The proposed tax reform has been approved by the House of Parliament. The new legislation will be effective from 1 January 2003. There are some provisions that are effective for 2002. The new legislation aims to conform with European Union law and the EU code of conduct and abide by its commitment to the Organization of Economic Cooperation and Development (OECD) to eliminate harmful tax practices.The main features of the tax reform are the following:

Corporation tax for legal entities 

• The definition of resident of Cyprus is introduced. A company is resident in Cyprus if its management and control is in Cyprus.
• There is no longer a distinction between local companies and International business companies (IBCs). There is a change from the current principle under which IBCs were considered residents of Cyprus and taxed in Cyprus irrespective of the place of management and control. The taxable profits of all Cyprus resident companies will be taxed at the rate of 10%. Non-resident Companies will be taxed on profits from a business activity which is carried out through a permanent establishment in Cyprus, rentals from immovable property located in Cyprus and profits from the sale of goodwill. Existing IBCs that had income from their activities at 31 December 2001 can choose to be taxed with the rate of 4,25% until the end of the fiscal year 2005.
• Dividend income from abroad and from Cyprus is wholly exempt from corporation tax.No taxation on the profits from the disposal of securities for all the companies that are residents of Cyprus. “Securities” is defined as shares, bonds, debentures, founders’ shares and other securities of companies or other legal persons, incorporated under the law in Cyprus or abroad and options thereon.
• Profits earned from permanent establishment abroad are fully exempt from corporation tax.
• Abolition of the 5 year restriction for the carrying forward of losses. No time restriction on the carrying forward of losses.
• Losses of a company can be set off against profits of another company of the same group.
• Abolition of 10% minimum tax on utilization of losses brought forward from previous years.
• 50% of the interest income of a company resident of Cyprus is exempt from corporation tax. Ηowever interest income earned from the trading activities of a company (e.g. credit institution) is fully taxable.
• For 2002, 20% of the interest income earned by a company resident of Cyprus is exempt from corporation tax.
• In order to conform with the European Union, the new tax legislation adopts the appropriate European Union directive which enables without tax implications reorganizations, mergers, acquisitions and amalgamations of companies.
• No withholding tax on the payment of dividends, interest and royalties to non-residents of Cyprus.
• Abolition of reduced rates for Income Tax on profits from exports
• Abolition of exemptions available for the importation of foreign exchange from activities abroad.
• There are special rules for an additional special tax for 2002, 2003 and 2004 for semi-government bodies and companies that are not controlled by foreigners.

Special contribution FOR defence for LEGAL entities 

• Abolition of special contribution for defence for companies.
• Dividend income is subject to special contribution for defence at the rate of 15% in the case where the shareholder is resident of Cyprus. In the case where a company resident of Cyprus does not proceed with the distribution of a dividend two years after the end of the fiscal year in which profits have been earned, 70% of the profit will be considered as distributed (notional/deemed distribution). In the case where the shareholder is non-resident of Cyprus there is no deemed distribution of dividends.
• Interest income is subject to special contribution for defence at the rate of 10% in the case where the company is resident of Cyprus. Interest income earned from usual trading activities is not subject to special contribution for defence.

• An individual is resident of Cyprus if he lives in Cyprus for one or more periods which exceed the total of 183 days per fiscal year.
• All individuals who are residents in Cyprus are taxed with the following rates: 

• Dividend income from abroad and from Cyprus is fully exempt from income tax.
• The whole amount of interest income is fully exempt from income tax.  For 2002, interest income of £600 plus 50% of amount exceeding £600 is exempt from income tax.
• Abolition of personal allowances and deductions for individuals who are residents of Cyprus including married couples allowances and allowances for children.  Social grants will be provided in lieu of the allowances abolished.
• Abolition of reduced income tax rates for working in international business companies.  For non-Cyprus residents taking up employment in Cyprus a special exemption from income tax will apply for the first three years of their employment in Cyprus amounting to 20% of income earned or 8.543 euro per annum whichever is the lower.
• No taxation on the profits from the disposal of securities for individuals that are residents of Cyprus. “Securities” is defined as shares, bonds, debentures, founders’ shares and other securities of companies or other legal persons, incorporated under the law in Cyprus or abroad and options thereon.
• Profits of an individual earned from permanent establishment abroad are wholly exempt from income tax.

 Special contribution for defence FOR individuals 

• Abolition of special contribution for defence on employees, self-employed persons and retirees (from 1 July 2002).
• Dividend income is subject to special contribution for defence at the rate of 15% in case where the shareholder is resident of Cyprus.
• Interest income is subject to special contribution for defence at the rate of 10% in case where the individual is resident of Cyprus.
• In case where the total annual income including interest income does not exceed 11.900 euro, the interest income is subject to special contribution for defence at 3%. Individuals earning interest income from savings bonds, development bonds and deposits with the Housing Finance Corporation including interest earned by a provident fund will be subject to special contribution for defence at 3%.

 Immovable property tax