ACCOUNTING, AUDIT, PAYROLL, COMPLIANCE,
NON-DOMICILE, TAX ADVISORY, ASSURANCE
TAX INCENTIVES FOR COMPANY RELOCATION
AND HEAD-QUARTERING TO CYPRUS
Expansion of Income Tax Exemptions for High Salary Employees
On 10th May 2022, the Council of Ministers approved legislation with new tax incentives aimed at attracting foreign talent to Cyprus and encouraging international companies to relocate their headquarters to Cyprus.
Specifically, the bill provides for the following incentives and benefits:
• Tax exemption of 50% for employees receiving annual salary in Cyprus that exceeds €55.000. The previous plan required annual salary of €100.000 or more for the 50% exemption to apply.
• The period for which the tax exemption will apply will be 17 years. The previous plan provided for a 10 year period.
• The tax exemption applies from the first year of employment in Cyprus.
• The exemption will apply retroactively to the existing eligible employees with annual salaries over €55.000.
• New and existing employees will benefit from the tax exemption provided that they have lived abroad for a period of 12 consecutive years before the commencement of their employment in Cyprus.
• A two year grace period will be provided to new employees (employment started from 1 January 2022 onward), and a six month grace period will be given to existing ones (employment started during the year 2020 or 2021) in order to qualify for the provisions (i.e. increase their salaries to €55.000 or more) to be eligible for the tax exemption.
Extension of Tax Exemption for Investments in Innovative Companies
On 10 March 2022, the Cyprus Parliament voted for an extension of the tax incentives for investing in innovative enterprises, which were introduced in the Cyprus Income Tax law (ITL) in 2017 (Article 9A), until 30 June 2024.
The amending ITL was published in the Gazette on 18 March 2022. The tax incentives aim to boost entrepreneurship, support start-ups in developing innovative products and services and strengthen the Cypriot entrepreneurial ecosystem.
According to the provisions of Article 9A of the ITL, a “qualifying investor” is an individual that makes a “risk-finance investment” in an “innovative small and medium-sized enterprise (SME)” may deduct the costs of the investment from his/her taxable income, subject to the following limitations:
• Percentage limit: The tax deduction is limited to 50% of the investor’s taxable income in the year in which the investment is made, as calculated before allowing this deduction but after allowing deductions for life insurance. premiums and contributions to provident and other approved funds (as per Article 14 of the ITL).
• Annual limit: The total deductible amount may not exceed €150,000 per year.
• Carry-forward: The remaining investment cost not claimed as tax deductible may be carried forward and deducted from the taxable income of the subsequent five years, subject to the aforementioned restrictions.
Increased Tax Deductions For Research & Development (R&D) Expenses
The Council of Minsters approved an enhanced tax deduction of 20% on R & D expenses and will be valid for three years, starting from the 2022 tax year. Thereafter, R & D expenses shall be eligible for a 120% deduction of the actual expenses as a deduction from taxable income.
Digital Nomad Visa Scheme Revised March 2022
On 15th October 2021, the Council of Ministers approved the introduction of the Digital Nomad Visa Scheme in Cyprus, initially with a ceiling of 100 residence permits to be issued. Later on 3rd March 2022, the Council of Ministers increased the ceiling to 500 residence permits.
The “Cyprus Digital Nomad Visa” Scheme allows non-EU and third-country citizens (non-EEA nationals) to perform their work location-independently. It permits them to temporarily reside in Cyprus and work for an abroad registered employer or carry out work for companies and/or clients situated abroad using telecommunications technology.
This Scheme aims to reinforce Cyprus positioning as a digital service hub, which in combination with other benefits offered by Cyprus, will contribute to the development of the country’s business ecosystem and economic growth. The “Cyprus Digital Nomad Visa Scheme” introduction is part of the Strategy for Attracting Businesses for Activities or/and Expansion of their Cyprus Activities.
New Policy for Temporary Residence and Work Permits, October 2021
On 15th October 2012, the Council of Ministers, decided to replace the current policy regarding the issuance of temporary residence and employment permits to employees of existing and new companies of foreign interests registered in the Republic with a new Strategy for Attracting Businesses for Activities or/and Expansion of their Activities in Cyprus.
• Foreign companies operating in Cyprus or foreign companies wishing to establish presence in Cyprus which have a physical presence in Cyprus
• Cyprus companies in shipping or marine sector
• Cyprus companies classified as high-tech or innovative
• Cyprus companies operating in the fields of pharmaceuticals, biogenetics, biotechnology.
• Gross monthly salary of minimum €2.500 for employees who have the required academic skills or at least two years of relevant experience
• Companies will be able to employ third country nationals as support staff (with gross monthly salary below €2.500) provided that the employment of third-country nationals does not exceed 30% of the total supporting staff
• Maximum number of third country nationals is 70% of the total number of employees in a 5-year period from the date of the inclusion of the company in the Business Facilitation Unit
• Duration of the residence and work permit can be up to three years and will be issued within one month from the application date.
• Immediate and free access to employment will be provided for spouses of third country nationals who have obtained a residence and work permit in the Republic, and who receive a minimum gross monthly salary of €2.500 (not applicable for support staff).
Notional Interest Deduction (NID) For Cyprus Companies
New equity introduced to a company as from 1 January 2015 in the form of paid-up share capital or share premium is eligible for an annual Notional Interest Deduction (NID). The annual NID deduction is calculated as an interest rate on the new equity, and cannot exceed 80% of the taxable profit derived from assets, financed by new equity.
The relevant interest rate is the yield on 10 year government bonds ( as at December 31 of the prior tax year) of the country where the funds are employed in the business of the company plus a 5% premium.
This incentive can be applied for Cypriot tax resident companies and non-resident companies with a permanent establishment in Cyprus.
In November 2020, there was positive news about this incentive when the EU Code of Conduct Group (Business Taxation) issued a report on Cyprus Notional Interest Deduction (NID) to say that this tax regime is approved and the EU Economic and Financial Affairs Council (Ecofin) declared it to be 'not harmful' .
The 2023 NID rate, which is around 9% or more, depending on the country where the “new funds” are applied, could be higher than the actual interest possibly charged from a shareholder loan. If used correctly, NID is a powerful tool for tax optimization and can significantly reduce the effective corporate income tax rate from 12.5% to as low as 2.5%. The increase in 2023 NID rates offers additional motivation for companies to choose equity financing and move away from debt financing to maximize tax efficiencies.
Companies with existing shareholder or related party loans towards a Cyprus company may wish to consider capitalizing such loans, making them qualified to claim NID. From an international tax perspective, companies who use their own funds instead of borrowed funds strengthen their position as the “beneficial owner” of the generated income and strengthen the local substance.
We encourage all eligible companies to consider taking advantage of NID to optimize their tax obligations.