New Developments in Cyprus Tax Legislation

In December 2011 the Cyprus House of Parliament passed a package of measures aiming to cut down on public expenses, and at the same time increase public revenues. It is very important to state that none of these measures affect international companies registered in Cyprus or individuals who are not Cyprus tax residents. On the contrary, the changes are expected to strengthen the financial position of the country and ensure that the economic environment in Cyprus remains stable.

The most important aspects of these measures are the following:

(a)          The Value Added Tax rate was increased from 15% to 17%. The effect of the new rate will start on 1 March 2012.

(b)          All taxable persons are required to issue an official receipt with regard to any transaction governed by the VAT   legislation. The VAT Regulations prescribe the minimum list of items to be included in the official receipt.

(c)          A new law was enacted, providing for a two-year freeze of salaries and pensions in the public and broad public sector, which includes increments and cost of living allowance.

(d)          Another new measure implemented provides for a two-year special contribution to be paid by the public sector employees, the private sector employees, as well as by self-employed persons, as follows: gross salary €2501- €3,500 per month: 2,5%, gross salary €3501- €4500: 3%, gross salary over €4501: 3,5%.

(e)          The Cyprus Companies Law, Cap. 113 was amended, now providing that companies may cancel any paid up share capital, in order to create reserves and to cover losses.

(f)           The Special Contribution for Defence Law was amended, raising the special contribution on dividends from 17% to 20%. Also, the basic law was amended, in order:

(i)        to hinder the postponement or avoidance of the payment of the defence contribution, via the interference of other companies, between the company that makes the profit and the shareholder;  and

(ii)      to impose tax on dividends from drawings, withdrawals, loans or other assets being withdrawn from the company by the shareholder or his/her family members, when such withdrawals, loans or other assets are considered balance due at the end of each year.

(g)          The Income Tax Law was amended and, as a result, any loan granted by a company to a director or a shareholder or their spouse or to members of their family up to the second degree of kinship shall be considered as a taxable benefit.