Services Sector in Cyprus in 2016

Undoubtedly the adversities of global economy and politics have a strong impact in the economic environment of Cyprus. The services sector showed resilience and undoubtedly helped to stabilize and improve the economy of the country during these difficult years, after the events of March 2013.

There were positive results in 2015, as balancing between state revenues – expenses and positive response of the economy which caused significant improvement in fundamentals and economic indexes. Cyprus has been upgraded by foreign rating agencies which reinforced the international credibility of the economy. The commercial and tourist sectors increased their activity, decisions have been taken in the field of energy and the efforts continue steadily for the full recovery of the banking sector.

Nevertheless, the economy presents actual problems such as unemployment, non-performing loans, and lack of liquidity, bureaucracy and deficiencies of public service or the outdated legislation which may hamper foreign investment and new businesses.

The issues to be addressed by the government and the businessmen, I believe should be (a) the effective restructuring of the public sector to reduce bureaucracy, which will assist the private activity for attracting new investments (b) the immediate commencement of approved projects for infrastructure (c) to provide financial and other incentives to SMEs, which are the backbone of the Cyprus economy (d) to make the most of European funds / grants by government, communal and the private sector (e) to be proactive and re-evaluate and re- identify the advantages of the country to further strengthen the benefits for enhancing foreign investment and international business (g) better use of renewable energy for reduction of operating costs for businesses (h) utilize to the country’s benefit the wobbly politico-economic conditions in the Middle East (i) further consolidation / restructuring of banks which will provide power to grant residential-business and investment loans at competitive borrowing cost.

The Cyprus relies on beneficial tax framework to attract foreign investors. The most recent tax reforms provide further incentives for investments. However, governments, tax authorities and relevant regulatory bodies are focusing more on tax concepts as ‘tax resident’, ‘final beneficiary’ and ‘conduit company’. More specifically, they are examining whether a company established in another jurisdiction, such as Cyprus, adequately support the tax resident in this jurisdiction, further to the management and control principle and has a “real” substance. This is especially important in cases where a company is claiming treaty benefits under the relevant double taxation agreement (“DTC”) between two countries and under the law of ‘de-offshorisation’ introduced in Russia on January 1, 2015 but of which adjustment period has been given until 2016/17.

The recent amendment of legislation expanded the definition of the terms “Republic” and “Permanent Establishment” to cover Cyprus’ national territory, its terrain, its territorial waters as well as any areas outside its territorial waters including the contiguous zone, the exclusive economic zone and the continental shelf, which we believe will significantly assist to the development of international investment, particularly in the field of energy.

In light of the recent developments described above, it is recommended that each business re-consider and if necessary re-structure the current structure to safeguard of passing the test of tax residency and other factors.

Additional tax reforms such as the neutral tax treatment of foreign exchange differences which do not relate to foreign exchange trading, simplifies the tax treatment of foreign exchange differences and causes stability.

In additional exemption of 20%-50% of income for people who were previously resident outside Cyprus and whose annual income from employment in Cyprus exceeds €8,550/€100.000, are entitled to an exemption from taxation of 20%/50% of such income. This could enhance the benefits provided to multinational companies to set-up and/or enhance their business presence in Cyprus by relocating senior management to Cyprus.

 

The harmonization of the Cyprus legislation with the European Directive 2011/96 / EU (Parent-Subsidiary Directive) in respect to dividends paid by subsidiaries and their parent for loss compensation, serves as an additional tax incentive for multinationals.

In the area of real estate investment have been positive tax amendments. Under the new regulations there is no tax capital gains tax on goodwill arising from the purchase date of the property by the date separating the estate, irrespective of the issue of deeds before or after separation of the plots. In addition there is a reduction of transfer estate duties by half until end of 2016 on properties that are subject to VAT and the expansion of it to cover an exemption of payment of transfer fees for properties which paid VAT or are subject to VAT payment. Moreover, there is a reduced by 50% of the transfer duties on all property sales taking place until 31/12/2016.

F.C.I. Ltd, Accountants – Business Consultants with a history of over forty years, evolves to offer services tailored to today’s economic environment. It offers a unique  perspective, which in addition to traditional fiduciary, accounting, tax services, VAT, payroll etc, has developed specialized and personalized services for local and international companies to tackle issues of international re-organisations / de-offshorisation, loan restructuring, crisis management programs, innovation and creativity and internal control and business management systems.

Andri Constantinides

Director, Jan 2016

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