Cyprus Tax Code | PMAudiTax Ltd.

Cyprus Tax Code in a Nutshell

The tax regulations are designed to fulfil your international business needs!

01

Main Provisions of Cyprus Tax Law

The following are the chief rules applicable to Cyprus enterprises:

A Cyprus tax resident company is subject to corporation tax on its worldwide income. Non-resident companies are subject to corporation tax only on profits derived in the Republic.
Resident companies are those companies whose management and control is exercised from Cyprus.

Management and Control

The majority of the members of the board of directors residing in Cyprus - 75% of the Directors.
The majority of the directors' meetings taking place in Cyprus and Registered office residing in Cyprus.
Company’s agreements get signed by the Cypriot director(s).

02

Taxation Basics

Net profits of companies are taxed at 12,5%.

Determination of Taxable income

Resident companies pay taxes on their net taxable profits. These are determined by pooling their worldwide income and deducting allowable expenses, charges and capital allowances. Non-resident companies pay taxes on their Cyprus-sourced income only.

Capital Allowances

Annual wear and tear allowances are allowed on various assets including plant and machinery; fixtures and fittings; commercial vehicles; hotels; commercial buildings; industrial buildings; computer hardware and software; and loose tools. Allowances range from 3% to 33% per annum. No capital allowances are given for saloon cars.

Depreciation

Depreciation included in the financial statements of entities is disallowed for tax purposes, as capital allowances are given instead. For accounting purposes, depreciation rates applied are those which write-off the assets over their useful life.

03

How the Dividends are treated?

Dividends receivable are exempt from tax.

The exemption (i.e. no tax) will not apply only when:

more than 50% of the foreign paying company’s activities result directly or indirectly in investment income, and
the foreign tax is significantly lower than the tax burden in Cyprus, i.e. less than 6,25% .

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

Interest expense is deductible if the borrowing is wholly and exclusively for the purposes of producing income. Interest paid to a connected party is a deductible expense.

04

How the Losses are treated?

Tax losses could have been carried forward until their final write off.

However, according to the Amendment effective from 21 December 2012, as from the tax year 2012 onwards, the chargeable income of each year can be set off against the tax losses of the five previous years only. This means that the chargeable income of year 2012 can only be set off with the tax losses of 2007 to 2011.

Losses from overseas activities can be set off against chargeable income for the year and can be carried forward.

Tax losses arising from a permanent establishment outside the Republic can be offset against taxable profits of the company arising in the Republic in the same year. However, any subsequent taxable profits from such a permanent establishment are taxable, up to the amount of losses utilised.

The loss from a permanent establishment abroad is set off first against profits from other permanent establishments aboard for the same year. The remaining loss is set off with the chargeable profit from the other activities of the same year and can be surrendered to other companies of the Group. Any amount of such losses not set off in a year can be carried forward to the following five years to be set off first against profits from permanent establishments abroad and then against other activities.

If, within any period of three years, there is both a change in the beneficial ownership of a company and a major change in the nature of trade and, at any time before the change of ownership the activities in the trade become small or negligible, then no trading losses incurred prior to the change in ownership are allowed.

05

How the foreign and group tax relief works?

Foreign tax relief

Foreign tax paid on income of a Cyprus resident company is credited against the Cyprus tax, subject to Double Tax treaty conditions. In the absence of a tax treaty, the tax paid in a non-treaty country is normally allowed as a deductible expense. Tax paid is credited only if a similar concession is given to Cyprus companies in that particular country. The foreign tax relief cannot exceed the Cyprus tax on these profits.

Group relief

Current year tax losses may be surrendered by one Cyprus tax resident group company to another. A group company which is tax resident in another EU country may also surrender current year tax losses to a Cyprus tax resident company, provided such company firstly exhausts all possibilities available to utilise its tax losses in its country of residence or in the country of any intermediary EU holding company.

Group relief is available if both companies are members of the same group for the entire tax year.

Two companies are considered to be part of a group for group relief purposes if:

one is a 75% subsidiary of the other, or
both are 75% subsidiaries of a third company

The interposition of a non-Cyprus tax resident company does not affect the eligibility for group relief as long as such company is tax resident in either an EU country or in a country with which Cyprus has either a tax treaty or an exchange of information treaty (bilateral or multilateral).

Where a company has been incorporated by its parent company during the tax year, this company will be deemed to be a member of this group for group relief purposes for that tax year.

Related Parties Transactions

Transactions between related parties do not need to be adjusted for tax purposes as long as they are on 'an arm's length' basis.

06

Withholding Taxes

Resident companies must withhold taxes on certain royalty payments depending on the rates provided in any tax treaty. Cyprus has entered into double tax treaties with over 50 countries. Non-resident companies have no obligation to withhold taxes on any payments they make.

Resident companies withhold special contributions to the defence fund of the Republic of Cyprus on dividends paid to resident individuals at the rate of 20%. Dividends paid to nonresident shareholders are not subject to withholding tax.

Due to New Regime of Non-Domicile which was introduced in July 2015 applies for all persons who became or will become Cyprus Tax Residents. This applies for those who were not tax residents of Cyprus for at least 20 years before the tax year in which they became or will become tax residents of Cyprus. In other words, they were not tax residents of Cyprus for a period of 20 years prior to the introduction of the amendment to the SDC Law. For those persons that applies are entitled for exemption of any Special Defence Contribution (Tax ) on Dividends Received and Interest Received for the next 17 years. In our case scenario the Shareholders of the Company as we spoke today are entitled for Non-Domicile Regime therefore no withholding taxes for any dividends derived from the Company to its shareholders and also no taxes(SDC) as persons/shareholders of such dividends received.

Interest income is subject to a withholding contribution to the defence fund of 30%. If interest is received from abroad, such income is assessed as above at 30%.

Where interest is considered as profit close to the ordinary activities of the company, then such type of income is considered as trading profit and not interest. Hence it is not subject to defence contribution. Examples include financing and insurance companies etc.

Note: Cyprus Tax Resident is considered the person who stays in Cyprus for more than 183 Days per each Tax Year. (Cyprus Tax Year is for the period from 01 January to 31 December).

07

Deemed Distribution

Companies which do not distribute 70% of their profits after tax, as defined by the Special Contribution for the Defence of the Republic Law, during the two years after the end of the year of assessment to which the profits refer, will be deemed to have distributed this amount as dividend.
Special contribution for defence at 20% for the tax years 2012 and 2013 and 17% for 2014 and thereafter (in 2011 the rate was 15% up to 30 August 2011and 17% thereafter) will be payable on such deemed dividend to the extent that the owners (individuals and companies) at the end of the period of two years from the end of the year of assessment to which the profits refer are Cyprus tax residents.
The amount of this deemed dividend distribution is reduced by any actual dividend paid out of the profits of the relevant year at any time. This special contribution for defence is paid by the company for the account of the shareholders.

08

Other Tax Incentives

Any gains realized on disposal of titles are not subject to taxation in Cyprus. This applies to all gains including gains from trading in securities.
Profits from permanent establishments abroad are exempt from tax.
No withholding of tax on dividends, interest or royalties, irrespective of the existence of a treaty with the recipient's country.
Taxes withheld in other countries can be credited against Cyprus tax even when there is no treaty between Cyprus and the paying country.
The non-resident owners of companies, branches and partnerships are not liable to an additional tax on dividends or profits over the amount paid by the respective legal entities.
Branches managed and controlled from Cyprus are taxed as a resident company.
Certain benefits such as use of cars for private purposes, rent, school fees etc are considered as benefits in kind and taxed accordingly.
Gains in respect of the sale of immovable property situated in Cyprus (including shares of a company whose assets include such immovable property) are subject to Capital Gains Tax. Both residents and non residents are subject to capital gains tax if they own immovable property in Cyprus. The
applicable rate on the taxable income is 20%. No tax is levied in respect of immovable property situated abroad. No tax is levied on capital gains in respect of profits on disposal of shares of companies (other the ones which own immovable property).
No estate duty is payable on the inheritance of shares in a Cyprus company.
Low Social Insurance contributions for employers and employees.
First €19.500 of the income of resident individuals is taxed at 0%, and the remainder on a scale from 20% to 35%.