06 June 2013 - Important updates to tax rates, effect on tax structures and administrative action for deposit loss.

The recent agreement Cyprus reached with international creditors provided for an increase in the tax rates as follows:

1. Corporation Tax ("CT") - Law 27(I)/2013 The corporation tax rate increased from 10% to 12.5% effective as from financial year 2013.

2. Special Defence Contribution tax ("SDC") - Law 29(I)/2013

The Special Defence Contribution on interest income has been increased from 15% to 30% effective as from 29 April 2013. SDC on interest income is payable by Cypriot tax resident individuals or companies. Non tax residents are exempted from SDC. In addition, interest income arising from the ordinary carrying on of the business i.e. corporate financing, is taxed under CT at 12.5% after taking into consideration allowable deductions.

3. Time limitation of carried forward tax losses - Law 188(I)/2012 Tax losses were carried forward indefinitely, however with the recent changes the tax losses of any year will be carried forward only for a period of 5 years.

4. Effect on Holding & Financing structures

The practical effect of the above changes should not adversely affect holding structures. Dividend income is exempt from CT and in most cases (subject to easily met conditions) is also exempt from SDC. In addition, holding companies do not generally have tax losses in order to be affected by the new time limit on carrying forward losses.

As far as financing structures are concerned, the real effect is an additional 2.5% CT on the net profit due to the increased rate. However, the predefined profit margins recently accepted by the tax authorities on back to back financing arrangements, allow for a low effective tax rate on arising interest income.

Overall, the tax benefits provided by the Cypriot tax system are still maintained.

5. Depositors of Laiki Bank or Bank of Cyprus

The depositors affected by the recent developments in Cyprus may file an administrative action against the decrees issued by the Government and Central Bank and claim that these are unlawful administrative acts. Depositors that are affected may contest the actions of the Government and Central Bank within a non extendable period of 75 days which expires on 11th of June 2013.

6. Business after Eurogroup's decision Following the enforced default of Laiki bank in March and the restrictive measures on capital movement, the general feeling was negative as expected. However, the significant progressive relaxation of the restrictive measures, in addition to the exemption of branches of foreign banks from such restrictions, are increasingly facilitating business transactions.

Alternative banking arrangements in other countries were also established as a Cypriot company does not have any geographical restrictions on where to operate a bank account. It also important to say that funds arriving in Cyprus after the Eurogroup's decision are not subject to the restrictive measures as long as they are not transferred to a different banking institution.

The overall business climate is positive but even more encouraging is the rate at which the situation normalises, with main drawback the restrictive measures on bank transactions.

Should you have any questions or require any assistance our team would be happy to assist.

WTS World Tax Service Cyprus Ltd is an independent member firm of WTS Alliance, a global tax network providing tax, legal and business consulting services. All legal services are provided through registered law firms in Cyprus. This message is informative and does not constitute professional advice. Copyright © 2013 WTS World Tax Service Cyprus, All rights reserved. You are receiving this email due to past correspondence with WTS World Tax Service Cyprus Ltd Our mailing address is: WTS World Tax Service Cyprus 14 Pireos Street, 1st Floor Nicosia CY-2023 Cyprus

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