As part of the debate on tax reform, the Cyprus Chamber of Commerce and Industry (KEBE) has submitted a proposal to Parliament for the complete abolition of the deemed distribution rule for the purposes of the extraordinary defence levy (deemed and actual) on dividends paid by Cypriot companies.
According to KEBE, this change should only apply to legal entities whose shareholders are tax residents of Cyprus.
As a compensatory measure, the Chamber proposes to increase the corporate tax rate to 15 per cent, so that Cyprus will finally be in full compliance with the European directives on the flat tax rate in the EU. This initiative is expected to eliminate the unfair competition that currently exists between Cypriot and foreign shareholders, while at the same time satisfying the EU's request to increase the tax rate to 15 per cent. According to KEBE, if all countries adopt the 15% tax regime, there will be no reason for investors to leave or not to come to Cyprus.
Incidentally, the deemed dividend distribution (DDD) rules currently apply to the profits of Cypriot tax resident companies that are directly attributable to Cypriot tax residents and local shareholders.
These provisions do not apply to that part of the profits which is directly or indirectly attributable to non-Cypriot tax resident shareholders or to Cypriot tax resident shareholders who are not domiciled in Cyprus (foreigners are granted "non-domiciled" status for 17 years from the year in which they move to Cyprus and, accordingly, are exempted from paying the defence contribution after filing the necessary forms with the tax authorities).
The DDD provisions apply where a Cypriot tax resident company has not distributed 70% of its after-tax profits within two years of the end of the tax year to which such profits relate. In such a case, the undistributed portion of such profits is subject to a Special Defence Contribution (SDC) of 17%. This is in addition to corporation tax, which is payable by all companies without exception. As a result, compared to foreign companies that pay only 12.5% corporate tax, the total tax for Cypriot companies and shareholders in many cases exceeds the 25% threshold, which is unacceptable.
KEBE's proposal will be considered at the next session of the Cypriot Parliament.