Dear clients, associates and friends
Whilst the summer is almost over, we would like to wish you a happy, relaxing and yet productive summer remainder. At the same time, we are pleased to provide a link to our latest Cyprus Tax Newsletter, which contains important and interesting developments.
Contents:
1.Cyprus tax residency for individuals based on 60 days2.Issue of Cyprus tax residency certificate during the tax year3.Procedure for relief on settlement of overdue taxes4.Intra-group financing: guidance issued by the Cyprus Tax Department
- Cyprus tax residency for individuals based on 60 days
On 14 July 2017 there has been an amendment to the Income Tax Law with regards to the criteria for an individual to be considered a tax resident of Cyprus. This enters into force as of 1 January 2017.
As per the amended legislation, an individual who does not remain in any other state for one or more periods exceeding 183 days in total during any given tax year, and who is not a tax resident in any other state for that year, shall be considered, for Cyprus tax purposes, to be a tax resident of Cyprus for the year in question, provided that all the following conditions are met:
- The individual resides in Cyprus for at least 60 days in the year of assessment; and•The individual carries out any business in Cyprus and/or is employed in Cyprus and/or holds an office (e.g. being a director) to a person (e.g. a company) resident in Cyprus at any time during the year of assessment; and•The individual maintains a permanent residence in Cyprus, either owned or rented.
The legislation further provides that an individual who cumulatively meets all of the above conditions, shall nevertheless not be considered a tax resident of Cyprus in the year of assessment, if the exercise of any business in Cyprus and/or the employment in Cyprus and/or the holding of an office to a person resident in Cyprus is terminated during the year of assessment.
What this means in practice is that the Cyprus tax authorities can now issue Cyprus Tax Residency Certificates for such persons based on 60 days of residing on the island, as opposed to the standard test of 183 days (which also continues to apply for all other cases). This development shall be very convenient for businessmen who take up personal tax residency in Cyprus but cannot physically spend 183 days in Cyprus.
It is being reminded that foreigners who become Cyprus tax residents are automatically designated as ‘non-doms’ for Cyprus tax purposes and enjoy an array of personal tax benefits (e.g. complete tax exemption from dividends and interest). There are also other significant tax benefits such as complete tax exemption on gain from sale of shares and 50% tax exemption on Cyprus sourced salaries for high earners.
- Issue of Cyprus tax residency certificate during the tax year
The Cyprus Tax Department (CTD) has issued a Circular in mid-March 2017 regarding the issuing of tax residency certificates for individuals. According to the Circular, it is now possible for Cyprus tax resident individuals to request and obtain a tax residency certificate at any time during the tax year for which the certificate is requested, even if they have not resided in Cyprus for at least 183 days during the tax year, as at the date of request of the certificate.
More on this can be read by clicking here
- Procedure for relief on settlement of overdue taxes
The Commissioner of Taxation has notified on 23 June 2017 that the Law regarding the procedure for settlement of overdue taxes comes into effect as of 3 July 2017.
In a nutshell, taxpayers with overdue tax liabilities may submit an application for settlement of their outstanding taxes through a series of instalments. Those who apply for the scheme stand to benefit from relief on the interest and penalties that have been imposed on the outstanding taxes. The level of this relief, ranging from 50% and all the way up to 95%, depends on the number of agreed instalments (the fewer the instalments, the higher the relief).
This scheme shall apply for three months from the date of the law entering into force for tax liabilities relating to years up to and including tax year 2015, and for new tax liabilities 3 months from the date of issue of the relevant tax assessment.
The provisions of the scheme apply for overdue tax liabilities arising under various tax laws such as Income Tax, Special Contribution for the Defence, Capital Gains Tax, Immovable Property Tax, Stamp Duty and VAT.
A comprehensive and detailed Information Sheet on this subject shall soon be available in the Knowledge Center of our website.
- Intra-group financing: guidance issued by the Cyprus Tax Department
Further to the termination of the application of minimum profit margins on back-to-back loans as of 1 July 2017 (click here for more details), the Cyprus Tax Department has issued an interpretative circular (the “Circular”) on 30 June 2017. This Circular applies and provides guidance to companies that are carrying out group financing transactions and are either Cypriot tax resident (i.e. their management and control is exercised in Cyprus), or are tax resident outside Cyprus and have a permanent establishment in Cyprus to which the financing activities are attributed.
Furthermore, the application of these provisions and guidelines shall reinforce the actual needed substance that a Cyprus resident company has in Cyprus (e.g. by having the capacity to manage the relevant risk and to bear the consequences should such risk materialise).
In brief:
- The Circular applies as from 1st July 2017 to both future, as well as to existing intra-group financing transactions, irrespective of the date of entering into the relevant transactions, and irrespective of any tax rulings issued prior to the said date. There are no grandfathering provisions for existing transactions; thus, any tax rulings issued prior to 1st July 2017 on transactions which are within the scope of this Circular will no longer be valid as from 1 July 2017.
- As of 1 July 2017, for each intra-group financing transaction, it is necessary to determine whether the remuneration arising from it complies with the arm’s length principle, i.e. whether it corresponds with the price that would have been charged between independent parties in comparable circumstances, taking into account the economic nature of the transaction.
- Towards this purpose, an appropriate comparability analysis (transfer pricing study – with certain guidelines and minimum requirements stated in the Circular) needs to be carried out, in order to determine whether the intra-group financing transaction is comparable to similar transactions between independent parties.
- Provided that the group financing entity has actual presence in Cyprus and is engaged purely in intermediary financing activities through a back-to-back manner, for the sake of simplification and in the absence of a transfer pricing study, the transactions are deemed to be in compliance with the arm’s length principle if the entity receives a minimum return of 2% after tax on assets in relation to its controlled transactions. The 2% minimum rate will be reviewed by the Tax Department on a regular basis, based on relevant market analyses.
A deviation from the aforementioned minimum return is allowed only in exceptional circumstances, where such deviation is justified by an appropriate transfer pricing study.
Entities which opt to benefit from this simplification measure should communicate this to the Tax Department by completing the relevant field in the Income Tax Return of the tax year in question.
A comprehensive and detailed Information Sheet on this subject shall soon be available in the Knowledge Center of our website.
In the meantime, please contact us for any clarifications or further assistance.
Petros Rialas, BA, MSc, FCCA, TEP
Director / Head of International Tax Planning Dept.
