Introduction
The income tax laws in Cyprus follow very closely the principles of the English laws.  Both companies and individuals are taxed under the Income Tax Law.

Tax is assessed in the year in which the income is earned or realized on a current year basis.  Income includes gains or profits from any trade, business, profession or vocation or from any office or employment including dividends, interest, rents, royalties and others.

Offshore enterprises and their expatriate employees enjoy substantial tax advantages which derive from domestic Cypriot legislation and from Cyprus double tax treaties.  In contrast to tax havens, Cyprus is a tax incentive country which offers benefits aimed at attracting non residents who wish to conduct their business from the island.  The most important advantages are those relating to corporate and personal taxation.

Main Taxation Provisions
1. IBC’s will no longer be taxable by virtue of their registration in Cyprus but instead they will be considered tax residents if they will be managed and controlled in Cyprus.

The Cyprus Company shall be regarded as managed and controlled outside Cyprus if:-

• The majority of its Directors are residents of Cyprus
• The board of Directors meet in Cyprus
• All major policy decissions are taken at board meetings in Cyprus
• All major contracts should be signed in Cyprus with the local Directors being involved in such signings
• The seal of the company should be authorised to be used in Cyprus

It must be pointed out that if the company is not or it ceases to be managed and controlled in Cyprus, and thus becomes not taxable in Cyprus, it shall not be able to avail of the benefits of the Double Tax Treaties which Cyprus has with various countries all over the world

2. IBC’s will be taxable as any other local company at the corporate tax rates prevailing (10%) and they will be entitled to the new beneficial tax provisions.

3. For the years 2003 and 2004 there is an additional company tax of 5% on all profits which exceed C£1.000.000.

4. IBC’s will, subject to obtaining the relevant permits, will also be allowed to derive income from within Cyprus.

5. IBC’s will be subject to the provisions of the Social Cohesion Fund Law and will be required to contribute at the rate of two per cent (2%) on the gross emoluments of its tax resident employees working in Cyprus.

6. 50% of income from interest will be exempted from corporate tax but the whole amount of interest received or credited will be subject to the Special Contribution at the rate of 10%.  However, interest from ordinary trading activities such as banking and financing activities will be considered as trading income and taxed only at the normal corporate rates prevailing.  Interest income from deposits with banks operating in the Republic which are currently completely exempt, will be subject to tax as above.

7. Dividends which may be received by the company from a foreign company provided that the Cyprus company holds at least 1% of the share capital of that foreign company and the income of that foreign company is not by more thatn 50% investment income and the foreign company that pays the dividend is subject to tax in the foreign country at a rate which is not substantially lower that 10%, are fully exempt from any king of tax in Cyprus.

8. The company will not be obliged or pay any withholding or other Cyprus tax on any dividends which it may distribute to its shareholders, individuals or corporations, who are not residents of Cyprus.

9. The profits which the company may have from a permanent establishment outside Cyprus shall be fully tax exempt unless the income of such permanent establishment consists by more that 50% of investment income and the foreign permanent establishment is subject to tax at a tax rate is substantially lower that 10%.

10. IBC’s holding royalty rights will continue to be exempt from any withholding tax on royalties payable if the right is granted for use outside Cyprus.

11. Profits from buying and selling shares will be exempted from tax,

12. The company will also be liable to pay special defense contribution at the rate of 3% on 75% of the amount of rents earned by it.

It is important to note that the company will be entitled to tax credit under any relevant Double Tax Treaties as well as to unilateral tax credit in respect of any tax paid by the company in any foreign country with which Cyprus does not have a Double Tax Treaty.  Both the credit under the relevant Double Tax Treaties as well as the unilateral tax credit will equally apply in respect of corporation Tax and or to special defense contribution.   It follows that if the company receives any dividends which under the New Tax Regime might be taxable in Cyprus or it earns any interest from abroad or any rentals from outside Cyprus and on any such type of income it pays any tax outside Cyprus the amount of such tax paid shall be deducted from any Cyprus tax.

Tax procedures
As with the majority of other Cypriot legislation, tax matters are based on English principles but in a more simplified form.

Companies
Companies are required to submit provisional self assessments on their estimated income for the current year by 1 August and pay the tax thereon.  In the absence of any provisional self assessment, the provisional assessment is raised by the Income Tax Office based on the previous year’s tax assessment.  Provisional tax is payable by the three equal installments at 1 August, 30 September and 31 December in the year of assessment.  An offshore company may revise its provisional self assessment at any time during the year.

Offshore companies must submit their annual tax return by 31 December after the end of their financial year and pay their tax under self assessment.

Company accounts must be audited by an independent auditor authorised by the minister of finance and may be submitted either in Greek or English.  The conversion of foreign currency amounts into Cyprus Pounds for taxation purposes may be made either at the average rate for the year or at the rate ruling at the end of the year.  Whatever method is selected must be used consistently in all other years.

The accounts and computations are subject to examination and agreement by the District Income Tax Office.  Although under the Income Tax Law the commissioner has the power to ask for the production of books and documents out of which the accounts were prepared, this is exercised selectively and in very few deserving cases. 

If there is a delay in the payment of tax, interest at the fixed rate of 9% per annum is charged.  Interest at the same rate is payable on refundable taxes.  Any objection to an assessment must be filed by the end of the month following the month in which the assessment is raised.  The taxpayer may then file a recourse to the Supreme court if still aggrieved by the commissioner’s final decision.

Employees
Expatriate employees are required to submit their annual tax returns to their district income tax office by 30 April after the end of the year.

Each employer, including IBC’s must operate a system of Pay As You Earn (PAYE) in respect of the emoluments paid to their employees.  Should the employer fail in this obligation and the income tax authorities are unable to recover the amount of tax due, they have the right to claim this from the employer.  The PAYE tax deducted for a month is paid over to the director of Inland Revenue at the district income tax office by the end of the month following the month in which the tax was deducted.  Interest is charged on delayed payments at the rate of 9% per annum.

A tax clearance certificate is required for the annual renewal of an expatriate’s resident and working permit.

VAT
In accordance with the Value Added Tax law of 2000 International Business Companies are treated in the same way as all the other Cypriot companies in relation to VAT.

IBC’s which belong to the Republic and carry out transactions exclusively outside the Republic they do not have to register for VAT purposes. However if they wish to register, they can do so voluntarily.