Corporate Tax Rates
Trading profits of a Cyprus tax resident company are taxed at the rate of twelve point five percent (12.5%), one of the lowest corporate income tax rates in Europe. Business profits of non-resident companies are tax free.
Cyprus Tax Resident
A company is considered to be tax resident in Cyprus, if its management and control is exercised in Cyprus.
According to Cypriot law, there is no legal definition of what constitutes management and control. In practice it is taken to mean, in simple terms, that management and control is where the majority of the directors reside, where corporate board meetings are held and where the general policy of the company is formulated.
The co-existence of all three criteria is essential. It is therefore necessary to ensure that a company satisfies the residence test to be able to be taxed under Republic of Cyprus tax laws, and at the same time enjoy the benefits. If a company does not satisfy the management and control test, there is no residence, therefore no taxation in respect of such company can be imposed under local law.
According to Cypriot law, there is no legal definition of what constitutes management and control. In practice it is taken to mean, in simple terms, that management and control is where the majority of the directors reside, where corporate board meetings are held and where the general policy of the company is formulated.
The co-existence of all three criteria is essential. It is therefore necessary to ensure that a company satisfies the residence test to be able to be taxed under Republic of Cyprus tax laws, and at the same time enjoy the benefits. If a company does not satisfy the management and control test, there is no residence, therefore no taxation in respect of such company can be imposed under local law.
Interest Income
There are two types of taxes that may apply to interest income earned by a Cypriot company: income tax at 12.5% levied on interest derived, less any allowable expenses, and Special Defense Contribution (SDC) at 30% applied to gross interest income. Interest earned by a Cypriot tax resident company derived in the ordinary course of business or closely connected thereto is only subject to income tax. Interest Income by all other companies is subject to SCD.
Dividends (Inter-company)
Dividends paid from one Cyprus tax resident company to another are exempt from any tax in Cyprus.
Dividends (Received from Abroad)
Dividends received from abroad are tax exempt unless both of the following conditions are satisfied in which case they are taxed to Special Contribution for Defence (SCD) at 17% (20% in 2013):
A tax credit will be afforded according to the Double Taxation Agreements concluded by Cyprus. In the absence of a Double Taxation Agreement, Cyprus unilaterally affords a credit for the foreign tax paid on such income. For dividends received from EU Member States the underlying tax credit is also available.
- The company paying the dividend must not engage directly or indirectly more than 50% in activities which lead to passive income (non-trading income), and
- The foreign tax burden on the income of the company paying the dividend is not substantially lower than the tax burden in Cyprus (an effective tax rate higher than 6.25% in the country paying the dividend satisfies this condition).
A tax credit will be afforded according to the Double Taxation Agreements concluded by Cyprus. In the absence of a Double Taxation Agreement, Cyprus unilaterally affords a credit for the foreign tax paid on such income. For dividends received from EU Member States the underlying tax credit is also available.
Royalties
There is an 80% exemption on the net income generated from the utilization of patent, trademark or any other intellectual property (IP) rights. The exemption results in an effective tax rate of 2.5% from the utilization of Cyprus registered IP.
Gross amounts of royalties from sources within Cyprus by a company which is not a tax resident of Cyprus are liable to 10% withholding tax at source. If the intangible property right, however, is granted to a Cyprus company for use outside Cyprus, then there is no withholding tax and the corporate rate is applied only on the profit margin left in the Cyprus company.
Gross amounts of royalties from sources within Cyprus by a company which is not a tax resident of Cyprus are liable to 10% withholding tax at source. If the intangible property right, however, is granted to a Cyprus company for use outside Cyprus, then there is no withholding tax and the corporate rate is applied only on the profit margin left in the Cyprus company.
Trading in Titles
Gains from trading and disposal of securities are tax free. The term ‘Titles’ includes:
- ordinary and preference shares;
- founder’s shares;
- options on titles;
- debentures;
- bonds;
- short positions on titles;
- futures / forwards on titles;
- swaps on titles;
- depositary receipts on titles;
- rights of claims on bonds and debentures;
- index participations (if they result in titles);
- repurchase agreements or Repos on titles;
- participations in companies; and
- units in open-end or closed-end collective investment schemes such as Mutual Funds, International Collective Investment Schemes (ICIS) and Undertakings for Collective Investments in Transferable Securities (UCITS).
Foreign Permanent Establishments (PE)
The profit of a foreign PE of a Cyprus Holding company is exempt from corporate tax in Cyprus, if one of the following two conditions is satisfied:
- The PE must not engage more than 50%, directly or indirectly, in activities which lead to passive income; or
- The foreign tax burden imposed on the PE must not be substantially lower than that in Cyprus.
Group Relief
Group is defined as:
Group relief is applicable only on yearly results if claimants are Cyprus tax resident companies and are members of the same group for the whole tax year. Current year losses of a company can be set off against the current year profit of another company provided that the companies are both Cyprus tax residents and members of a group for the whole of a tax year.
- One company holding at least 75% of the shares of the other company
- At least 75% of the voting shares of the companies are held by another company
Group relief is applicable only on yearly results if claimants are Cyprus tax resident companies and are members of the same group for the whole tax year. Current year losses of a company can be set off against the current year profit of another company provided that the companies are both Cyprus tax residents and members of a group for the whole of a tax year.
Losses
Losses incurred during a year and which cannot be set off against other income is carried forward and se off against future profits for a period of 5 years.
Withholding Taxes
There are no withholding taxes on payments to non tax resident persons (companies or individuals) in respect of dividends and interest.
Capital Gains Tax (CGT)
Capital gains are not included in the ordinary trading profits of a business, but instead are taxed separately under the CGT Law. Capital gains from the sale of immovable property situated in Cyprus as well as from the sale of shares in companies (other than quoted shares) in which the underlying asset is immovable property situated in Cyprus, are taxed at a flat rate of 20% after allowing for indexation.
Capital Gains that arise from the disposal of immovable property held outside Cyprus or shares in companies which may have as an underlying asset immovable property held outside Cyprus, are completely exempt from capital gains tax.
Capital Gains that arise from the disposal of immovable property held outside Cyprus or shares in companies which may have as an underlying asset immovable property held outside Cyprus, are completely exempt from capital gains tax.
Immovable Property Tax
Immovable Property Tax is imposed on the market value as at 1 January 1980 and applies to the immovable property situated in Cyprus and owned by the taxpayer on 1 January of each year. Physical and legal persons are both liable to Immovable Property Tax. Immovable property owners, with total immovable property value not exceeding €12,500 (01/01/1980 prices), are exempt from immovable property tax.
Inheritance or Estate Taxes
There are no inheritance or estate taxes on shares held in a Cyprus company.
Wealth Taxes
Cyprus imposes no tax on wealth.
Capital Duty
Capital duty in Cyprus is estimated at a flat rate of €105 payable upon incorporation plus the amount of 0.6% on the initial authorized capital. Shares issued out of the initial authorized capital shall not carry additional capital duty. If a company needs to increase its authorized share capital, the 0.6% will be imposed on the amount of the increase. Capital duty can be minimized by issuing shares at a premium since share premium is not subject to capital duty tax.
Stamp Duty
Stamp duty is enforced on written documents which deal with Cyprus situated property or matters that will be performed in Cyprus, irrespective of where the agreement is signed. Stamp duty on agreements ranges between 0.15% - 0.20% depending on the amount of the contract, with a maximum duty of €20,000. The duty is payable within 30 days from the signing of the agreement.
No Thin Capitalization Rules
There are no thin capitalization rules in the Cyprus tax legislation. However, interest suffered on loans used for the acquisition of assets not used in the business is not tax deductible.
No Transfer Pricing Regulations
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.
No Control Foreign Companies (CFC) Rules
There are no Controlled Foreign Companies rules in Cyprus tax legislation and Cyprus companies are not subject to CFC Rules.
Exit Routes
The Cyprus Company offers an ideal exit route through a tax free sale of participations and own shares or the liquidation of the company and distribution of the proceeds completely tax free to the non-resident shareholders.
Cyprus VAT
In accordance with the Cyprus legislation every corporation must be registered in the Value Added Tax (VAT) Register provided that they have an annual turnover exceeding €15,600. Voluntary registration is also possible.
Where the exclusive purpose of a holding company is the acquisition and holding of interest in shares in other companies, with the intention of deriving dividend income, such a company is not considered to be performing an economic activity for VAT purposes and consequently it does not have the status of a taxable person.
Companies which are not performing economic activities have neither the liability nor the right to register for VAT purposes and consequently they cannot claim input VAT. However, holding companies may be liable to register for VAT where, in addition to the holding of investments, they also have taxable or exempt activities such as:
Where a holding company is registered for VAT purposes, it may claim input VAT on goods and services acquired in Cyprus and other EU Member States. The right to claim input VAT depends on which type of the holding company’s activities the acquired goods or services, directly or indirectly relate.
Where the exclusive purpose of a holding company is the acquisition and holding of interest in shares in other companies, with the intention of deriving dividend income, such a company is not considered to be performing an economic activity for VAT purposes and consequently it does not have the status of a taxable person.
Companies which are not performing economic activities have neither the liability nor the right to register for VAT purposes and consequently they cannot claim input VAT. However, holding companies may be liable to register for VAT where, in addition to the holding of investments, they also have taxable or exempt activities such as:
- Supply management services at a consideration to subsidiaries;
- Supply finance to subsidiaries;
- Trade in shares i.e. purchase and sell shares on a frequent basis with the intention to profit from the fluctuations of the share price.
Where a holding company is registered for VAT purposes, it may claim input VAT on goods and services acquired in Cyprus and other EU Member States. The right to claim input VAT depends on which type of the holding company’s activities the acquired goods or services, directly or indirectly relate.
Reorganization Provisions
Cyprus legislation provides for a fully exempted reorganization of Companies procedures. Such reorganization may include any division, merger, partial division, transfer of assets, exchange of shares and redomiciliations. The same reorganization provisions apply in Cyprus and for all EU Companies or Cyprus Companies in other EU Jurisdictions under the European Union Merger Directive.
Advance Rulings
Advance rulings can be obtained from the Income Tax office upon request.
Redomiciliation of Companies
Redomiciliation of any share capital in and out of Cyprus is permissible; however, the other jurisdiction’s legislation must also recognize such a possibility.
International Treaties for the Avoidance of Double Taxation
Cyprus has currently concluded DTAs with 50 countries including the majority of the European countries, the United States of America, Canada, India, China, Russia and the C.I.S countries.
