Taxation
Cyprus residents are taxed individually on the basis of worldwide income, irrespective of whether the income is repatriated to Cyprus.
Persons who are non-residents in Cyprus are subject to income tax on income accruing or arising from sources in Cyprus in respect of:
Individuals are considered to be resident if they are present in Cyprus for more than 183 days in the relevant year. Days of departure and arrival are treated according to the return.
Cyprus residents are taxed individually on the basis of worldwide income, irrespective of whether the income is repatriated to Cyprus.
Persons who are non-residents in Cyprus are subject to income tax on income accruing or arising from sources in Cyprus in respect of:
- Profit or other benefits from a permanent establishment situated in Cyprus or from any office or employment exercised in Cyprus.
- Pensions in respect of past employment exercised in Cyprus.
- Rent from property situated in Cyprus.
- The gross income derived by an individual from the exercise in Cyprus of any profession, the remuneration of public entertainers, and the gross receipts of any theatrical, musical or other group of public entertainers.
Individuals are considered to be resident if they are present in Cyprus for more than 183 days in the relevant year. Days of departure and arrival are treated according to the return.
Personal allowances and deductions have been abolished, apart from relief for life insurance premiums and contributions to pension, social insurance and welfare funds. Relief may also be available under a double taxation treaty
Resident expatriate employees are subject to income tax on their worldwide income.
Exemptions and special cases
A number of exemptions are available, namely:
Income from ship management services is taxed at a rate of 4.25%. No deductions or allowances are available.
Company Tax
The Income Tax Law that depicts the following:
The criteria for management and control have not been formally defined, but the following are generally accepted as the key factors determining whether or not the management and control of a company are exercised in Cyprus:
A company should have economic substance in terms of staff, premises and equipment and sufficient competence in Cyprus to make necessary business decisions. Finally, it should provide a service that is genuinely required by the group and not “devoid of an economic purpose”. Otherwise, payment for such services could be viewed as an artificial transfer of profits from one company to another.
The Cypriot branch of a foreign company will be taxed at 12.5% on its worldwide income if the locus of management and control of the branch is in Cyprus. If the locus of management and control is overseas, all the branch income is exempt from tax in Cyprus.
From 1 January 2003 trading losses by one group company may be set off against trading profits of another group company to give group relief, provided that the losses and profits have occurred in the same year of assessment.
Resident expatriate employees are subject to income tax on their worldwide income.
Exemptions and special cases
A number of exemptions are available, namely:
- Interest and dividends receivable by individuals.
- Retirement funds of individuals.
- Capital sums from approved life assurance policies and provident or pension funds.
- Income from employment services provided abroad to a non-resident employer for a period exceeding 90 days in the tax year.
- Profit from the sale of shares.
- Special pensions (e.g. widow’s pension).
- Salaries of officers and crew of ships owned by a Cyprus shipping company that sail under the Cyprus flag and operate in international waters.
- Income from a qualifying scholarship, exhibition, bursary or similar educational endowment.
Income from ship management services is taxed at a rate of 4.25%. No deductions or allowances are available.
Company Tax
The Income Tax Law that depicts the following:
- A uniform corporation tax rate of 12.5% for all companies registered in Cyprus.
- No geographical limitation on the exercise of a company’s activities.
- No restrictions on the shareholding a company.
The criteria for management and control have not been formally defined, but the following are generally accepted as the key factors determining whether or not the management and control of a company are exercised in Cyprus:
- The majority of the directors should be resident in Cyprus.
- All the strategic decisions affecting the company should be proven to be made in Cyprus by the board of directors.
- The company headquarters should be maintained in Cyprus.
- The company should operate an account with a bank in Cyprus.
A company should have economic substance in terms of staff, premises and equipment and sufficient competence in Cyprus to make necessary business decisions. Finally, it should provide a service that is genuinely required by the group and not “devoid of an economic purpose”. Otherwise, payment for such services could be viewed as an artificial transfer of profits from one company to another.
The Cypriot branch of a foreign company will be taxed at 12.5% on its worldwide income if the locus of management and control of the branch is in Cyprus. If the locus of management and control is overseas, all the branch income is exempt from tax in Cyprus.
From 1 January 2003 trading losses by one group company may be set off against trading profits of another group company to give group relief, provided that the losses and profits have occurred in the same year of assessment.
Royalties or any other payments to a non-resident for intellectual or industrial property rights are liable to a 12.5% withholding tax, subject to relief under any applicable double taxation treaty. No tax need be withheld if the rights are used exclusively outside Cyprus.
Rental payments made to a person not resident in Cyprus in respect of films shown in Cyprus are subject to withholding tax at 5% of the gross amount.
Income from ship management services is taxed at a rate of 4.25%. No deductions or allowances are available.
Special Defense Contribution
Special contribution for defense is payable by Cyprus resident (determined in the same way as for income tax) individuals and companies on interest, dividend and rentals received
Rental payments made to a person not resident in Cyprus in respect of films shown in Cyprus are subject to withholding tax at 5% of the gross amount.
Income from ship management services is taxed at a rate of 4.25%. No deductions or allowances are available.
Special Defense Contribution
Special contribution for defense is payable by Cyprus resident (determined in the same way as for income tax) individuals and companies on interest, dividend and rentals received
Relief or credit may be available under a double taxation treaty for income already taxed abroad.
Dividends
Dividends received by a resident company or a permanent establishment of a non-resident from a non-resident company are exempt from the Special Defense Contribution (SDC) if the Controlled Foreign Company (CFC) satisfy the provisions:
If a resident company does not pay a dividend within two years of any year of assessment, it will be assessed to the SDC at 15% on a deemed distribution of 70% of its accounting profits after deduction of 10% corporation tax and permitted transfers to reserves. The SDC will be refunded when such profits are actually distributed as dividends.
Interest which is active, i.e. received in, or closely related to the normal course of business, is exempt from SDC. Passive interest, i.e. interest not received in or closely related to the normal course of business, is liable to SDC at 10%.
Dividends
Dividends received by a resident company or a permanent establishment of a non-resident from a non-resident company are exempt from the Special Defense Contribution (SDC) if the Controlled Foreign Company (CFC) satisfy the provisions:
- The shareholding in the paying company is at least 1 per cent, in accordance with the EU Parent-Subsidiary Directive.
- Investment income is less than 50 per cent of the paying company’s activities, and
- The foreign tax burden on the income of the paying company is not substantially lower than the Cypriot tax burden.
- Dividends received by one resident company from another resident company are exempt from the SDC.
- Dividends received by a foreign shareholder (individual or company) from a resident company are also exempt, and this gives Cyprus a real advantage over other European holding company regimes which generally impose a withholding tax, even when reduced by a double taxation treaty, of at least 5%.
If a resident company does not pay a dividend within two years of any year of assessment, it will be assessed to the SDC at 15% on a deemed distribution of 70% of its accounting profits after deduction of 10% corporation tax and permitted transfers to reserves. The SDC will be refunded when such profits are actually distributed as dividends.
Interest which is active, i.e. received in, or closely related to the normal course of business, is exempt from SDC. Passive interest, i.e. interest not received in or closely related to the normal course of business, is liable to SDC at 10%.
Capital Gains Tax
Subject to certain exemptions, net gains from the sale of immovable property in Cyprus and of shares of unlisted companies owning immovable property in Cyprus are taxable at 20%. Gains from the disposal of other securities are exempt.
Many of Cyprus’s double taxation treaties, tax capital gains only in the country of residence of the company or individual disposing of the asset. The exemption from capital gains tax in Cyprus could therefore lead to complete elimination of any tax liability, for example in the case of a capital gain made by a Cypriot-resident company from a sale of its foreign subsidiary shares, which will be exempt from tax both in Cyprus and in the country where the subsidiary and the shares are based.
As the gain from a sale of goodwill as such is taxable at 12.5%, it is usually beneficial to transfer goodwill to a newly-formed company and sell the shares of that company. Any capital gain on the sale of the shares (which will include the value of the goodwill) will be exempt from tax.
Advance rulings
The Commissioner of Income Tax provides written replies on interpretation of the Cyprus tax law provisions. This practice is not incorporated in the Cyprus tax legislation and it is not an official ruling regime as used in other EU member states. Even so, the interpretations should be binding on the tax authorities if the full facts are disclosed on the ruling request. It is hoped that the advance ruling practice will be developed in Cyprus as far as possible, so that taxpayers will be able to obtain binding advance decisions on the tax consequences of proposed transactions.
Value Added Tax
The VAT rate is set at 5% on some necessity products and 19% on all other products and services which is the lowest in the EU. Companies that do not have trading activities within the EU need not register for VAT but of course they will be unable to recover input tax.
Stamp duty
Stamp duty is payable on contracts relating to property or business in Cyprus, and on the incorporation of a company in Cyprus.
Capital duty
On incorporation of a Cyprus registered company, capital duty is payable to the Registrar of Companies. Any subsequent increase in share capital is liable to capital duty at 0.6%. No capital duty is payable on share premium and capital duty can be minimised by issuing a reduced nominal value of shares at a premium.
Subject to certain exemptions, net gains from the sale of immovable property in Cyprus and of shares of unlisted companies owning immovable property in Cyprus are taxable at 20%. Gains from the disposal of other securities are exempt.
Many of Cyprus’s double taxation treaties, tax capital gains only in the country of residence of the company or individual disposing of the asset. The exemption from capital gains tax in Cyprus could therefore lead to complete elimination of any tax liability, for example in the case of a capital gain made by a Cypriot-resident company from a sale of its foreign subsidiary shares, which will be exempt from tax both in Cyprus and in the country where the subsidiary and the shares are based.
As the gain from a sale of goodwill as such is taxable at 12.5%, it is usually beneficial to transfer goodwill to a newly-formed company and sell the shares of that company. Any capital gain on the sale of the shares (which will include the value of the goodwill) will be exempt from tax.
Advance rulings
The Commissioner of Income Tax provides written replies on interpretation of the Cyprus tax law provisions. This practice is not incorporated in the Cyprus tax legislation and it is not an official ruling regime as used in other EU member states. Even so, the interpretations should be binding on the tax authorities if the full facts are disclosed on the ruling request. It is hoped that the advance ruling practice will be developed in Cyprus as far as possible, so that taxpayers will be able to obtain binding advance decisions on the tax consequences of proposed transactions.
Value Added Tax
The VAT rate is set at 5% on some necessity products and 19% on all other products and services which is the lowest in the EU. Companies that do not have trading activities within the EU need not register for VAT but of course they will be unable to recover input tax.
Stamp duty
Stamp duty is payable on contracts relating to property or business in Cyprus, and on the incorporation of a company in Cyprus.
Capital duty
On incorporation of a Cyprus registered company, capital duty is payable to the Registrar of Companies. Any subsequent increase in share capital is liable to capital duty at 0.6%. No capital duty is payable on share premium and capital duty can be minimised by issuing a reduced nominal value of shares at a premium.