CORPORATE TAXATION IN CYPRUS
Companies that are resident in Cyprus (and not simply incorporated in Cyprus) are taxed with corporate tax at the rate of 10% on profits.
It should be noted that the following exemptions and/or tax benefits apply:
(a) 50% of any interest income received by the Company is exempt from corporate tax;
(b) Any dividend income received by the Company will be exempt from corporate tax (Note: it may in certain circumstances be taxed with special defense contribution);
(c) Any profits from a permanent establishment abroad are exempt;
Profits from the sale of shares are exempt;
(d) There are no withholding taxes on dividends paid to non-resident shareholders;
(e) Reorganization relief may be available; and
(f) The carrying of losses forward is unrestricted.
INTRODUCTION TO THE CYPRUS
Cyprus has an excellent tax regime for international tax planning. Its entrance into the European Union as per 1 May 2004 has even enhanced the attraction of Cyprus for multinational companies, increasingly using Cyprus as a base for their international trading, financial, investment and other operations.
This publication explains some of the tax benefits international trading companies enjoy in Cyprus. It is not intended to be comprehensive, so we recommend you to get in contact with us for more detailed information and advice addressing your specific requirements.
A company resident in Cyprus is subject to income tax on its worldwide income. A company is resident in Cyprus if its control and management are in Cyprus.
Non-residents are subject to income tax only on income attributable to a permanent establishment in Cyprus, on rental income from property in Cyprus, and on profits from the sale of Cyprus based real estate or certain shares in companies owning such property (see also hereafter)
The term permanent establishment has the same meaning as defined in the OECD Model Tax Convention on Income and Capital, with the exception of a building site or construction or installation project, which only qualifies as a permanent establishment in Cyprus if it lasts more than three months.
Corporate income tax rate
According to a survey conducted by financial magazine Forbes, Cyprus offers the lowest burden of taxation in the entire European Union.
The standard rate of corporate income tax is 10%. Income arising from ship management activities is subject to a special rate of 4,25% (or to a special tonnage tax if more beneficial to the tax payer). Companies operating ships under Cyprus flag can benefit from a very favourable tonnage tax regime.
A capital gains tax of 20% is levied on gains from the disposal of immovable property located in Cyprus or the disposal of shares in companies whose assets include such immovable property. The latter does not apply to profits from the sales of shares listed on a recognized stock exchange. In all other cases of share transfers, capital gains derived from these disposals are not subject to any corporate income tax. This is based on the general tax exemption for profits from the sale of “securities”, included in the Cyprus Income Tax Act. “Securities” are defined as “shares, bonds, debentures, founders’ shares and other securities of companies or other legal persons incorporated under a law in Cyprus or abroad including options thereon.”
Dividend income from an overseas subsidiary is exempt from Cyprus tax, provided that at least 1% is held in its share capital and the subsidiary does not meet the following cumulative conditions;
- It engages more than 50% in activities leading to “investment income” (“passive” income such as interest income), and;
- Its income is subject to a tax burden lower than 5%.
Thus, dividends from a (more than) 1% subsidiary whose income is subject to 5% (or higher) tax should always be exempt from Cyprus tax, regardless of the subsidiary’s activities.
Dividends from a (more than) 1% subsidiary whose income does not for more than 50% consist of investment income should also be exempt, even if its income is subject to very low or no taxation at all.
In case a company does not qualify for the exemption, it will be liable to a so-called “Special Contribution for Defence Tax” at a 15% rate.
50% of interest income received by a Cyprus resident company is exempt from corporate income tax. Furthermore, the whole interest received will be subject to the Special Contribution for Defence Tax of 10%, leading to a total effective income tax rate for interest income of 15%.
However, when interest income is the result of the ordinary activities of the company or is closely connected to the ordinary activities of the company, it is subject to 10% Cyprus tax like any other ordinary Cyprus company.
A Cyprus company whose main purpose and conduct (e.g.) is to act as group finance company should in general only be subject to the standard 10% corporate income tax rate.
No special provisions apply to the tax treatment of royalties. Royalty income is subject to the standard corporate income tax rate of 10%.
Deductibility of expenses
Expenses incurred wholly and exclusively for the production of the income are fully deductible from corporate income tax in Cyprus.
FOREIGN PERMANENT ESTABLISHMENT
According to Cyprus’ domestic legislation, profits from a permanent establishment maintained outside Cyprus are exempt from corporate income tax. However, an exception applies and no exemption will be obtained, if;
- the permanent establishment engages more than 50% of its activities in producing investment income, and;
- the foreign tax burden on its income is lower than 5%.
If the exemption does not apply, corporate income tax at 10% will be payable over the branch profits.
Losses incurred by a foreign permanent establishment owned by a Cyprus company are deductible, but they are subject to recapture provisions in case of profits derived by the permanent establishment in subsequent years
Foreign tax relief
Foreign tax on income and gains of a Cyprus resident company can in many circumstances be credited against Cyprus tax payable over such income or gains. Such foreign tax relief cannot exceed Cyprus tax payable on this income.
As mentioned above, expenses incurred for the production of income are in principle fully deductible from Cyprus corporate income tax. This includes interest expenses. In Cyprus there are no thin capitalization rules, which might limit interest deduction to the extent that a company’s debt/equity ratio exceeds a certain level.
There is a general provision in Cyprus (roughly) stating that the conditions in the commercial or financial relations between affiliated parties in which a Cyprus company is involved, should meet the arm’s length criterion. There are no further specific provisions regarding transfer pricing, except for one provision stipulating that, in case a Cyprus company, controlled by less than five persons, has provided a non-interest bearing loan to its directors/shareholders, it must add an amount to its taxable income equal to 9% of the nominal amount of the receivable.
Losses can be carried forward for an indefinite period of time in Cyprus. Loss carry back, which could lead to a refund of corporate income tax paid in previous years, is not allowed in Cyprus.
Companies forming part of the same group are allowed to consolidate their results, in the sense that a loss making company is allowed to surrender its loss to a profitable group company. Companies will be considered as belonging to the same group in the above sense if;
- A company is at least 75% subsidiary of the other, or;
- Both companies are at least 75% subsidiaries of a third company.
The third company does not have to be a Cyprus resident company or EU-resident company
The income tax year in Cyprus is equal to the calendar-year. An estimation of the taxable profit is due by 1 August of the income year in question (hereafter: “year X”).
Provisional tax is payable, in accordance with the filed estimation, in three equal instalments on 1 August, 30 September and 31 December in year X.
The final tax return over year X must be filed at the end of the year following this year (or: “X + 1”). Any difference between the estimation and the tax actually due in accordance with the final return, will then be payable by 1 August of the year following the year of submission of the return (X + 2).
Royalty payments made by a Cyprus resident company to a non resident licensor are not subject to any withholding taxes in Cyprus provided that the exercise of those royalty rights takes place outside Cyprus. The granting of a license to a foreign licensee typically qualifies as such.
Cyprus does not impose any withholding tax on dividends paid to non-resident shareholders.
Cyprus does not impose any withholding tax on interest paid to non-resident creditors
Cyprus does not levy any capital tax over capital contributions into Cyprus resident companies as such. Taking into consideration, in addition, the above-described absence of any thin capitalization provisions, one may conclude that companies basically have full liberty in choosing how they want to fund their Cyprus operations.
PAYROLL TAXES AND SOCIAL SECURITY
Persons liable to wage/income tax and Cyprus social security
Residents in Cyprus are taxed on a worldwide basis. Non-residents will only be taxed on their Cyprus source income, which includes, amongst others, income from an office or employment in Cyprus. Residence is assumed if an individual stays in Cyprus for an aggregate period of more than 183 days during a calendar-year. Non-residence or residence outside Cyprus shall be construed accordingly. Residence rules comply with OECD standards.
A resident in Cyprus is liable to wage/income tax and social security tax over salary received from employment. An exemption will apply in respect of the remuneration relating to services rendered for a permanent establishment of a resident employer situated outside Cyprus or to a non-resident employer outside Cyprus for a total aggregate period in the year of assessment of more than 90 days.
A non-resident will only become liable to tax for his remuneration relating to services performed in Cyprus, the remaining part of the remuneration (for services outside Cyprus) being exempt.
Taxes and contributions for employers and employees
Employers and employees must each make social security payments of 6,3% of the monthly compensation granted to/received by the employee, up to a maximum amount of CYP 2.015 (in 2005; 1CYP = 1,73 EURO). In other words, to the extent an employee’s salary exceeds CYP 2.015, no social security contributions are due, neither by the employer nor by the employee.
Furthermore, contributions to the so-called “Human resource industrial training and redundancy fund”, at a rate of 1,7%, have to be paid by employers over the salaries of their employees, up to the same CYP 2.015 maximum monthly amount.
Finally, employers must pay contributions to the so-called “Social Cohesion Fund”, at a 2% rate over the gross salaries of their employees.
The income tax rates for individuals in Cyprus are as follows;
Chargeable Income in CYP Tax Rate
Up to 10,000 NIL
10,000 – 15,000 20%
15,000 – 20,000 25%
20,000 and over 30%
Individuals exercising an office or employment in Cyprus, whose residence was outside Cyprus before the commencement of the employment, are granted a tax exemption for 20% of their remuneration, or 5.000 CYP, whichever is the lower, during a period of three years starting at the beginning of the year following the year of commencement of their employment.
Cyprus has concluded social security agreements with Australia, Austria, Czech Republic, Greece, Slovakia, Switzerland, and the UK. These treaties usually provide for coverage of one to three years. Besides, in EU context, the relevant EU regulations in the field of social security will apply
VAT is imposed on the provision of goods and services in Cyprus, as well as on the importation of goods into Cyprus. Taxable persons charge VAT on their supplies and are allowed to deduct VAT charged on goods or services, which they purchase in the further range of their business. If output tax in a VAT period exceeds total input tax, a payment has to be made to the State. If input tax exceeds output tax a repayment is due by the State.
As an exception to the general rule, input VAT cannot be recovered in a number of cases, including the following;
- When businesses only make exempt supplies;
- The purchase, import or hire of saloon cars;
- Certain entertainment and hospitality expenses.
Cyprus VAT legislation provides for three rates; the zero (0%) rate, the reduced rate (5%) and the standard rate (15%). Zero rated goods and services include amongst others exports, commissions received from abroad for exportation of goods and international air and sea transport.
Registration is compulsory for businesses a) with turnover in excess of 9.000 Cyprus Pounds during the 12 preceding months, or b) with an expected turnover in excess of 9.000 Cyprus Pounds in the 30 days following. Businesses with less than 9.000 CYP turnover have the option to register if they wish to do so.
VAT returns must be prepared and submitted quarterly and the payment of the VAT must be made within 40 days from the end of each quarter. Other administrative obligations for VAT payers include:
- Preparation and submission of the Intrastat document for statistical purposes (Intracommunity Statistics), which has to be prepared for all intra-EU sales and purchases and is a monthly document to be prepared within then days from the end of each month;
- Preparation and submission of a VIES document (VAT Information Exchange System), which document is used by EU-member states for the exchange of information and the avoidance of tax evasion.
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