Cyprus Tax System Provisions
Corporation Tax Rate
The corporation tax rate is 12,5% and is one of the lowest in the European Union.
Tax is imposed on all Cyprus resident persons (individuals and companies) on their worldwide income. A company is tax resident in Cyprus when its Management and Control is exercised in Cyprus. An individual is tax resident in Cyprus when he/she spends more than 183 days in Cyprus in a calendar year.
Companies do not pay any tax on dividends received from other Cypriot tax resident companies.
Also, dividends received by Cyprus tax resident companies from foreign companies are exempt from tax. This exemption does not apply if:
(a) more than 50% of the paying company’s activities result directly or indirectly in investment income and
(b) the foreign tax rate is significantly lower than the Cyprus tax burden. The tax authorities have clarified through a circular that “significantly lower” means a tax burden below 6,25%.
When dividend income is not exempt there is a 17% defence tax contribution. Tax credits for taxes paid abroad are available.
Exemption of Profits from Permanent Establishments Abroad
Profits from activities of a permanent establishment (PE) situated outside Cyprus are completely exempt. This exemption will not apply if:
1)Its foreign permanent establishment directly or indirectly engages in more than 50% of its activities in producing investment income, and
2)The foreign tax burden is significantly lower than in Cyprus. The tax authorities have clarified through a circular that “significantly lower” means a tax burden rate below 6,25%.
If the profits of the PE are not exempt, there is a 12,5% corporation tax. Tax credits for taxes paid abroad are available.
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 the tax like any other “active” trading income. If the interest income fails the test of “active” trading income then it is subject to defence tax contribution at 30% and exempt from corporation tax.
Group finance interest income is considered as trading income.
Losses can be carried forward subject to conditions and set off against profits of the next five years.
Group tax loss relief is available for companies forming part of a group as defined under the law.
Mergers, acquisitions and spin offs as per the same rules as the relevant EU directive can be effected without tax cost.
Cyprus does not impose any withholding taxes on dividend, interest and royalty payments to non-Cyprus resident recipients.
In the case of royalties the exemption applies for royalty payments when the asset/right used is outside Cyprus. In case it is in Cyprus then there is a 10% withholding tax unless a tax treaty provides for a lower or nil withholding tax rates.
Double Tax Avoidance
Cyprus has an extensive network of Double Tax Agreements. Several others are under negotiation.
If the Cyprus Company’s only activity is the holding of shares, then it is not subject to VAT legislation, as the holding of shares is outside the scope of the VAT legislation.
If however the Cyprus Company is engaged in management services, or trading activities, then it may have an obligation to register to VAT. Sometimes it may simply elect to register voluntarily to VAT so as to claim VAT on its expenses incurred in Cyprus.
Capital Gains Tax (CGT)
CGT is only imposed on the sale of land and buildings situated in Cyprus or on the sale of shares of non-listed companies that own such property in Cyprus.
There is no CGT on the sale of real estate outside Cyprus, or on the sale of any other type of asset.
Sale of shares, bonds, debentures, options, futures and similar titles are exempt from tax.
Cyprus imposes no tax on wealth.
There is no inheritance tax in Cyprus.
The Merchant Shipping Legislation (1.1.2010) places Cyprus in a very competitive position, as it allows Shipping Companies to be taxed under Tonnage Tax, rather than Corporation Tax on profits.
Other Important Provisions
There are no thin capitalization rules (companies can be funded almost entirely by debt).
There is no Transfer Pricing legislation in Cyprus, other than a provision in the Income Tax Law which requires transactions between related parties to be in accordance with the arm’s length principle. The Cyprus tax legislation adopted the OECD model and guidelines to determine whether a transaction is at arm’s length.
Deductible expenses (to arrive at taxable income) under Cyprus law are those incurred for the production of income.
Stamp Duty is enforced on written documents related with property/assets situated in Cyprus or matters that will be performed in Cyprus, irrespective of where the documents are signed. The stamp duty legislation provides for rates ranging between 0.15%-0.20% on agreements with a maximum duty of EUR20.000 and is payable within 30 days from signing the agreement.
80% of the net royalty income from owned intangible assets as well as 80% of the net profit emanating from the disposal of intangible assets are deductible for corporate tax purposes. The term “intangible assets” includes copyrights, patents, and trademarks