Major Changes in the Tax Map in 2012 and 2013
TAX CHANGES 2012 AND 2013
Significant tax changes take place in 2012 and in 2013, after a significant number of drafts of law took effect after their vote in the parliament.
The main changes are:
Taxation of dividends increased to 20%
One of the most significant changes for businesses is the increase in the Special Contribution for Defense of dividends of companies from 15% to 20%. The growth for the rate for the special contribution for defense would be for a period of two years.
It is worth to mention that no Special Contribution for Defense is deducted for dividends received from non-Cyprus tax residents. Also there is no withholding tax on dividends paid from Cyprus to abroad.
This law begins in 1 January 2012 and applies to income acquired or resulted from 1 January 2012 and until 31 December 2013.
Taxation of interest income increased to 15%
Special Contribution for Defense on interest income received from a Cyprus tax resident is increased from 10% to 15%. This law applies to both physical persons and legal entities.
In the case of legal entities that have as its main activity the financing, the interest income is not subject to Special Contribution for Defense. Instead, net interest income, i.e. after deducting interest expense and other expenses is subject to Corporation tax at the rate of 12.5%. However, there is a minimum profit margin on financing activities. Thus financing companies and companies that are created to finance a group of companies will not be affected by the increase of Special Contribution for Defense.
It is worth to mention that there is no withholding tax on interest income received paid to non-Cyprus tax residents.
Increase in Value Added Tax (VAT)
One of the most significant changes for households and businesses is the increase in VAT from 17% to 18% at 14 January 2013 and to 19% from 13 January 2014.
Furthermore, according to the previous legislation, persons that acquire or build their first residence for self housing are entitled to request back VAT from the government up to €17.000. This law is replaced with the introduction of a reduced VAT rate of 5% for the acquisition or building of a residence for self housing provided that the area of the residence does not exceed 200 square meters
Increase in the highest Income Tax rate
A new Income Tax rate charge is introduced in the rate of 35% for persons with taxable income that exceeds € 60.000.
Introduction of annual charge for Companies
An annual charge of €350 for all companies that are registered in Cyprus is introduced for the year 2011. The amount for groups of companies cannot exceed € 20.000.
The charge for the year 2012 has to be submitted until the 29 March 2013 and for the following years the 30th of June of the corresponding year is the latest date that the charge has to be paid. In the case of non payment within the specified period, a 10% penalty is imposed on the full amount if the payment takes place up to 2 months late. If the payment takes place up to 5 months late the penalty is increased to 30% of the annual charge. If the payment does not take place after the 5 month period then the Company Registrar removes the company from the registry.
Taxation of private employees
From 1st January 2012, employees, self-employed in the private sector and retirees with wage earnings beyond € 2500 will pay a special contribution to the state of €10 minimum for two years.
The special contribution for private sector employees will be based on the scales and rates applicable to public sector employees for two years, while the payment of the contribution will be shared equally by employer and employee.
The rates are as follows:
|€0 — €1.500||0%|
|€1.501 — €2.500||0%|
|€2.501 — €3.500||2.5%|
|€3.501 — €4.500||3%|
|€4.501 and above||3.5%|
In case of an employee, the payment of special contribution is shared equally by the employer and the employee, representing fifty percent (50%) each.
The following deductions will apply from 1st January 2014 to 2016:
|€0 — €1.500||0%|
|€1.501 — €2.500||2.5%|
|€2.501 — €3.500||3%|
|€3.501 and above||3.5%|
To sum up all these new measures were a response of the government to increase its revenue in the midst of the economic crisis.
However, most of these changes do not affect companies that belong to non-Cypriot tax residents.