Although a year 2020 has been difficult for all in business, this has brought some positive tax developments in Cyprus, in particular: the renewal by the EU of the Cypriot tonnage tax system (TTS) and the assessment of the EU of the Cyprus deduction of hypothetical interest (NID) as "innocent".
Cyprus tonnage tax system
The Cypriot TTS allows shipowners to choose the option of calculating the tax on the basis of tonnage rather than profits. In December 2019 The European Commission has approved the extension of the shipping system and the maritime programme, once both are found to comply with the European Community Guidelines on State aid for maritime transport.
Cyprus TTS is probably the best approved shipping system in the EU. The scheme retains a full exemption from the income tax of eligible owners, charterers and ship managers, and further improvements improve its competitiveness.
Additional services
The TTS contains a comprehensive list of ancillary services covered by the tonnage tax scheme. Revenue from these activities shall be exempt from corporation tax, if they do not exceed 50% total revenue from maritime transport activities. Importantly, the exemption also applies to ancillary services provided by another group member, who is also a tax resident in Cyprus, without requiring that that member be a legitimate owner or charterer of a qualifying vessel.
Charter without crew
Where the charterer and the ship owner are part of the same group, the crewless charter shall continue to qualify for TTS without limitation. Bareboat charter agreements with persons third are still eligible, provided that:
- • the bareboat agreement does not exceed three years
- • at least 50% fleet is chartered on time
- • ships covered by charter contracts without crew represent a short-term overcapacity in the group.
The TTS also includes a programme for seafarers that provides income tax exemption for all crew members on all ships qualified from the EU and the EEA.
Nominal interest deduction system
The Cyprus NID system was reviewed by the EU Code of Conduct Group as part of the EU-wide review of NID systems. After incorporating a small number of EU recommendations, the EU Code of Conduct Group assessed the Cypriot NID system as "innocent". This assessment shall apply from the entry into force of the scheme on 1 January 2015
The NID regime allows you to deduct mortgage interest from profits when companies acquire funding through New Capital. New Capital means capital contributed to the company from 1 January 2015 in the form of paid-up share capital or premium, in cash or in kind.
The capitalisation of reserves that existed after the introduction of the NID regime in Cyprus also results in the application of the NID rules. The deduction is available to companies resident in Cyprus and permanent establishments of non-resident companies.
The NID rate shall be calculated by adding a premium of 5% to profitability 10-Cypriot summer government bonds. NID is limited to 80% income of the company or permanent establishment subject to taxation, resulting in an effective tax rate 2.5%.
What Cyprus has to offer
Both TTS and NID make the Cypriot tax system attractive. Cyprus maintains its global position as the EU's leading shipping and ship management centre. In addition to excellent infrastructure, Cyprus continues to offer the most modern, competitive, flexible and fully approved TTS in the EU. Moreover, the NID system means that companies that pay tax under normal corporate tax rules can benefit from an effective tax rate, such as 2.5%.
About the author
Kyriakos Hadjikiriakou Nicosia, Cyprus
Kyriakos Hadjikyriakou is a senior tax manager at Intertaxaudit, a member company of Russell Bedford, Nicosia, Cyprus. He deals with various taxes of the case when specialising in direct taxes. Kyriakos holds a bachelor's degree in Economics and Finance from the University of Economics and Business in Athens.
He is a member of the Association of Chartered Certified Accountants (ACCA) and the Institute of Certified Public Accountants in Cyprus.
Combining its knowledge and experience in direct and indirect taxation matters, Kyriakos has a comprehensive understanding of the exchange between financial planning and taxes, as required by Intertaxaudit customers.