Nicosia, May 2012
No interest expense restriction will apply in cases where shares are acquired directly or indirectly in a wholly owned subsidiary provided that this subsidiary does not own any assets which are not used in the business.
If this subsidiary does own assets that are not used in the business, the restriction of interest will only correspond to the percentage of assets not used in the business.
This change is expected to make the Cyprus Holding Company much more attractive than before as interest will now be an allowable expense for tax purposes. Such interest expense can be used in group structures for group relief purposes.
Group relief provisions
Under the current provisions of group relief, a company is considered to belong to the same group for group relief purposes if it is part of that group for a whole tax year.
With the amended legislation, in cases where a company has been incorporated by its parent company during the tax year, this company will be deemed to be a member of this group for group relief purposes for that tax year.
Related party transactions
The transfer pricing provisions of section 33 will not apply for transactions between parent and wholly owned subsidiary companies for which the group relief provisions of section 13 apply.
This change in the law will impact on the provisions of section 33 in cases where there may be an intercompany balance between two companies that are part of the same group for group relief purposes (as long as there is a 100% direct ownership).
In this way, routine tax adjustments previously imposed under section 33 which did not necessarily eliminate the tax avoidance of companies will be avoided.
The rate of capital allowances for any plant and machinery purchased in the tax years 2012, 2013 and 2014 has been set at 20%, unless the rate of capital allowances on such assets is higher.
For industrial and hotel buildings purchased in the tax years 2012, 2013 and 2014, the capital allowances rate will be increased from 4% to 7%.
This change in the Income Tax Law, along with the change in the Special Contribution for the Defence law (see below) should encourage corporate investment in plant and machinery, industrial and hotel buildings.
For the purposes of the Income Tax Law, approved Provident Funds and Pension Funds are those which have been approved by the Commissioner of Income Tax.
Special Contribution for the Defense Law
In calculating the profits subject to deemed distribution under this law, a deduction will be given for the acquisition of any plant and machinery purchased in tax years 2012, 2013 and 2014.
The definition of plant and machinery is the same as that in the Income Tax Law and it excludes any saloon cars purchased for private use.
This provision will apply for the profits earned in the tax years 2012, 2013 and 2014.