TaxLegi 28.02.2022
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Cyprus Tax Authorities publish 10-year government bond yield rates for NID purposes
Executive summary
On 3 February 2022, the Cypriot Tax Department issued an announcement which lists the 10-year government bond yield rates as at 31 December 2021 for a number of countries (listed on the table below) with respect to the Notional Interest Deduction (NID) on equity. These yield rates are to be used to determine the reference interest rate for claiming NID for the 2022 tax year.
The key NID provisions and the applicability of the 10-year government bond yield rates are summarized below.
Detailed discussion
Notional Interest Deduction
As of 1 January 2015, Cyprus tax resident companies (as well as foreign companies with permanent establishments in Cyprus), which carry on a business, are entitled to claim a NID on their equity capital introduced on or after 1 January 2015.
The NID is deducted from the taxable income of the company for the relevant tax year (subject to any restrictions) for the period of time during which the equity is used by the company for the carrying on of its activities. The NID is subject to a number of conditions, including a taxable income limitation.
The NID equals the multiple of the “reference interest rate” (as defined below) and ‘’new equity.’’
“Reference interest rate” means the 10-year government bond yield as of 31 December of the year preceding the tax year of the country in which the new equity is invested increased by 5%.
10-year government bond yield rates as of 31 December 2021 (applicable for 2022 tax year)
Country Yield rate Abu Dhabi N/A* Albania N/A* Argentina 3.508 Armenia 9.722 Australia 1.670 Austria 0.072 Azerbaijan N/A* Belarus (US$) 9.785 Belgium 0.180 Bermuda (US$) 2.376 British Virgin Islands N/A* Bulgaria 0.690 Canada 1.479 Cayman Islands N/A* Chile 5.652 Chile (US$) 2.560 Chile (€) 0.834 China 2.775 Costa Rica 6.363 Croatia 0.560 Cyprus 0.629 Czech Republic 2.797 Denmark 0.061 Dubai (€) N/A* Dubai (US$) 2.533 Egypt 14.913 Egypt (US$) 7.570 Estonia 0.122 Finland 0.082 France 0.195 Germany -0.206 Guernsey N/A* Greece 1.315 Hong Kong 1.524 Hungary 4.484 India 6.509 Ireland 0.237 Isle of Man 1.502 Israel 1.290 Israel (US$) 1.919 * There are currently no government bond yield rates for the above indicated countries.
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Exemption of natural persons from the obligation to submit a personal income tax return for the tax year 2021
Τhe Council of Ministers, exercising its powers conveyed to it by the Assessment and Collection of Taxes Law, issued a decree (No.51/2022) exempting natural persons, whose total gross annual income is below €19.500, from the obligation to submit a personal income tax return for the tax year 2021. The decree was published in the official gazette of the Republic on 4th February 2022.
The said decree was issued further to amendments in the Assessment and Collection of Taxes Law, published in the official gazette of the Repuplic on the 20th of August 2020, according to which all individuals would have an obligation to submit a personal income tax return from tax year 2020 onwards, subject to a decree to be issued by the Council of Ministers which may provide conditions for an exemption.
EY Cyprus is at your disposal for any information and/or clarifications required.
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Financial reporting year ending on a date other than 31st December
The Ministry of Finance, through the Tax Department, issued Interpretive Circular no. 57 (“Circular”), on 29 November 2021, which refers to the tax treatment for companies whose financial year ends on a date other than the 31st of December.
Specifically, the Circular makes reference to the provisions of article 7 of the Income Tax Law and clarifies that in those instances where the financial year does not end on the 31st of December, the taxable profit will be allocated to the respective tax years on a monthly pro-rata basis.
For example:
- if the financial year ends on the 31st of March, then the taxable profits for the tax year 2021 will comprise of 3/12 of the taxable profits deriving from the financial year ending 31/3/2021 and 9/12 of the taxable profits deriving from the financial year ending 31/3/2022.
- if the financial year ends on the 30 st of September, then the taxable profits for the tax year 2021 will comprise of the 9/12 of the taxable profits deriving from the financial year ending 30/9/2021 and 3/12 of the taxable profits deriving from the financial year ending 30/9/2022.
In addition, the Circular indicates that for all cases, regardless of the financial year end of each company, the tax year is the year from 1st of January to 31st of December. Furthermore, the deadline for the payment by self-assessment of the final income tax liability is the 1st of August of the next year, and the deadlines for the payment of the provisional tax instalments are 31st of July and 31st of December of each respective year.
For the purpose of paying the final income tax liability through self-assessment or paying the provisional tax instalments, the determination of the taxable profit will be performed via the monthly pro-rata basis as explained above.
Contrary to tax circular 1989/19 which is revoked, Interpretive Circular no. 57 does not provide for any extension to the filing deadline of the annual Income Tax Return in case the financial reporting year does not coincide with the tax year however it has been clarified through a communication between the Ministry of Finance and the Institute of Certified Public Accountants of Cyprus (ICPAC) that in such instances, the annual Income Tax Return can be submitted within 6 months from the end of the financial year without being considered overdue (e.g. the 2020 tax return can be submitted by 30 April 2022 if the financial year of a company ends 31/10/2021).
EY Cyprus is at your disposal for any information and/or clarifications required.
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Updates on the new strategy for attracting businesses to Cyprus
Following the relevant decision of the Council on Ministers dated October 15th 2021, the new strategy for attracting buinesses to Cyprus entered its implementation phase on the 3rd of January 2022.
The provisions of the policy that are now implemented follow on the following pages:
1. Amendment of the International Business Companies policy for Companies that will be part of the newly established Business Facilitation Unit – main changes:
I. Required minimum salary is now €2500 per month, up from €2000.
II. Required minimum employment contract duration is now 2 years, up from 1 year.
III. Required documented experience in a similar position, when the applicant cannot produce relating Academic/ Professional Qualifications, is now 2 years, up from 1.
IV. No more limits to Third Country Nationals Employees in total and per category (in 5 years’ time the company will need to prove that at least 70% of total employees are CY or EU).
V. Maximum duration of the Temporary Residence Permit will be 3 years, up from 2 years, assuming that the passport and employment contract cover the duration (expected to be announced within the coming weeks).
VI. CRMD Fees for Entry Permit applications, including registration and permit for up to 3 years, will be €140, down from €400 for 2 years of permit (expected to be announced within the coming weeks).
VII. CRMD Fees for Registration and Permit for up to 3 years, will be €150, down from €330 for 2 years permit (expected to be announced within the coming weeks).
VIII. CRMD Fees for Renewal up to 3 years, will be €80, down from €260 for 2 years permit (expected to be announced within the coming weeks).
2. Employment of family members:
a. Spouses of Non-EU Nationals that are employed in a Company operating under the provisions of the Business Facilitation Unit (excluding the supporting staff category) will have immediate and free access to employment (self-employment is not allowed).
3. Digital Nomad Visa (with a maximum quota of 100 applications):
The "Cyprus Digital Nomad Visa" Scheme allows nationals from non-EU and non-EEA countries, who can perform their work location-independently using telecommunications technology, to reside temporarily in Cyprus and work for an employer registered abroad or perform remote work for companies or clients located abroad.
The Scheme’s goal is to strengthen Cyprus as a center for the provision of electronic services, where in combination with the other advantages offered by Cyprus, the attraction of digital nomads will contribute to the development of the business ecosystem and consequently to the economic development of the country.
Based on the above:
a. A new type of permit is introduced, with no employment rights for the holders of the permit.
b. The permit will be valid for one year, with the ability for a renewal for another 2 years.
c. Digital nomads can be accompanied by family members.
d. Must be able to prove that they have stable and sufficient monthly net income of at least €3500 (after the deduction of contributions and taxes).Individuals who meet the above requirements should follow the steps below:
Step 1: Entry in the Republic of Cyprus:
- The applicant enters Cyprus with a tourist visa (where necessary). Applicant and dependents must have valid original clean criminal records duly certified/apostilled.
Step 2: Submit an application for a residence permit:
- Within 3 months of arrival, the applicant should submit the relevant application at the Civil Registry and Migration Department in Nicosia, to be granted a residence permit, by paying the corresponding fees.
- In case the applicant legally resides in Cyprus under a different status, he/she has the right to submit the relevant application to be granted a residence permit as a Digital Nomad, at the Civil Registry and Migration Department in Nicosia.
- The applicant must state in the application the type of his/her employment, i.e., self-employed or employed for an employer registered abroad, and prove his/her monthly net income.
- The application must be accompanied with all necessary documents, and, during its submission, the biometric data (photograph and fingerprints) will be taken as well as the signature of the applicant.
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- The applicant enters Cyprus with a tourist visa (where necessary). Applicant and dependents must have valid original clean criminal records duly certified/apostilled.
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Cyprus’ revised strategy for attracting businesses | Is it better than the policy it replaces?
A brief comparison between the new strategy and the one it replaces
On October 15th, 2021,the Republic’s Council of Ministers approved a new strategy for “Attracting Businesses for Activities or/and Expansion of their Activities in Cyprus”. Following the recent debacle with the national Citizenship by Investment Scheme, the government has been looking into new initiatives for attracting foreign money to the island. Two of these initiatives, from an immigration perspective, are the revised Permanent Residency by Investment and what we will discuss further below, the registration of a “Foreign Company” or International Business Company (IBC), as they are commonly referred to.
What does a company have to gain by registering as an IBC? The answer is clearly fast-track access to the legal employment of highly skilled Third-Country Nationals (TCNs). In a tiny labour market like Cyprus, sourcing enough highly skilled employees is always an issue, not to mention the ease of just relocating your existing team from where you used to be headquartered, or from another location.Old Vs New
Points for the new strategy:
- One-stop shop. Through the newly announced Business Facilitation Unit (BFU), the government is aiming for a real gamechanger for foreign companies wanting to be incorporated in Cyprus; setting-up almost everything required by a new company, through one single governmental unit. At the BFU, a company could be registered, among others, with the Registrar of Companies, Social Insurance Services, Tax/ VAT Authorities and Civil Registry and Migration Department, all from a sole point of contact.
- Lower barriers of entry. With the older policy, for a company to be eligible to be registered as an IBC for CRMD purposes, the following were needed:
- Prove that more than 50% of its shareholding is owned by TCNs (Exceptions that apply: 1. Listed companies, 2. Cypriot Pharmaceutical Companies 3. Cypriot Shipping Companies, 4. Former offshore companies, 5. Companies whose UBOs have acquired the Cypriot Citizenship by Investment, 6. Cypriot Companies of high technology / innovation).
- Operate from their independent offices in suitable premises.
- Invest in the newly formed company €200,000 from abroad
This has now been revised and the €200,000 investment is no longer required.
- Unlimited number of TCN employees regardless of categorization. Previously, foreign entities were allowed to apply through the fast-track procedure for only 5 Directors with monthly salary of at least €4,000 and 10 Key-personnel with monthly salary of at least €2,000, now there are no limits regardless of their category (Director or Key-personnel). The only requirement is that in 5 years’ time, the company will need to prove that 30% of its total workforce are EU Nationals. If that is not the case, the government will examine it on a case-by-case basis.
- Duration of Temporary Residence Permits. The maximum duration of the Temporary Residence/Work Permits has been increased from 2 years to 3.
- Free access to the labour market for IBC employees’ spouses (or legal equivalents). The previous Policy stated that IBC Employees had access to Family Reunification for their immediate family, as soon as their permit was issued.. Their spouses were also allowed employment in eligible employers i.e., other registered IBC companies or companies that have the Labour Department’s approval to employ TCNs with a stamped Employment Contract, a very lengthy process. With the new policy, spouses, or legal equivalents, once they are registered as dependents of an IBC employee, can enjoy free access to employment in Cyprus, with any employer they see fit, as long as they fulfil the requirements of the position they are applying for.
- An easier path towards Citizenship by Naturalization. With the new announcement, a new, more favourable process for Citizenship through Naturalization was teased but we are still waiting on more information about that, as the government is in the process of amending the relevant law.
Points for the old strategy:
- CRMD’s relevant sector’s efficiency. To-date, the CRMD has managed to keep a very high level of service and specialization with its longstanding IBC team. Whereas now a company needs to submit all the documents with the BFU, wait for their response which should come within a week theoretically, and only then proceed with the registration of any employees, before it could register the company, the first employee and any other employees, all within a day.
- Lower salary requirements. The minimum salary for an IBC employee has increased from €2,000 to €2,500. This is a cost that new and existing IBC companies will need to shoulder, with the exception of current employees at IBCs registered with the previous policy, who get a 5-years grace period.
It becomes clear that this is irrefutably a step towards the right direction. Time will tell if the government and its BFU will get to achieve their goals and we are definitely rooting for them both!
A final thought; there is always room for further improvement and optimizations. For example, it would make practical and financial sense that skills acquired by any public servant after years of dealing with IBCs will be utilised in the new mechanism . Surely a solution must exist where we can get all that expertise and embed it in the new process.
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