Morison Patsalides -> Taxation

Taxation

PERSONAL TAXATION

All Cyprus tax residents are taxed on all income from all sources in Cyprus and abroad.

Individuals who are not tax residents of Cyprus are taxed on income from sources in Cyprus.

An individual is tax resident in Cyprus if he spends in Cyprus more than 183 days in any one calendar year.

Exemptions

The following are exempt from income tax:

Interest -100%
Dividends -100%
Remuneration from any employment exercised in - 50% of the remuneration Cyprus by an individual who was not a resident of Cyprus before the commencement of the employment, exemption applies for a period of 10 years for employments commencing as from 1 January 2012 provided that the annual remuneration exceeds €100.000. For employments commencing as from 1 January 2015 the exemption does not apply in case the said individual was a Cyprus tax resident for 3 (or more) tax years out of the 5 tax years immediately prior to the tax year of commencement of the employment nor in the preceding tax year. In certain cases it is possible to claim the exemption where income falls below €100.000 per annum. - 50% of the remuneration
Remuneration from any employment exercised in Cyprus by an individual who was not a resident of Cyprus before the commencement of the annually employment. For employments commencing during or after 2012 the exemption applies for a period of 5 years starting from the tax year following the year of commencement of the employment with the last eligible tax year being 2020.This exemption may not be claimed in addition to the immediately above mentioned 50% exemption for employment income. -20% of income with a maximum amount of €8.550 annually
Profits of a permanent establishment abroad under certain conditions -100%
Lump sum received by way of retiring gratuity, commutation of pension or compensation for death or injuries -100%
Capital sums accruing to individuals from any payments to approved funds (e.g. provident funds) -100%
Profits from the sale of securities -100%


The term “Securities” is defined as shares, bonds, debentures, founders’ shares and other securities of companies or other legal persons, incorporated in Cyprus or abroad and options thereon. A circular has been issued by the Tax Authorities in 2008 revised in 2009 further clarifying what is included in the term Securities. According to the circular the term includes, among others, options on Securities, short positions on Securities, futures/forwards on Securities, swaps on Securities, depositary receipts on Securities (ADRs, GDRs), rights of claim on bonds and debentures (rights on interest of these instruments are not included), index participations only if they result on Securities, repurchase agreements or Repos on Securities, units in open-end or close-end collective investment schemes). The circular also clarifies specific types of participation in foreign entities which are considered as Securities.

CORPORATION TAX

Basis of taxation

All companies tax resident of Cyprus are taxed on their income accrued or derived from all sources in Cyprus and abroad. A non-Cyprus tax resident company is taxed on income accrued or derived from a business activity which is carried out through a permanent establishment in Cyprus and on certain income arising from sources in Cyprus.

A company is resident of Cyprus if it is managed and controlled in Cyprus.

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


  1. The majority of its Directors are residents of Cyprus
  2. The board of Directors meet in Cyprus
  3. All major policy decisions are taken at board meetings in Cyprus
  4. All major contracts should be signed in Cyprus with the local Directors being involved in such signings
  5. The seal of the company should be authorised to be used in Cyprus

Corporation tax rate – 12,50%

Exemptions

Profit from the sale of securities -100%
Dividends (excluding as from 1 January 2016 dividends which are tax deductible for the paying company) -100%
Interest not arising from the ordinary activities or closely related to the ordinary activities of the company -100% (Such interest income is subject to Special Defence Contribution)
All the interest income of Collective Investment Schemes is considered to be arising from the ordinary activities or closely related to the ordinary activities of the Scheme Taxable under corporation tax
Profits of a permanent establishment abroad, under certain conditions - 100% -100%
Gains relating to foreign exchange differences (forex) with the exception of forex arising from trading in foreign currencies and related derivatives. -100%


Tax deductions

Any expenditure which is not supported by invoices, receipts or other supporting documents as required by relevant Regulations will not be deductible under income tax.

All expenses incurred wholly and exclusively in earning the income of the Company and supported by documentary evidence, including:

Donations to approved charities - (with receipts) -100%
Employer’s contributions to social insurance and approved funds on employees’ salaries -100%
Entertainment expenses for business purposes Lower of €17.086 or 1% of the gross income of the business

Expenditure incurred for the acquisition of shares in an innovative business.

The whole amount of interest expense incurred for the direct or indirect acquisition of 100% of the share capital of a subsidiary company will be treated as deductible for income tax purposes provided that the 100% subsidiary company does not own (directly or indirectly) any assets that are not used in the business. If the subsidiary owns (directly or indirectly) assets not used in the business the interest expense deduction is restricted to the amount which relates to assets used in the business. This applies for acquisitions of subsidiaries from 1 January 2012.

Equity introduced to a company as from 1 January 2015 (new equity) in the form of paid-up share capital or share premium is eligible for an annual notional interest deduction (NID). The annual NID deduction is calculated as an interest rate on the new equity. The relevant interest rate is the yield on 10 year government bonds (as at December 31 of the prior tax year) of the country where the funds are employed in the business of the company plus a 3% premium (subject to a minimum amount which is the yield on the 10 year Cyprus government bond as at the same date plus a 3% premium). Certain anti-avoidance provisions apply. The NID deduction cannot exceed 80% of the taxable profit derived from assets financed by new equity (as calculated prior to the NID deduction)

Profits from the exploitation and / or disposal of intellectual property rights – 80%

Expenditure incurred for the development or acquisition of intangible assets as defined in the Patent Rights Law, the Intellectual Property Law and the Trademarks Law is tax deductible. The annual capital allowance deduction on such intangible assets is equal to 20% of the acquisition cost. The capital allowance is tax deductible over 5 years including the year of acquisition. An 80% deemed deduction applies to the net profit from the exploitation or disposal of such intangible assets (including the compensation from irregular use of these intangible assets). The net profit is calculated after deducting from the income or profit that is generated from the exploitation or disposal of such intangible assets, all direct expenses associated with the production of this income or profit. Where a net loss is created, only 20% of such loss will be eligible to be surrendered / carried forward.

The following are excluded:

Expenses of a private motor vehicle -100%
Interest applicable to the cost of acquiring a private motor vehicle, irrespective of its use and to the cost of acquiring any other asset not used in the business-100% for 7 years
Professional tax -100%


Losses carried forward

The tax loss incurred during a tax year and which cannot be set off against other income may be carried forward and set off against other taxable income of the five succeeding years only.

The current year loss of one company can be set off against the profit of another, subject to conditions, provided the companies are Cyprus tax resident companies of a group. As from 1 January 2015 a Cyprus tax resident company may also claim the tax losses of a group company which is tax resident in another EU country, provided such EU company firstly exhausts all possibilities available to utilise its losses in its country of residence or in the country of any intermediary EU holding company.

Group is defined as: One Cyprus tax resident company holding directly or indirectly at least 75% of the voting shares of another Cyprus tax resident company. Both of the companies are at least 75% (voting shares) held, directly or indirectly, by a third company.

As from 1 January 2015 interposition of a non- Cyprus tax resident company (ies) will not affect the eligibility for group relief as long as such company (ies) is tax resident of either an EU country or in a country with which Cyprus has a double tax treaty or an exchange of information agreement (bilateral or multilateral).

A partnership or a sole trader transferring a business into a company can carry forward tax losses into the company for future utilisation.

Losses from a permanent establishment abroad can be set off with profits of the company in Cyprus. Subsequent profits of an exempt permanent establishment abroad are taxable up to the amount of losses allowed.

SPECIAL CONTRIBUTION FOR DEFENCE

Tax rates

Individuals (i)Companies (i)
Dividend income from Cyprus resident companies 17% 0% (ii)
Dividend income from non -Cyprus resident companies17% 0% (iii)
Interest income arising from the ordinary activities or closely related to the ordinary activities of the business 0% 0%
Other interest income 30% (iii)30% (iv)
Rental income (reduced by 25%) 3% 3%


Notes

(i). Legal entities are subject to Special Contribution for Defence if they are tax resident in Cyprus. Prior to 16 July 2015 individuals were subject to Special Contribution for Defence if they were tax resident in Cyprus. As from 16 July 2015 individuals are subject to Special contribution for defence if they are both Cyprus tax resident and Cyprus domiciled. An individual is domiciled in Cyprus for the purposes of Special Contribution for Defence if he has a domicile of origin in Cyprus per the Wills and Succession Law (with certain exceptions) or if he has been a tax resident in Cyprus for at least 17 out of the 20 tax years immediately prior to the tax year of assessment. Anti-avoidance provisions apply.

(ii). Dividends declared by a Cyprus tax resident company to another Cyprus tax resident company after the lapse of four years from the end of the year in which the profits were generated are subject to defence contribution. Dividends which emanate directly or indirectly out of such dividends on which special contribution for defence was previously suffered are exempt.

(iii). Dividend income from abroad is exempt from defence fund contribution.


    This exemption does not apply if:
  1. a. more than 50% of the paying company’s activities result directly or indirectly in investment income, and
  2. b. the foreign company that pays the dividend is subject to tax in the foreign country at a rate which is lower than 6,25%.

When the exemption does not apply, the dividend income is subject to special contribution for defence at the rate of 17%

As from 1 January 2016 this section only applies to dividends which are not deductible for tax purposes by the paying company. Dividends which are deductible for tax purposes by the paying company are subject to Corporation Tax.

(iv). Interest income from Cyprus government savings bonds and development bonds and all interest earned by a provident fund is subject to special contribution for defence at the rate 3%. In the case where the total income of an individual (including interest) does not exceed €12.000 in a tax year, then the rate is reduced to 3%.

Other information

When the tenant is a company, partnership, the state or local government Special contribution for defence on rental income is withheld at source. In all other cases the special contribution for the defence on rental income is payable by the landlord in 6 monthly intervals on 30 June and 31 December each year.

For interest and dividends received gross any defence tax due is payable at the end of the month following the month in which they were received.

However, special contribution for defence on dividends from abroad and interest income from abroad is payable in 6 month intervals on 30 June and 31 December each year.

Foreign taxes paid can also be credited against the defence tax liability.

DEEMED DIVIDEND DISTRIBUTION

A Cyprus tax resident company is deemed to distribute as a dividend 70% of its accounting profits (as adjusted for Special Contribution for Defence purposes and net of Corporation Tax, Special Contribution for Defence on company incomes, Capital Gains Tax and unrelieved foreign taxes) two years from the end of the tax year in which the profits were generated.

If a Cyprus resident company does not distribute a dividend within two years from the end of the tax year then:


  1. 70% of accounting profits (net of corporation tax, special defence contribution, capital gains tax and foreign taxes and after some adjustments) are deemed to have been distributed.
  2. 17% Special Contribution for Defence is imposed to the extent that the ultimate direct / indirect shareholders of the company are individuals who are both Cyprus tax resident and Cyprus domiciled. Prior to 16 July 2015 the imposition applied to the extent the ultimate direct / indirect shareholders of the company were Cyprus tax resident individuals. (Instead of the rate of 17% a rate of 3% is applicable on deemed dividend distribution of Collective Investment Schemes).
  3. Deemed distribution is reduced with payments of actual dividends which have already been paid during the two years from the profits of the relevant year.

When an actual dividend is paid after the deemed dividend distribution, then special contribution for defence is imposed only on the dividend paid over and above the dividend that was previously deemed to have been distributed.

In case of two tier structures of Cyprus companies (parent with subsidiary) owned by non resident shareholders, defence contribution paid by the subsidiary on deemed distribution is refundable to the non resident shareholder upon receipt of an actual dividend.

DISPOSAL OF ASSETS TO SHAREHOLDER AT LESS THAN MARKET VALUE

When a company sells assets to an individual shareholder or a relative up to second degree or spouse thereof for a consideration less than its market value, the difference between the consideration and the market value will be deemed to have been distributed as a dividend to the shareholder. This provision does not apply for assets originally gifted to the company by the shareholder.

COMPANY DISSOLUTION

The cumulative profits of the last five years prior to the company’s dissolution, which have not been distributed or deemed to have been distributed, will be considered as distributed on dissolution and will be subject to special contribution for defence at the rate of up to 17% (3% for Collective Investment Schemes).

This provision does not apply in the case of dissolution under a reorganisation.

REDUCTION OF CAPITAL

In the case of a reduction of capital of a company, any amounts paid or due to the shareholders over and above the paid up share capital will be considered as dividends distributed subject to special defence contribution at the rate of 17% after deducting any amounts which have been deemed as distributable profits.

Prior to 16 July 2015 the above provisions applied only to the extent that the ultimate shareholders (direct or indirect) are Cyprus tax resident individuals. As from 16 July 2015 the above provisions apply only to the extent that the ultimate shareholders (direct or indirect) are individuals who are both Cyprus tax resident and Cyprus domiciled.

CAPITAL GAINS TAX

Capital Gains Tax is imposed at the rate of 20% on gains from the disposal of immovable property situated in Cyprus including gains from the disposal of shares in companies which own such immovable property, excluding shares listed in any recognised stock exchange.

Further, as from 17 December 2015 shares of companies which indirectly own immovable property located in Cyprus and at least 50% of the market value of the said shares derive from such immovable property are subject to Capital Gains Tax.

DOUBLE TAXATION TREATIES

The Cyprus double tax treaties have been drafted very closely to the Organisation in Economic Cooperation and Development (OECD) Model Treaty. The OECD model has been changed where necessary in order to conform with the tax systems of the countries concerned.

The Double Tax Agreements concluded and their respective date of enforcement between Cyprus and other countries can be found on the official website of the Ministry of Finance

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.

The current standard VAT rate is 19%.

IBC’s which belong to the Republic and trade in goods or provide services within EU member states are liable for VAT Registration in Cyprus.

IBC’s which belong to the Republic and trade in goods or provide services outside EU member states or third countries may be liable to register for VAT purposes.

Businesses are required to complete and submit a declaration for Intra Community Supplies (within EU) of services which are taxed under the reverse charge provisions of another member state. This form is called VIES. Services which are supplied to non member states are not included.

The VIES form is also completed from Companies which are performing triangular transactions.