On 17 July 2020, a bill amending the Income Tax Law
was approved by the Cyprus Parliament, introducing a number of changes concerning
the tax treatment of intangible assets.
The changes are intended to simplify and clarify the
relevant legislation and provide increased flexibility to taxpayers.
Background
The Income Tax Law provides that any expenditure
incurred for the acquisition or development of an intangible asset,
incurred by a person carrying on a business and for the benefit of that
business, is deductible for Income Tax/Corporation Tax purposes.
Balancing
Statement
Under the existing provisions, a taxpayer has an
obligation to prepare a so-called “Balancing Statement” in the event of a sale
of an intangible asset. This statement presents, on one hand, the acquisition
cost of the asset minus any depreciation (termed as “capital allowances”) claimed
over the years and on the other hand the disposal proceeds, leading to a
balancing addition or balancing deduction. This effectively means that any
cumulative depreciation claimed may be clawed back and taxed in the year of
disposal.
Based on the amendments voted, as from 1 January 2020,
the obligation to prepare a Balancing Statement upon a disposal of an
intangible asset is abolished. This means that no balancing addition or
balancing deduction would be included in a taxpayer’s taxable income in the
year of disposal.
Depreciation
Under the existing provisions, any expenditure
incurred for the acquisition or development of an intangible asset which is of
a capital nature is claimed (through capital allowances) as a deduction from
taxable income over the useful life of that asset with a maximum period of 20
years.
Although a taxpayer has the option not to claim
capital allowances in a particular tax year, the Income Tax Law is silent as to
whether the unused amount can be carried forward and be used in subsequent
years.
Following the amendments, as from 1 January 2020, any capital
allowances that have not been claimed in a year are claimed over the remaining
useful life of the asset. This means that the remaining value (initial cost
minus total capital allowances claimed) of the asset at the beginning of each
year will be re-distributed over the remaining useful life of the intangible.
Implications
The amended provisions are expected to have a positive
impact on companies engaged in ownership and/or commercial exploitation of
intangible assets. The abolition of the balancing statement means that any gain
of a capital nature realised upon the disposal of such assets is exempt from tax.
Furthermore, the amended provisions concerning capital allowances provide
certainty and clarity that any deduction not claimed in a year can be carried
forward and be used in the following years.
