, increased by 3%. The 10-year Cyprus Government bond yielded approximately 5.02% at December 31st 2014.

    It should be noted that the NID is not applicable in loss making scenarios

    The introduction of this measure is an incentive for Cyprus companies to deleverage and substitute borrowing with new investments in the form of “new capital”. A Cyprus Company that boosts significantly its equity capital can under this new legislation achieve an effective tax rate of 2.5% (if the NID amounts to 80% of the taxable income).

  • Exclusion of non-domiciled persons from Special Defense Contribution

    For the first time the concept of the non-domiciled individual is introduced, allowing physical persons that qualify as tax residents of Cyprus (183 days rule) to be exempted from the Special Defense Contribution Tax (“SDC”) if they can prove that they are not “domiciled” in Cyprus.

Currently, the SDC rates that are applied to a physical person that is a Cyprus Tax Resident are: a) 30% on bank deposits in Cyprus, b) 3% on rental income arising from Cyprus and c) 17% on dividends received by a Cypriot Company. Actually, SDC is the only tax a Cyprus Tax Resident that is a physical person has to pay on dividends received.

This amendment  gives a strong incentive to foreign High Net Worth Individuals for moving to Cyprus and become tax residents, especially if they are also registered shareholders of Cyprus Companies and receive dividends from these companies. In this way not only they legally minimize the tax burden of their company but they also legally minimizing their personal tax burden on the received dividends.

  • Capital Gains Tax exemption on Cyprus immovable propertyThe Capital Gains Tax legislation was amended such that there will be no Capital Gain Tax on the future sale of an immovable property situated in Cyprus if:
  • a) Such a property has been acquired between the date when the new law enters into force (16 July 2015) and December 31st 2016;

  • b) The property was acquired through a purchase and not through an exchange or a gift;

  • c) The purchase price was at market value;

  • d) The seller and the buyer are not related parties.The exemption will not apply for properties obtained as a result of a default of the owner on his mortgage.

    The above mentioned tax reform will hopefully give a breath to the currently subdued construction activity as it attempts to make the real estate sector more attractive for local and foreign investors. Previously a 20% Capital Gains Tax was imposed on the seller of real estate located in Cyprus.

  • Reduction of Cyprus property transfer fees

Cyprus property transfer fees have been reduce by 50% until December 31st 2016. The current rate is 3% on the first EUR 85,340, 4% on the next EUR 85,340 and 8% thereafter. At the same time, a number of other reduced fees (which in some cases are zero) have been introduced on transfers of property between related parties.

As in the case of Capital Gains Tax exemption, the above mentioned reforms aim to “re-activate” the real estate sector.


Pending Legislation

  • Tax Neutrality of Foreign Exchange differences
  • Limitation of losses carried forward on IP activities
  • Extension of the available exemptions of personal income tax for those taking up residency in Cyprus
  • Tax exemptions for executives moving to Cyprus
  • Increase of annual allowances for capital expenditure
  • Group Loss relief
  • Abolition of Local Taxes on Immovable property

The above legislative issues are still pending approval and we therefore refrain from proceeding with their in depth analysis as we acknowledge the possibility that significant amendments may result during the course of the legislative procedure. An update will be published once we have more concrete details about this second batch of proposed reforms.