Cyprus – 2021 brings positive tax changes

August 2021

Although a challenging year for everyone in business, 2020 did produce some positive tax developments in Cyprus, specifically:

• the EU’s renewal of the Cyprus tonnage tax system (TTS)
• the EU’s assessment of the Cyprus notional interest deduction (NID) as ‘not harmful’.

Cyprus tonnage tax system

The Cyprus TTS allows ship owners to opt for tax to be calculated based on tonnage rather than profits. In December 2019, the European Commission approved the extension of the shipping regime and the seafarer scheme after concluding that both are in line with European Union Community Guidelines on state aid to maritime transport.

The Cyprus TTS is arguably the best approved shipping system in the EU. The regime retains the full exemption from income tax for qualifying owners, charterers, and ship managers, while the following enhancements improve its
competitiveness further.

Ancillary services

The TTS contains an extensive list of ancillary services that fall under the tonnage tax regime. Income arising from the listed activities is exempt from corporation tax provided it does not exceed 50% of the total income arising from maritime transportation activities.

Importantly, the exemption also applies to ancillary services provided by another member of the group, which is also a tax resident in Cyprus, with no requirement for this member to be a qualifying owner or charterer of a qualifying ship.

Bareboat chartering

Where the charterer and ship owner are part of the same group, bareboat chartering remains eligible for the TTS with no restrictions. Third-party bareboat chartering agreements remain eligible provided:

• the bareboat agreement does not exceed three years
• at least 50% of the fleet is time chartered
• vessels under bareboat chartering agreements represent short-term excess capacity in the group.

The TTS also includes a seafarers’ scheme, which grants an income tax exemption to all crew members aboard all EU and EEA qualified vessels.

Notional interest deduction regime

The Cyprus NID regime underwent a review by the EU Code of Conduct Group as part of an EUwide review of NID regimes. After incorporating a small number of EU recommendations, the EU Code of Conduct Group has assessed the Cyprus NID regime as ‘not harmful’. This assessment applies from the regime’s implementation on 1 January 2015.

The NID regime allows a notional interest deduction from profits where businesses raise finance through New Equity. New Equity means equity injected into a company since 1 January 2015 in the form of paid-up share capital or premium, in cash or in kind. Capitalisation of reserves that existed after the introduction of the NID regime in Cyprus also triggers the application of the NID rules. The deduction is available to Cyprus tax-resident companies as well as permanent establishments of non-resident companies.

The NID rate is calculated by adding a premium of 5% to the yield on 10-year Cyprus government bonds. The NID is capped at 80% of the taxable profits of the company or permanent establishment, leading to an effective tax rate as
low as 2.5%.

What Cyprus has to offer

Both the TTS and the NID regime make the Cyprus tax system an attractive one.

Cyprus retains its global position as a leading shipping and ship management centre within the EU. As well as an excellent infrastructure, Cyprus continues to offer the most modern, competitive, flexible, and fully approved TTS in the EU.

Further, the NID regime means companies that pay tax under the normal corporation tax rules may enjoy an effective tax rate as low as 2.5%.

About the author

Kyriakos Hadjikyriakou
Nicosia, Cyprus

Kyriakos Hadjikyriakou is a senior tax manager at Intertaxaudit, Russell Bedford’s member firm in Nicosia, Cyprus. He deals with a variety of tax
matters while specialising in direct tax.

Kyriakos holds a BSc in Economics and Finance from the Athens University of Economic and Business. He is a member of the Association of Chartered Certified Accountants (ACCA) and the Institute of Certified Public Accountants in Cyprus.

Combining his knowledge and expertise in direct and indirect tax matters, Kyriakos has a holistic understanding of the interchange between the finance planning and tax as required by clients of Intertaxaudit.

Author: Kyriakos Hadjikyriakou - Intertaxaudit, Nicosia, Cyprus

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