The main points of the plan are:

• Application for Cypriot Citizenship

The period of eligibility for applying for citizenship will be reduced from seven years of residence and work in the Republic, to five years and to four years for holders of certification for very good knowledge of the Greek language

• Simplification of the process for granting work permits

 The Ministry of Interior will amend the relevant Regulations of the Aliens and Migration Law, to simplify the process and determine the criteria based on which work permits will be granted

• Right to employment for family members of third country nationals

Spouses of third country nationals who have obtained a residence and work permit in Cyprus with a minimum gross monthly salary of €2,500 will have immediate and free access to employment. The scheme is not available for support staff.

• Revised policy for the issuance of temporary residence and work permits to third country nationals
  • Eligible Companies:
    • Foreign companies operating in Cyprus or wishing to have physical presence in Cyprus
    • Cyprus shipping companies
    • Cyprus high-tech/innovation companies (subject to conditions)
    • Cyprus pharmaceutical companies or companies operating in the fields of biogenetics and biotechnology.

• • Main provisions:
    •  A minimum gross monthly salary of €2,500 is introduced 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 all support staff
    • The duration of the residence and work permit can be up to three years and will be issued within one month from the application date
    • The 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 scheme
• Tax incentives
  • Expansion of the existing income tax exemption of 50% for taking up employment in Cyprus:
    • The personal income tax exemption of 50% will be expanded to cover new Cyprus tax residents-employees with salaried income of €55,000.
    • Existing beneficiaries of the scheme (income between €55,000 – €100,000) should be able to extend the exemption from 10 to 17 years.
  • Extension of the tax exemption for investment in innovative companies
    • Consideration of the possibility to grant the tax exemption of 50% for investment in certified innovative companies to corporate investors in addition to individuals
  • Increased tax deductions for Research & Development (R&D) expenses
    • Granting an increased tax deduction on R&D expenses (e.g. by 20%). Eligible R&D expenses will be deducted from taxable income equal to 120% of the actual.
• Digital nomad visa

A new type of residence permit will be introduced, for people who wish to live in Cyprus but work in companies operating abroad referred to as digital nomad visa.

Persons eligible for the “visa” are third country nationals who are self-employed or employees who work remotely using information and communication technologies, with employers/clients outside Cyprus.

Digital nomads will have the right to stay in Cyprus for up to one year, with the right to renew for another two years. They can be accompanied by their family members, to whom, upon request, a residence permit that expires at the same time as their dependent’s is granted. During their stay in Cyprus, the spouse or partner and the minor members of the dependent’s family are not allowed to provide dependent work or to engage in any kind of economic activity in the country. In case they reside in Cyprus for a total period exceeding 183 days within the same tax year, then they are considered Cyprus tax residents.

• • Prerequisites (among others):
    •  There is a minimum threshold of funds coming from abroad (supported by salary, bank statements, etc.) set to €3,500 per month, increased by 20% for the spouse and by 15% for any minor dependent
    • Medical insurance
    • Clean criminal record certificate from the country of residence

The anti-tax avoidance measures which were voted are:

1. Interest limitation rule
2. General anti-abuse rule
3. Controlled Foreign Company rule
4. Exit taxation
5. Rule to tackle hybrid mismatches

The application dates for the above are:

1 January 2019: Interest limitation rule, general anti-abuse
rule and controlled foreign companies rule.

1 January 2020: Exit taxation and rule to tackle hybrid
mismatches (reverse hybrid rules shall apply by 1 January 2022).

As from 1 July 2017, the new framework will apply to these and certain other financing arrangements.

On 30 June 2017, the Tax Department has issued a circular regarding the new framework. The Circular applies to intra-group financing activities where loans are granted by a company (“financing company”) to related parties (definition under the Income Tax Law art. 33), financed by financial means and instruments such as private loans, cash advances, bank loans etc.

Transfer pricing

A financing company will be required to determine its remuneration on the basis of transfer pricing principles. This means that the company will need to identify each commercial and financial relationship with the related parties (“controlled transactions”) and to determine the economical and significant conditions and circumstances relating to such transactions.

An analysis is required of the functions performed, assets used and risks assumed by the financing company.

An underlying principle of the risk analysis is that a financing company bearing risks, must have the financial capacity to manage those risks and bear the financial consequences id the risks assumed actually materialise. Therefore, the company is expected to determine the appropriate level of equity that would be needed to assume the risks. In case the financing company is a credit/financial institution or an investment firm, it is deemed to have a sufficient level of equity to bear the financial consequences of its risks.

In addition, an appropriate comparability analysis must be carried out in order to determine whether the remuneration resulting from the transactions between the related parties are comparable to transactions between independent parties under similar circumstances in the open market. The Circular indicates that in the case of companies performing functions similar to those of regulated financing and treasury companies, a return on equity of 10% after tax can be considered as reflecting an arm’s length remuneration. This percentage will be regularly reviewed by the Tax Department based on relevant market analyses.

Substance

The Circular indicates that financing companies must have an actual presence in Cyprus and  qualified personnel to control the risks and transactions entered into. The financing company is considered to control the risk if:

• it has the decision making power to enter into a risk-bearing commercial relationship
• it has the ability to address such risks
• it actually performs such decision-making functions

The actual presence criteria taken into account are:

• the number of directors that are Cyprus tax residents
• the number of board of directors meetings held in Cyprus
• the number of shareholders meetings held in Cyprus

The daily activities of risk mitigation can be outsourced to third parties as long as the company has the capability to take, and actually make, the key decisions with respect to the outsourcing.

Transactions without commercial rationale

Transactions that cannot be observed on the open market and do not have any commercial rationale must be disregarded to ensure full compliance with the arm’s length principle.

Minimum requirements

The minimum requirements for the transfer pricing analysis are:

• a description of the computation of equity allocation required to assume the risks
• a description of the group and the inter-linkages between the functions performed by the entities participating in the controlled transactions and the rest of the group, together with a description of the value creation within the group by the entities participating in the transactions
• the precise scope of the transactions analysed
• a list of the searched potentially comparable transactions
• a rejection matrix for rejected potentially comparable transactions with justifications
• the final list of comparable transactions which have been selected and used to determine the arm’s length price applied to the intra-group transactions accurately delineated
• a general description of market conditions
• a list of all previous agreements on transfer pricing concluded with other countries in relation to the transactions in question
• a list of all the previous agreements concluded with entities under analysis which are still in effect at the time of the submission of the request
• a projection of the income statements for the years covered by the request

Simplification regime

A financing company which meets the substance requirements and is engaged in purely intermediary financing activities, borrowing from related entities and lending to related entities, will be deemed for the sake of simplification to comply with the arm’s length principle if it receives in relation to its controlled transactions a minimum return of 2% after tax on assets.

An entity which meets the criteria and does not intend to prepare transfer pricing documentation may choose to benchmark its remuneration based on this minimum return on assets approach. The 2% will be regularly reviewed by the Tax Department.

Submission of transfer pricing analysis

The Tax Department expects that the transfer pricing analysis will be submitted to the Tax Department by auditors, who are required to carry out an assurance quality control in order to confirm the quality of the transfer pricing analysis.

i2an Newsletter – January 2016 issue