KPMG Reports On New Cyprus Tax Regime

by Lorys Charalambous, Tax-News.com, Nicosia

14 October 2002

A report from KPMG's Cyprus office gives a very full description of the new tax package being adopted by Cyprus as from 1st January 2003, in response to OECD pressure and as part of the country's preparations for joining the EU, made virtually certain last week when the European Commission confirmed that 10 countries, including Cyprus, could join as from 2004.

Despite criticism from several interest groups, economists have, in the main, welcomed the tax reform package as a timely stimulus to the jurisdiction's economy.

The new Income Tax Law, No. N118 (I) 2002, consolidates and reforms existing legislation on the subject. The main goals of the law are to:

• Harmonise the tax laws with EU directives and Code of Conduct of business;
• Simplify and modernise the taxation system; and
• Maintain and improve the comparative advantage of Cyprus in the field of international taxation.

The House of Representatives amended a series of other laws to bring them in line with the new legislation. Key changes to the taxation system include:

• Adoption of a residence basis rather than a source basis as the criterion of taxation;
• Unification of the taxation system and rate of corporate tax for international and local business enterprises;
• Abolition of personal allowances and certain deductions and their replacement by grants.

Companies, except semi-governmental bodies, will now be liable to corporate tax at 10% of their chargeable income; semi-governmental bodies are liable to corporate tax at 25% of their chargeable income.

IBCs (offshore companies) will no longer be taxable by virtue of their registration in Cyprus but instead they will be considered tax residents if they are managed and controlled in Cyprus. Existing IBCs however can elect to remain under the existing taxation regime (4.5% taxation) until 2005.

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