Cyprus, which like many countries is extremely reliant on amendments to legislation, continuously aims to optimise tax by revisiting, reviewing and rethinking its laws from all possible angles. Located strategically at the crossroads of Europe, Asia and Africa, Cyprus has managed, over the years, to mould itself into a highly established business and financial centre, placing itself in a prime position by implementing much needed reforms.

The eastern Mediterranean island is beneficial to those seeking to commence business due to its robust, independent and transparent legislation.

Cyprus, a former British colony, has come a long way since gaining independence in 1960.

But things really started changing for the better when it joined the EU in 2004 and became a member of the eurozone at the start of 2008. Ever since then it has become the natural gateway for investment opportunities for a number of global organisations seeking to set up in Europe. Although Eastern European countries and Russia remain its two most prominent markets, Cyprus has most recently observed an influx from Asia, China and India. Cyprus’ prospective progress of tax and business strategies is predetermined by objective trends in the economic environment, mirrored by its legislative measures. The country has realised that by being more transparent and cooperative, it will be able to develop stronger connections with national legislators.

Changes in legislation
A factor that puts Cyprus at an advantage – and has done so since its independence 52 years ago – is that it recognises the need for continuous reform in order to sustain its competitive standing among the top international business centres. By bringing in new legislation, Cyprus has managed to decrease the taxation and administrative load for international and domestic businesses. Most specifically, Cyprus introduced new laws that resulted in the nation being taken off various international tax blacklists over the last couple of years.

Most prominently the Duma, Russia’s lower house of parliament, recently endorsed the double taxation avoidance agreement that has been in place since 2008 and confirmed removal from its infamous blacklist. Cyprus had originally made the blacklist, which included a further 53 countries, as it was found to be an “uncooperative territory.” The signing of the avoidance agreement means that Cyprus has amended its legislation to such an extent that it can prove it can satisfy a high level of cooperation with tax authorities in Russia. This union will now exchange tax information in accordance with the OECD model, with the addition of a few augmented provisos, and will deal with all taxation in place within both jurisdictions. The pact, which is due to come into force at the beginning of 2013, will incorporate a preamble of provisions that allow Russian profits taxation to be chargeable on Cypriot companies’ capital gains, acquired from the company’s sale of shares in companies where over half the capital comes from Russian real estate, at a rate of 20 percent, commencing four years after the Protocol’s ratification.

The country’s House of Parliament, meanwhile, passed a package of procedures to assist it in cutting down public expenditure, while simultaneously trying to raise public revenues.

Most notably, however, it should be emphasised that none of these actions will affect global companies registered within Cyprus or persons who are not tax residents there.

Quite the opposite, in fact; changes are anticipated to reinforce Cyprus’ financial position and make certain that the nation’s economic environment stays constant.

Be aware of key changes
Cyprus’ VAT rate was recently raised from 15 percent to 17, a decision which came into effect in March. As a result of this amendment, taxable persons are now required to issue an official receipt with respect to any transaction governed by the VAT legislation. The VAT Regulations provides guidance and shows what the prescribed minimum list of items is to be included in the official receipt.

A new measure implemented in relation to wages provides for a two-year special contribution to be paid by public sector employees, private sector employees, and self-employed persons. The changes will affect people in the following manner. Gross salary €2,501-€3,500 per month will mean a 2.5 percent contribution, a gross salary of €3,501-€4,500 would mean three percent, and anything above €4,501 will contribute 3.5 percent.

Cyprus Companies Law Cap 113, which is literally a copy of England’s 1948 Companies Act, was also amended. It now states that companies may cancel any paid-up share capital, with the intention to create reserves and cover losses. Amendments to the country’s Income Tax Law also means that as a result any loan granted by a company to a director, shareholder, spouse or to family members, up to the second degree of kinship, will be considered as a taxable benefit.

There was an increase in the Special Defense Contribution due on interest income. It has gone up by five percent from 10 percent to 15 percent, while the dividend income was raised from 17 percent to 20 percent. Its basic law was also amended to come in line with international laws. Foreign investors who fear that this modification will affect their tax position in a negative way should note that these changes do not affect any non-residents, for which the above sources of income continue to be non-taxable at the level of Cyprus.

In addition to the above, a 50 percent exemption will be set to previously non-Cypriot tax residents for employment within Cyprus if the income from their employment exceeds €100,000. The rule applies regardless of nationality and will be relevant to both Cypriots and non-Cypriots. This release is given for five years and has been in place since the beginning of January.

Double Taxation Agreements (DTAs)
Cyprus has most recently wrapped up three new international DTAs with Denmark, Slovenia and the UAE. The individual signing of DTAs with other jurisdictions is another step towards growing business for both Cyprus and the agreeing country. Moreover, agreements reinforce the focus both nations place on creating lasting trade relationships and in building business within the two regions. As well as strengthening the ability to exchange requested tax information with more ease, the pact is expected to bring important commercial benefits to Cyprus in the form of investment. It will simultaneously resolve matters regarding potential double taxation of both corporate and personal incomes, including dividends, royalties, business profits, interests, and income from pensions and employment.