Cyprus taxes

Cyprus - Tax overview

Under the current legislation, Cyprus has the lowest tax regime in the European Union and its role as an international financial centre is greatly enhanced. Due to the extensive double - tax treaty network, Cyprus is an ideal location for investments to and from Central and Eastern Europe and for investments to and from the European Union.

The main provisions of the tax legislation affecting International Business Companies (IBC's) are outlined below:

  1. Cyprus tax residence
    • A company is taxed if it is a resident of Cyprus.
    • A company is resident if its management and control is in Cyprus. The incorporation of a company in Cyprus is not sufficient to establish residence.
    • Although the term "management and control" is not defined in the legislation, it is generally understood to mean the place where the board meetings take place or where the majority of the board members reside.
    • A company which is resident is taxed in Cyprus on its worldwide income.
    • Such income includes profit from business activities such as trading, manufacturing, industrial, mining, agricultural, profession or vocation, interest, rentals from immoveable property, royalties and profit from sale of goodwill. Foreign taxes paid are credited against Cyprus tax paid on the same income.
    • A company which is non-resident, will only be taxed on its profits arising from a permanent establishment in Cyprus. The term "permanent establishment" basically includes an office, a branch, a factory or laboratory, a mine, an oilfield, or a construction site for a project exceeding three months. Rental from immoveable property located in Cyprus and profit from sale of goodwill in Cyprus is also taxable irrespective of the existence of a permanent establishment.
  2. Corporation Tax There is no distinction between local companies and International Business Companies. A uniform corporation tax rate of 10% is applicable for all companies. Exemptions from corporation tax:
    • Dividend income received in Cyprus by a foreign corporation is wholly exempt from tax in Cyprus.
    • Profits earned from a permanent establishment abroad are fully exempt from corporation tax except if: More than 50% of the paying company's activities result in investment income; and The foreign tax is significantly lower than the tax rate payable in Cyprus.
    • Profits from the disposal of securities are not taxable for all Cyprus tax residents (individuals and companies).
    • 50% of interest earned other than interest earned in the ordinary course of business (although other interest is subject to defence tax as explained below).
      • Tax losses: Tax losses can be carried forward indefinitely to be set - off against future profits.
      • Group relief: There are provisions for group relief whereby companies can transfer losses to be set off against taxable profits of other companies in the same group. Two companies will be considered as part of the same group if one is a 75% subsidiary of the other or both are 75% subsidiaries of a third company. Also, group companies must be Cyprus residents.
      • Reorganisations/amalgamations: The tax legislation adopts the relevant EU directive whereby reorganisations, amalgamations, mergers and acquisitions can be effected without any tax implications.
  3. Special Contribution for Defense (withholding tax):
    • On dividends payable: There is a 15% withholding tax on dividends distributed to shareholders who are residents of Cyprus, but there is no tax on dividends paid to non-resident shareholders.
      There is a deemed distribution of dividends for an amount equal to 70% of profits if not actually distributed within two years after the end of the tax year in which the profits arose and payment of 15% withholding tax on deemed distribution. Profits allocated to non-resident shareholders are not subject to this tax.
    • On dividends receivable: Dividends received from a foreign company are not subject to withholding tax of 15% provided that:
      • The company receiving the dividend owns at least 1% of the company paying the dividend;
      • Not more than 50% of the paying company's activities result in investment income; and
      • The foreign tax is not significantly lower than the tax rate payable in Cyprus;
      • There is no tax on dividends paid by a Cyprus resident company to another Cyprus resident company.
    • On interest earned: There is a 10% tax on any interest earned by any individual or company resident in Cyprus.
    • On interest and royalties payable: There is no withholding tax on payment of interest and royalties to non-resident individuals or companies.
    • On rents: There is a 3% withholding tax on rents earned by a Cyprus resident (after deduction of 25%). Note: The special defence contribution on dividends, interest and rents is treated as income tax for the purposes of Double Tax Treaties as well as for the purposes of unilateral tax credit.
  4. Capital Gains Tax: Capital gains arising from the sale of immoveable property outside Cyprus is not within the scope of capital gains tax. Capital gains tax is only applicable for immoveable property situated in Cyprus.
  5. Value Added Tax: The standard VAT rate is 15%. The reduced rate is 5%. Resident International Companies an register for Vat in Cyprus so that they can benefit with zero rated tax on Intra European trading and recover input-VAT on local expense

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