opinion
Memorandum Of
(Mis)understanding
The country’s tax system remains intact and
should be the starting point for the rebuilding
of the economy
B
y targeting the downsizing and
restructuring of the Cyprus banking
sector, the Memorandum of (Mis)
understanding attracted massive
international attention. Rarely in its
short history as an independent sovereign state had Cyprus made headlines globally but
in March 2013 the world watched with bated breath
as the Troika set about “bailing out” (or rather “bailing in” as it turned out) our small island’s economy.
The unprecedented, Soviet-style method that was
followed to bail out Cyprus had nothing to do with
the EU’s acquis communautaire, European solidarity
and the fundamental principles of freedom, democracy, equality and human rights protection on which
the idea of a European Union was founded.
It is no exaggeration to say that the only bright spot
left to shine and spread a little hope is the fact that the
country’s tax system remains intact.
This, in my opinion, should be the starting point
for the rebuilding of the economy with the aim of
restoring financial stability and reinventing the financial sector on solid ground in order to safeguard
sustainable growth.
Changes have, of course, been made to the tax system:
• The corporate tax rate is marginally increased from
10% to 12.5%. All tax benefits associated with Holding and Financing structures (forming the majority of
corporate activity undertaken by foreign investors in
Cyprus) continue to exist. As far as trading companies
are concerned, the marginal increase in the tax rate
is deemed manageable and, in real numbers, is not
expected to cause noticeable harm.
• Tax on income from deposits is increased from 15%
to 30%. The hike on this tax is substantial only in absolute numbers since, in reality, it is only imposed on
passive interest income and is not expected to impede
growth. On the positive side, this tax does not apply
to non-tax residents of Cyprus.
What are the tax benefits that remain unaffected?
Everything else!
• The unconditional tax-free sale of securities including shares and units in funds; (it does not cover
securities which derive their value from immovable
property situated in Cyprus).
• There is no tax on dividend income received from
overseas (subject to relaxed conditions as before).
• There are no withholding taxes on dividend or
info: Costas Markides is a Member of the Board of KPMG.
56 Gold the international investment, finance & professional services magazine of cyprus
Now is the
time for the
public and the
private sectors
to join forces
in an effort to
minimize (if
not eliminate)
the damage
to Cyprus’
reputation
By
Costas
Markides
interest payments (also applicable to royalty income
when the source of such income is not in Cyprus).
There are no thin capitalization rules in Cyprus and
therefore financing costs are tax deductible in full
against taxable income (without reference to the ratio
of debt to equity).
• Interest expense suffered to finance the acquisition
of the share capital of a trading company is fully tax
deductible (direct or indirect 100% acquisitions).
• There are no exit taxes for Cyprus companies that
wish to redomicile or change their tax residency.
• The new IP (Intangible Property) regime aiming
at stimulating growth and encouraging research and
development through the acquisition or development
of intangible assets remains unharmed (deemed 80%
income exemption allowed, making the effective tax
rate to be capped at just 2.50%).
• Thin margin taxation on loans that are routed
through Cyprus companies remains intact, putting
Cyprus firmly on the map as a preferred financing
jurisdiction for leveraging overseas investments.
• There is no Financial Transactions Tax in Cyprus
The tax advantages outlined above, combined with
the fact that the legal system in Cyprus is based on
the Anglo-Saxon model, provide strong foundations
for staging a comeback but these alone will not suffice. The high level of professional services that are
being offered in Cyprus and the abundance of talent
and experience (UK- and US-qualified accountants
and lawyers), in conjunction with the low cost that
accompanies such services, give Cyprus a competitive
advantage that must be preserved and, at the same
time, heavily promoted towards investors on each and
every occasion.
Now is the time for the public and the private
sectors to join forces in an effort to minimize (if not
eliminate) the damage to Cyprus’ reputation caused
by the recent Eurogroup decisions and to invalidate
the unfounded, malicious and unjustified accusations
of money laundering.
Cyprus must now invest in rebuilding its image by
retaining the services of world-class firms possessing
the necessary specialized skills and knowledge in this
field and set out a short-, medium- and long-term
plan for rebranding and marketing Cyprus as a credible, transparent and modern financial centre.
Cyprus is small only in size. It is not small in dignity and certainly not in integrity