The Legal 500

The Department of Merchant Shipping has issued two new notifications under the Tonnage Tax Law (44(I)/2010).

The Taxation of Owners of Cyprus Ships Notification, published in the Official Gazette on April 6 2012, repeals and replaces an earlier notification issued in 2010. The new notification:

After years of falling behind, Cyprus has recently updated its law on international trusts to reflect changes in global investment practice. The following article examines the revisions involved from a tax perspective.

In March 2012 the Cyprus VAT Authority launched a special scheme making Cyprus as one of the most attractive EU jurisdictions for yacht registration.

This new favorable VAT scheme requires a Cyprus company to enter into a lease agreement of a yacht with a third party, paying VAT only on a predetermined percentage of the time that the yacht is deemed to sail within EU waters, hence reducing the effective VAT rate down to only 4,42% when taking into account as well the required profit condition.

- Kinanis LLC

May 2012 – Accounting & VAT Division of Kinanis LLC

In November 2011 the Cyprus Parliament enacted a law allowing for a partial write-off of interest and penalties on overdue tax liabilities of companies and individuals in respect of tax years up to and including 2008.

The protocol amending the double taxation agreement between Cyprus and Poland has recently been signed on behalf of both countries. When ratified, the protocol will make a number of changes to the existing agreement, which dates back to 1992.

The Double Taxation Treaty between Russia and Cyprus, which took effect in 1998, replaced a treaty between the former Soviet Union and Cyprus dating back to 1983, but it proved inadequate with regard to information sharing between jurisdictions, to the concern of the Russian tax authorities. The forthcoming Protocol aims to resolve these concerns.

The protocol amending the double taxation agreement between Cyprus and Poland has been signed on behalf of both countries. The protocol makes a number of changes to the existing agreement, which dates back to 1992. The principal changes are outlined below.

The following article examines how Czech businesses can benefit from including a Cyprus holding company in their corporate structure.

The Protocol to the 1998 Double Tax Agreement between Cyprus and Russia (for further information please see "New protocol added to Cyprus-Russia tax treaty") was finally ratified by Cyprus in September 2011.

nears completion

The Protocol to the 1998 Double Tax Agreement between Cyprus and Russia was ratified by Cyprus in September 2011.

In December 2011 a number of amendments were made to the laws regarding income tax, special defence contribution (SDC) tax and value added tax (VAT) in order to reduce the government deficit. The main changes are as follows.

In December 2011 the Parliament of Cyprus voted on certain amendments to various Tax Laws aimed at increasing the revenues of the government as well as reducing government expenditure. Most of the amendments affect residents of Cyprus and were designed in such a way so not to affect Cyprus’ position as an international business center.

- Kinanis LLC

January 2012 – Tax Department of Kinanis LLC

The European Commission has issued a Communication on inheritance taxes asking governments of Member States to address two issues: the potential double taxation of inheritances, where more than one Member State claims the right to tax the same inheritance; and discriminatory taxation, such as a higher tax rate being applied if the assets, the deceased or the heir are located outside the Member State.

The new Agreement between the Republic of Cyprus and the Kingdom of Denmark for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income, which was signed on 11 October 2010, entered into force on 7 September 2011. The new Agreement replaces the 1981 agreement between the two countries.

The Cyprus Parliament has passed a law allowing a partial write-off of interest and penalties on overdue tax, provided that liabilities are settled by 31 March 2012.

The European Commission has recently announced that it has adopted a Communication on Double Taxation, which highlights where the main double taxation problems lie within the EU and outlines concrete measures that the Commission will take to address them. By doing so the Commission seeks to remove obstacles to a more competitive economy and make the EU easier to invest and do business in.

of the Cyprus-Russia Double Taxation Agreement

The current double tax agreement between Cyprus and Russia provides for a reduced rate of withholding tax dividends paid by a Russian company to a Cyprus-resident  shareholder.

Cyprus has been removed from the so-called "blacklist" published by the Portuguese tax authorities. Decree 150/2004 of the Portuguese Ministry of Finance set out a list of more than 80 jurisdictions considered to have unduly favourable tax regimes. Residents of countries on the list are denied certain benefits of the Portuguese tax system, and subject to higher rates of certain taxes.

The Cyprus Inland Revenue Department has issued a circular (2011/10) introducing a significant change in practice which will benefit international companies in Cyprus.

Cyprus Companies are in wide use as major vehicles in international tax structuring mainly due to the broad range of legal and tax related benefits they can offer because of the flexible tax system and the extended network of double tax treaties between Cyprus and other countries. In this respect, there are certain advantages that have made Cyprus also a favorable financing company jurisdiction.

The Cyprus Parliament has passed a series of measures to increase various taxes and impose an annual levy on companies incorporated in Cyprus. These measures form part of an austerity package aimed at reducing the budget deficit, which also includes an increase in government employees' pension contributions and a two-year special levy on salaries and pensions paid to national and local government employees.

The Cyprus Parliament has passed a series of amendments to tax and companies legislation in order to increase various taxes and impose a levy on companies incorporated in Cyprus. These measures form part of an austerity package aimed at reducing the budget deficit, which also includes an increase in government employees' pension contributions and a two-year special levy on salaries and pensions paid to national and local government employees. Further measures are expected over the next few months which will predominantly focus on the provision of tax incentives and other measures for promoting growth.

Since July 1 2011, companies, partnerships and national or local government bodies that pay rent to Cyprus-resident landlords have been required to deduct a special defence contribution tax from their rental payments and remit it to the tax authorities. The amount to be deducted and paid over to the tax authorities is 3% of 75% (ie, 2.25%) of the gross rental amount.

Tax developments in Ukraine and Russia underline the requirement for proper documentation and execution of transactions

On 2 June 2011 the Higher Administrative Court of Ukraine issued a circular to subordinate courts giving guidance on the application of the provisions of the Tax Codes in disputes coming before the courts.

Section 33 of the Income Tax Law allows the tax authorities to adjust a company's taxable profit in the event that transactions between related companies are undertaken on a non-arm's length basis.

With effect from 1 July 2011, companies, partnerships, and national or local government bodies which pay rentals to Cyprus-resident landlords are required to deduct SDC tax from rental payments and remit it to the tax authorities. The amount to be deducted and paid over to the tax authorities is 3% of 75% (i.e. 2.25%) of the gross rental amount.

In August 2011 the Parliament of Cyprus voted certain amendments to the Companies’ Law as well as various Tax Laws aimed at increasing the revenues of the Government as well as reducing government expenditure. The amendments include the imposition of a fixed annual charge for all Cyprus registered companies as well as the increase in applicable tax rates of Special Defence Contribution Tax on interest and dividends.

- Kinanis LLC

The Czech Republic has concluded another agreement on exchange of information on tax matters (TIEA). Following the signing of similar agreements with the British Virgin Islands on 13 June 2011 and the Isle of Man on 18 July 2011, the Czech Republic concluded and signed a TIEA with Bermuda on 15 August 2011. The TIEA with Bermuda will enter into force after both parties have completed all required ratification procedures and exchanged corresponding notifications. For criminal tax matters the treaty provisions will take effect immediately on that date.

Companies that operate in Sakhalin Region and a number of other regions are entitled to use accelerated depreciation of fixed assets and deduct larger amounts as expenses for tax purposes

On 5 July 2011, the Federal arbitration Court for the Far Eastern Circuit issued its precedent forming resolution No. F03-2566/2011 which states that companies operating in Sakhalin Region are entitled to apply a special coefficient for their fixed assets depreciation (but not more than 2). The court’s conclusions may also apply to companies operating in other regions of the Far North and areas equivalent to the Far North.

Introduction
The government's budget for 2011, approved by the Parliament in December 2010, introduced a number of new penalties for late payment and late filing of returns under the Income Tax Law, the Special Contribution for Defence Law, the Assessment and Collection of Taxes Law, the Capital Gains Tax Law and the Immovable Property Tax Law.

The treaty between Russia and Norway on Maritime Delimitation and Cooperation in the Barents Sea and the Arctic Ocean took effect in July 2011. The treaty ends a 40-year border dispute between the two countries, sets new fisheries rules and removes obstacles to development of oil and gas deposits in a 175,000-square-km area of the Arctic shelf.

The Partnership and Business Names (Amendment) Law (54(I)/2011) introduces new provisions to the Partnership and Business Names Law (Cap 116) to facilitate the reorganisation and merger of partnerships and extend the favourable tax treatment of qualifying corporate reorganisations to partnerships.

Cyprus offers a substantial number of incentives and advantages to businesses looking for a favorable jurisdiction through which to structure and conduct their business.

The Presidents of Cyprus and Ukraine have expressed confidence that a new double taxation agreement between the two countries will be signed shortly. Speaking during a visit to Ukraine the Cyprus President confirmed that Cyprus is ready to sign a new double tax agreement.

The Isle of Man and the Czech Republic signed a Tax Information Exchange Agreement  (TIEA) on 18 July to regulate and facilitate the exchange of tax information between them. The TIEA will enter into force after both parties have completed all required ratification procedures and exchanged corresponding notifications. Most of its provisions will then take effect immediately, with the remainder taking effect on the following 1 January.

In July 2011 the Commissioner of Inland Revenue Office provided guidance on the minimum acceptable profit margins on back to back loans between related companies. Much of the guidance provided was already applied in practice before, but nevertheless this is the first time that an official confirmation in given. In addition, the guidance clears some grey areas of the Income Tax law that existed in the past.

-Kinanis LLC

July 2011 – Tax Department of Kinanis LLC

The Cyprus Department of Merchant Shipping has issued circular 21/2011 drawing attention to the "ring fencing" provisions of the Merchant Shipping (Fees and Taxing Provisions) Law of 2010 (Law 44(I)/2010) ("the Tonnage Tax Law”).

The double taxation agreement between Cyprus and the United Arab Emirates, concluded in October 2010.

What are the main authorities responsible for enforcing taxes on corporate transactions in your jurisdiction?

There are two main departments within the Ministry of Finance

The Russian Tax Code includes thin capitalisation rules which limit or disallow the deduction of interest paid by a Russian company which
fails to meet the prescribed debt-to-equity ratio.

The enactment of Russian Federal Law 395-FZ  on “The amendment of legislative acts of the Russian Federation in respect of dividends”, together with the consequent change to the Russian Tax Code, is an important development in the Russian tax order.

After lengthy negotiations, Cyprus and Germany have signed a new Agreement on the Avoidance of Double Taxation, which, when ratified, will replace the existing agreement of 1974 ("the 1974 agreement").

A Russian case on the application of the Cyprus-Russia double tax agreement highlights the need for thorough planning and careful compliance

Foreign and local investors in Russia will have to wait longer than expected for new transfer pricing rules to come into effect following the State Duma’s failure to adopt the new provisions at the beginning of 2011, as had originally been anticipated.w Russian transfer pricing rules will remain in the pipeline

The Cyprus Department of Merchant Shipping has issued Circular 11/2011 regarding the introduction of tonnage tax under the provisions of the Merchant Shipping (Fees and Taxing Provisions) Law of 2010 (the Tonnage Tax Law). Early action is required in order not to miss the deadline for submission of the necessary application.

Section 15 of the Merchant Shipping (Fees and Taxing Provisions) Law of 2010 (the Tonnage Tax Law) allows owners of mixed fleets, comprising Community-flagged ships and non-Community-flagged ships to benefit from inclusion in the tonnage tax scheme provided that:

• at least 60% of the fleet in terms of tonnage comprises Community ships; or
• part of the fleet comprises Community ships; and
• the percentage share of the fleet in tonnage terms represented by Community-flagged ships is not reduced for three years from the date of entering the tonnage tax scheme; and
• the commercial and strategic management of the fleet is carried out from the territory

The Cyprus Department of Merchant Shipping has announced that, further to its Circular 42/2010 dealing with the definition of "Community ship" for the purposes of the Merchant Shipping (Fees and Taxing Provisions) Law of 2010 ("the tonnage tax law"), it considers that the requirements and provisions with respect to the fiscal obligations of vessels registered in Germany are similar to those of the corresponding Cyprus legislation.

Background

In April 2009, the European Commission issued a Communication on “Good Governance in Tax Matters” with the intention to launch a debate about concrete actions that could be taken to better promote the principles of good governance in the tax area (transparency, exchange of information and fair tax competition).  The aim of the Commission to improve synergies between tax and development policies becomes concrete with the Council Directive 2011/16/EU of 15 February 2011. 

The House of Representatives of Cyprus has voted in December 2010 several amendments to the current tax legislation for the prevention of tax evasion and tax avoidance.

Circulars issued by the Russian tax authorities in 2010 clarify their interpretation of certain aspects of the existing Cyprus‐Russia double taxation agreement, specifically the presence required to give rise to a permanent establishment, the deeming of excessive interest as dividends and the treatment of the proceeds of liquidation of a Cyprus company in the hans of Russian taxpayers.

Details of the new double tax treaty between Cyprus and Denmark have now been released. The new treaty was signed on October 11 2010 and will take effect once it has been ratified by both countries. Until then, the existing treaty, which dates back to 1981, will continue in effect

Tax News

Country Q&A

Speaking at a meeting with the President of the Cyprus House of Representatives, Ukrainian Prime Minister Mykola Azarov has stated that he is hopeful that a new agreement for the avoidance of double taxation between Ukraine and Cyprus will be signed soon.

I have set out the matters below in order to update you on the relevant tax matters following the signing of the long awaited Protocol in relation to the Double Tax Treaty between Cyprus and Russia to the effect that the same may be of interest to the activities of a company.

Cyprus has always been an excellent location for holding companies for a host of reasons, including its transparent legal system, excellent communications and world-class professional and banking services. It is an EU member state with an open market economy and no restrictions on capital movements

On the 7th of October 2010, officials representing the Republic of Cyprus and the Russian Federation concluded and signed a Protocol to the 1998 Double Tax Treaty between the two countries. The Protocol amends 10 existing articles of the Double Tax Treaty and introduces one new. With the new Protocol, Cyprus still remains the most favourable route for investments into Russia and ensures that Cyprus is removed from the Russian black list of “Offshore Jurisdictions”.

Negotiations are underway to update the double taxation treaty between Cyprus and Ukraine. The existing treaty dates back to the Soviet era and is extremely favourable, as it eliminates withholding taxes (usually charged at 15%) on payments from Ukraine to Cyprus. Furthermore, the treaty contains no anti-avoidance rules or restrictions on thin capitalisation.

EIB and Central Cooperative Bank sign Convention aiming to boost Cyprus economy   -   Cyprus presidency of the Council of the European Union   -   EU APPROVES NEW CYPRUS TONNAGE TAX LEGISLATION   -   more...

The Department of Merchant Shipping has issued The Taxation of Owners of Cyprus Ships Notification of 2010 explaining the detailed operation of certain provisions of the Merchant Shipping (Fees and Taxing Provisions) Law of 2010 (the Tonnage Tax Law).

The additional protocol to the Cyprus – Italy agreement on the avoidance of double taxation, which was signed on 28 May 2009, has now been ratified by both countries and has come into effect. The additional protocol provides for the exchange of bank and other information based on the OECD Model Tax Convention.

Cyprus has recently introduced new tax legislation regulating the taxation of income from shipping activities which will have a retrospective applicability as from 1 January 2010. The Law introduces the Tonnage Tax System (“TTS”) which imposes taxation according to the tonnage of the ships owned, managed or chartered and not according to the profit on shipping activities. Certain conditions must be met in order for a ship-owner / ship manager or a charterer to be qualified to be taxed under the tonnage tax system.

- Kinanis LLC

Mit dem vereinfachten und modernisierten Steuersystem verfügt Zypern über ein hochgradig wettbewerbsfähiges Steuersystem und fördert dieses. Es sollte von internationalen Investoren bei jedem Schritt im Hinblick auf internationale Steuerplanungsstrukturen genau berücksichtigt werden.

Tax on Transactions 2010/11 Country Q&A Cyprus: What are the main authorities responsible for enforcing taxes on corporate transactions in your jurisdiction?

The report covers in detail the Cyprus VAT Law and its practical implementation with Cyprus companies viewed from the International Investors' angle.

It is a very good manual for those interested to elaborate this delicate matter and especially it will be helpful to those who constantly are faced with VAT issues involving Cyprus companies and EU VAT rules. 

- Kinanis LLC

The Temporary Tax Assessment of the estimated net taxable profit for 2010 (if any) should be submitted to the Tax Authorities by 1st of August 2010.

The government's proposal to reduce the tax burden on companies that engage in international maritime transport through the introduction of a special tax regime has received approval from the European Commission.

The favorable tax regime of Cyprus in conjunction with the numerous double tax treaties Cyprus has signed and its flexible management and corporate procedures, has created a unique environment for Cyprus public companies giving to the international investor a suitable vehicle for public offerings and listings of their securities, debentures or other titles in European and international markets. - Kinanis LLC

Cyprus has made a number of important changes to its tax laws relating to the participation exemption, the taxation of mutual funds and the taxation of interest. The changes were made by Laws 110(I)/2009 and 111 (I)/2009, amending the Income Tax Law and the Special Contribution for Defence Law respectively.

Loyens & Loeff is an independent full service law firm with integrated corporate law and tax practices. The firm has a strong international and EU focus with over 900 lawyers working across its 7 home offices in the Netherlands, Belgium and Luxembourg and 11 offices in the world’s major financial centers. Loyens & Loeff is a firm where tax lawyers on the one hand and lawyers and civil law notaries on the other hand are equally divided. The collaboration between the various specialists within one office works to the client’s advantage.

Cyprus is the top country in a league table of European tax systems, compiled by KPMG International, in which major business organizations across Europe were asked to assess the attractiveness of their domestic tax regimes.

An extremely attractive feature of the Cyprus tax system is the exemption from tax of profits from the sale of securities under the Income Tax Law of 2002. In December 2008 the Inland Revenue Department issued a long-awaited circular clarifying the definition of “security” qualifying for exemption.

The Cyprus Commissioner for Income Tax has recently clarified his department’s policy on acceptable margin parameters for taxable interest in transactions involving Cyprus resident companies used as intermediary financing vehicles in back-to-back financing arrangements. The minimum margin which the Inland Revenue Department will accept varies according to the amount of the advance, as follows.

Despite having complied with all relevant information exchange requirements Cyprus continued to be included in the Spanish tax authorities “blacklist” of tax havens. Tax benefits and exemptions under the rules on participation exemption, controlled foreign companies and valuation of shares were not available to entities that were tax resident in any of the countries or territories included in the “blacklist”.

Cyprus is intent on meeting its obligations regarding information exchange and transparency, and has recently passed a new law (Law 72(I) of 2008) amending the Assessment and Collection of Taxes Law to incorporate the exchange of information provisions of Article 26 of the OECD Model Tax Convention of 2005 in double taxation agreements which have been concluded between Cyprus and other jurisdictions.

Taxation

29.12.2008 - A draft bill has been submitted to the Cyprus parliament reducing the rate of corporation tax paid by semi-governmental agencies such as the Electricity Authority of Cyprus, the Cyprus Telecommunications Authority and the Cyprus Ports Authority with effect from 1 January 2009.

Cyprus is intent on meeting its obligations regarding information exchange and transparency, and has recently passed a new law (Law 72(I) of 2008) amending the Assessment and Collection of Taxes Law to incorporate the exchange of information provisions of Article 26 of the OECD Model Tax Convention of 2005 in double taxation agreements which have been concluded between Cyprus and other jurisdictions

Cyprus is intent on meeting its obligations regarding information exchange and transparency, and has recently passed a new law (Law 72(I) of 2008) amending the Assessment and Collection of Taxes Law to incorporate the exchange of information provisions of Article 26 of the OECD Model Tax Convention of 2005 in double taxation agreements which have been concluded between Cyprus and other jurisdictions.

The Third EU anti-money laundering Directive extends Member States’ anti-money laundering and antiterrorist financing obligations to cover life insurance intermediaries and trust and company service providers. In order to implement the Directive Cyprus is introducing a new regulatory regime for professional trustees and providers of company management services.

Reorganisations legislation was introduced into Cyprus tax law in 2003 to align it with the EU Mergers Directive (90/434/EEC). Any profits or gains resulting from transactions effecting a qualifying reorganisation are exempt from income tax, capital gains tax and stamp duty. Furthermore, if the reorganisation involves the liquidation of a company, there is no liability to special defence contribution tax under the deemed dividends provisions. Land transfers within a reorganisation are exempt from land transfer fees.

Recent publicity regarding the United Kingdom and German revenue authorities’ purchase of confidential details of Liechtenstein bank accounts has re-focussed attention on tax havens and on how far the authorities may go to prevent their misuse.

Despite being among the world’s smallest countries, Cyprus has developed into one of the world’s major financial and business centres. The island continues to be the largest source of investment into Russia, ahead of Luxembourg,the Netherlands, Germany, Great Britain, the US and France.  Read more...

In preparation for accession to the European Union in 2004, Cyprus thoroughly overhauled its legislation around the turn of the millennium. All of the country's laws were reviewed and updated and brought into line with the EU's acquis communautaire.  Read more...

When one thinks about the most attractive holding company jurisdiction, Cyprus may not come immediately to mind. This article will argue that Cyprus, with its extensive double taxation treaty network as well as its stable social and economic environment will be widely recognized in the very near future as the ideal location for setting up a European holding company.

Cypriot trusts are effective vehicles for channeling income to and from companies in different jurisdictions. Recent corporation tax changes have placed Cyprus in a good position to use companies in conjunction with Cypriot offshore trusts.

1. INTRODUCTION
The new Income Tax Law1 (the Law), which came into force on 1 January 2003, has brought about some major changes to the Cypriot tax system as it affects companies.