As of 1st January 2003 there is no longer a distinction between local companies and IBCs following the new tax legislation which aims to conform with European Union law and the EU code of Conduct and abide by Cyprus’ commitment to the OECD to eliminate harmful tax practices. With the new legislation, Cyprus has maintained and enhanced its competitiveness as an international financial center. It remains a perfect location for investments to and from Russia and Central and Eastern Europe and now even to Middle East and Africa.
At the same time, having the lowest tax regime in the EU, it becomes a stepping stone for investments to and from the EU.
Further, the tax regime provides many tax exemptions. The exemptions include, inter alia, profits from the sale of shares and securities, dividend income and royalties. The island’s 45 double tax treaties remain in force and continue to offer abundant opportunity for effective international tax planning whilst also at the same time legitimately reducing overall taxation for businesses and individuals.
1) Taxed and Non-Taxed Companies One of the basic provisions of the Tax Law in Cyprus is the Law concerning Taxable and Non Taxable Companies.
Non-Taxable Companies Any Company which is registered in Cyprus and which is not managed or controlled in Cyprus is subject to taxation only on income arising from the business of the Company within Cyprus. Such companies, however, are exempted from the advantages of the Treaties for the Avoidance of Double Taxation.
Taxable Companies Any Company whose management and control is carried out in Cyprus is taxed in accordance to the relevant tax legislation on a 10% tax rate.
Provided that for Tax Planning purposes the company shall be subject to management and control in Cyprus. Only then can the company enjoy the advantages and incentives in Cyprus as they are referred to below. The term “permanent establishment” 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 immovable property located in Cyprus and profit from sale of goodwill in Cyprus is also taxable irrespective of the existence of permanent establishment. An IBC will now be allowed to have income from sources within Cyprus (subject to foreign investment regulations issued by the Central Bank of Cyprus).
Note: The term management and control is not specified in the Cyprus Tax Law. Nevertheless, our experience indicates that it is generally accepted by the tax authorities that such company is managed and controlled in the place where the Directors of the company are residing and in general where the decisions of the Board are taken.
2) Tax Rate of Companies Companies are taxed on the basis of the corporate rate which is 10% and is the lowest tax rate in the European Union. The tax is imposed on the taxable income of the Company which arises from the income of the company less any deductions which are permitted.
3) Exemptions from Taxation
Shares and Securities The transactions of any person who is subject to taxation in Cyprus, in shares or other securities and the profits from them are completely tax exempted.
Dividends Dividends allotted by a company with a tax residency status in the Republic are exempted from tax, provided that the Cypriot Company holds more that 1% of the share capital of the company allotting the divided. Such exemption is not absolute and it does not apply when the company which pays the dividends earns more than 50% of its income from investments and it has a reduced tax burden.
Income from Interest Only 50% of the company’s income earned from interest are calculated as income for tax purposes. This exemption applies only when interest from income does not arise from the ordinary carrying out of the business of the company. Interest on deposits or debenture stock and interest from loans to third parties fall into the said exemption.
On the other hand, income from interest related to the enterprise (credit to customers, etc) or falling into the ordinary carrying out of the business of the company (e.g. bank facilities, etc) are included in the income and are taxed accordingly.
4) Summary of tax advantages for companies registered in Cyprus The tax advantages enjoyed by the companies registered in Cyprus are the following:
Uniform corporate tax rate of 10% (the lowest in the EU) which, in combination with the tax exemption for dividends and profits for permanent residence overseas, may be reduced to 0%.
Treaties for the avoidance of double taxation with 45 countries.
No withholding of tax on dividend income and rights paid by a Cyprus enterprise to a non tax citizen of Cyprus (company or individual). This, in combination with the tax exemption for dividends and profits earned from permanent establishment abroad as well as the provisions of the Treaties for the Avoidance of Double Taxation and the EU Directive regarding parent-subsidiary companies may lead to a complete avoidance of taxation.
Exemption for tax on profits from stock which, in combination with the Avoidance of Double Taxation, may result in complete tax avoidance.
Exemption for tax on capital gains and income on the disposal of property abroad which, in combination with the Avoidance of Double Taxation Treaties, may result in complete tax avoidance.
Contemporary provisions for re-structuring which allow the readjustment of existing or future structures without any tax costs.
Introduction of provisions regarding the setting off of group relief between companies of the same group and the abolition of deadlines for the utilization of tax losses.
Taxation according to the EU Directive for the tax status enjoyed by holding and subsidiary companies (EU Parent Subsidiary Directive).
0% Value Added Tax (VAT) for the movement of products and services in the European Union.
5) Analysis of the Tax imposed on Companies resident in Cyprus I. WITHHOLDING TAX (special defense contribution)
On dividends payable:
There is a 15% withholding tax on dividends distributed to shareholders who are residents of Cyprus, but no tax on dividends paid to nonresident 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 an 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 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 defense 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.
II. CAPITAL GAINS TAX Capital gains arising from the sale of immovable property outside Cyprus is not within the scope of capital gains tax. Capital gains tax is only applicable for immovable property situated in Cyprus.
III. VALUE TAX ADDED As from 1st January 2003 the standard VAT rate is 15%. As under the new legislation there is no longer a distinction between local and IBC companies, the IBC companies are subject to the same registration procedures as local companies. In most cases this benefits IBCs as their activities fall outside the scope of VAT while at the same time they can register on a voluntary basis and recover any input VAT on Cyprus expenses.
6) Taxation of Employees As from 2003 there is no longer a distinction between local and expatriate employees resident in Cyprus and there is no longer time apportionment of taxable income. All individuals who are resident in Cyprus are taxed at the following rates :
Chargeable Income (EURO)
Tax Rate (%)
Up to 19.500
0
19.501 – 28.000
20
28.001 – 36.300
25
36.301 plus
25
Taxation of expatriates:
If employed outside Cyprus, no taxation.
If employed in Cyprus for 183 days or more, taxed on all income from employment.
If employed in Cyprus for less than 183 days, taxed in Cyprus on the salary attributable to the employment in Cyprus.
The following types of income are exempt from taxation:
Dividends
Interest received
Profits from the sale of shares
Salaried services rendered abroad by a Cyprus resident for a period totaling more than 90 days in a fiscal year to an employer who is not a Cyprus resident or at the permanent establishment abroad of a Cyprus resident.
Withholding tax for resident individuals:
10% on interest received either in Cyprus or abroad
15% on dividends received either from abroad or in Cyprus including IBCs
3% on 75% of rental income from property wherever located.
Allowances deductable from income by individuals:
Social insurance contributions
Life insurance premiums
Contributions to approved provident funds, pension’s schemes and medical schemes.
For non Cyprus residents taking up employment in Cyprus a special exemption from income tax applies for the first 3 years of their employment in Cyprus amounting to 20% of income earned or Euro 8.543,01 per annum whichever is the lower.
