Cyprus taxation in brief
Cyprus has developed into a popular platform from where investors from all over the world and multinational companies hold, manage and direct their investments through Cyprus.
The main reasons of the attraction of such investments in Cyprus are mainly the following:
– The favourable Cyprus tax regime, offering the lowest overall taxation in the European Union;
– The broad tax exemption system for dividends from overseas subsidiaries;
– The general tax exemption for profits from the sale of securities;
– The absence of withholding tax over dividends paid by Cyprus companies to foreign shareholders physical persons and/or legal persons;
– The wide double tax treaty network Cyprus has with around 50 countries and
– The possibility for Cyprus companies to make use of the benefits of primarily but not limited to, the EU Parent-Subsidiary Directive and the EU Interest and Royalty Directive
– There are no “thin capitalization rules”, limiting deductibility of interest
– There are no special rules for Controlled Foreign Companies (CFCs)
CORPORATION TAX
A company is resident in Cyprus if the management and control of the company is exercised in Cyprus. The following factors will be taken into consideration in deciding where management and control is exercised:
– The place where Board meetings are held
– The place where strategic company decisions are made
– The place where the majority of directors resides
– The place where an office is maintaned from where the company operates
– The place where the bank accounts are operated
Cyprus resident companies are taxed at 12,5% Corporation Tax as from 2013 onwards (10% up to the year 2012) on taxable profits derived from a business activity, interest arising on the ordinary activities or closely related to the business activities of the company, rentals from immovable property, royalties and profits from sale of goodwill. Non Cyprus resident companies are taxed on profits from a business activity which is carried out through a permanent establishment in Cyprus, rentals from immovable property situtated in Cyprus and profits from sale of goodwill of a permanent establishment in Cyprus
PERSONAL INCOME TAX
All Cyprus tax resident individuals are taxed on all income accrued or derived from all sources in Cyprus and abroad. Individuals who are not Cyprus tax residents, are taxed on their income accrued or derived from sources in Cyprus only
In the case of an individual, resident of Cyprus means an individual who is present in Cyprus for a period or periods exceeding in aggregate 183 days in a tax year of assessment. For the purpose of calculating the days in and out of Cyprus, the following are taken into consideration:
– The day of departure from Cyprus counts as a day of residence outside Cyprus
– The day of arrival in Cyprus counts as a day of residence in Cyprus
– Arrival and departure from Cyprus in the same day counts as a day of residence in Cyprus
– Departure and arrival in Cyprus in the same day counts as a day of residence outside Cyprus
The applicable Personal Income Tax rates are as follows:
• Up to €19.500 taxable income, tax rate = nil
• From €19.501 up to €28.000 taxable income, tax rate = 20%
• From €28.001 up to €36.300 taxable income, tax rate = 25%
• From €36.301 up to €60.000 taxable income, tax rate = 30%
Over and above €60.001 taxable income, tax rate = 35%
Income of a Cyprus tax residence individual from pensions for services rendered outside Cyprus, is taxed at 5% special rate, with an annual tax exempt income of €3.420. Each taxpayer however, has the right every year to chose whether or not to be taxed under the special tax rate or under the normal rates prevailing as above, in cases where the individual has other taxable income as well, in which case it can benefit from the €19.500 annual tax exempt income
OTHER SPECIAL RATES OF TAXATION
Any gross amount of royalty, premium, compensation or other income earned from sources within Cyprus by a person non resident in Cyprus, is subject to 10% withholding tax (5% for TV and film rights). Royalty payments to an EU associated company can be exempted from withholding tax in Cyprus based on the EU Interest and Royalty Directive (2003/49/EC) provided all conditions of the Directive are fulfilled. Any royalties granted for use exclusively outside Cyprus are free from any withholding tax in Cyprus
The gross income derived by an individual non tax resident in Cyprus, from the exercise in Cyprus of any profession or vocation or of public entertainers including football clubs and other athletic missions, is subject to 10% withholding tax
Life Insurance companies in cases where there is no Corporation Tax arising, or the Corporation Tax payable is less than 1,5% of the gross insurance premiums, then the company pays the difference in the form of additional tax. In any other case, the Corporation Tax is 10% (in the case of an individual, no personal allowances, credits or allowances are allowed)
CORPORATION AND INCOME TAX EXEMPTIONS AND DEDUCTIONS
The income of a ship owner of a Cyprus vessel from the operation of such vessel in any shipping activity is exempt from Corporation Tax. The term shipowner of a Cyprus vessel includes bareboat chartering, while the term operation of such vessel includes chartering of any form
Profits derived from the sale of securities are exempt from Corporation Tax in Cyprus. The term “Securities” include shares, debentures, bonds, founders’ shares and other securities of companies or other legal persons, incorporated under a law in Cyprus or abroad, including options thereon.
Profits from a permanent establishment outside Cyprus are exempt from Corporation Tax provided that at least one of the following conditions is met:
• The permanent establishment does not engage directly or indirectly more than 50% in activities, which lead to investment income; or
• The foreign tax burden on the income of the permanent establishment is not less than 6,25%. A building site, construction or installation project or supervisory activities constitute a permanent establishment if they last more than 3 months
SPECIAL CONTRIBUTION FOR DEFENCE
Dividends received by a company resident of Cyprus are exempt from Corporation tax but levied under Special Contribution for Defencce at 17% as from 1 January 2014. For the years 2012 and 2013 the rate was 20%. Until 30 August 2011 the rate was 15% and increased to 17% for the period up to 31 December 2011.
TAX LOSSES
Tax losses can be carried forward 5 years after the end of the tax year of which the tax loss arose.
Group relief is also available and can be used between companies of the same group. This relief can be utilised provided that all companies are part of the same group for group relief purposes (see below) and are part of the same group for the whole tax year under consideration.
Two companies are considered to be part of the same group if:
(a) One company is 75% subsidiary of the other, or
(b) Each company separately are 75% subsidiary of a third company
In case where an owner of a business, including a partnership, converts his business into a company, any accumulated tax losses of the owner may be carried forward to the company to be utilised against future taable profits of the company
Tax losses incurred by a permanent establishment outside Cyprus, can be set off against taxable profits derived in Cyprus. But, when in a tax year there is taxable profit from such permanent establishment abroad, an amount equal to the total tax losses from permanent establishment abroad offset in previous tax years, will be included in the taxable profits of the current tax year up to the amount of the profit of the permanent establishment abroad (recapturing rule)
CAPITAL GAINS TAX
Capital Gains Tax is levied at the rate of 20% on the gains arising from the disposal of immovable property situated in Cyprus or on the disposal of shares of companies not listed in any recognised Stock Exchange, which own immovable property in Cyprus. In the case of disposal of company shares, the gain is calculated exclusively on the basis of the gain from immovable property. The value of the immovable property for calculating the gain, is the market value of the property at the time the shares are disposed
The taxable gain is the difference between the sale proceeds and the original cost of the property plus any capital improvements both as adjusted for inflation up to the date of disposal on the basis of the Consumer Price Index in Cyprus. In case of property acquired before 1st January 1980, the original cost is deemed to be the value of the property as at 1st January 1980 on the basis of the general valuation conducted by the Cyprus Land Registry Department under the Immovable Property Law. Any other tax allowable expenses can be deducted as well. Immovable property taxes, immovable property fees and local sewage fees are not tax deductible
Life time exemptions are available to individuals only as follows:
– On gains arising from the disposal of own residence (under certain conditions) – €85.430
– On gains arising from the disposal of agricultural land by a farmer – €25.629
– On gains arising from the disposal of any property – €17.086
The above exemptions are given only once and the maximum deduction that can be claimed by an individual under any combination of the above, is €85.430