Key Features of the Cyprus Tax System
-12.5% headline corporate tax rate
-Foreign source income generally tax exempt
-Profits on transactions in shares tax exempt
-Generous tax deductibility rules reduce effective tax rates
-No withholding taxes on outbound dividends, interest & royalties, irrespective of the country of destination i.e. tax free exit EU tax directives apply (Parent / Subsidiary, Interest & Royalties, Reorganisations)
-Unilateral credit relief for foreign taxes
-No CFC legislation
-No thin capitalisation rules
-No detailed transfer pricing rules (arm’s length principle only)
-No capital gains tax (except on real estate situated in Cyprus)
-No taxes on entry, reorganisations and exits
-No wealth taxes and only minimal stamp and local taxes
-No exchange controls
-Most international transactions free of VAT
-Low personal tax regime – Top rate 35%
-OECD approved / EU compliant system
-A tax administration that wants to help foreign investors
-Wide network of favourable tax treaties with almost 50 countries
Basis of taxation
All companies that are tax residents 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.
Corporation tax rates
Corporation tax is imposed on business profits, interest, discounts, rents, royalties, remunerations or other profits from property and net consideration in respect of trade goodwill. Expenses incurred for the production of income are tax deductible. Losses brought forward or surrendered by other group companies (group relief) can be set off against taxable profits.
-Profit from the sale of securities: 100%
-Interest not arising from the ordinary activities or closely related to the ordinary activities of the company: 100%
-Profits of a permanent establishment abroad, under certain conditions: 100%
All expenses incurred wholly and exclusively in earning the income of the company including:
1. Losses carried forward
The tax loss incurred during a tax year and which cannot be set off against other income, is carried forward and set off against future profits with no time restriction. The current year loss of one company can be set off against the profit of another provided the companies are Cyprus tax resident companies of a group. Group is defined as:
-One company holding at least 75% of the shares of the other company.
-At least 75% of the voting shares of the companies are held by another company.
Losses from a permanent establishment abroad can be set off with profits of the company in Cyprus. Subsequent profits of the permanent establishment abroad are taxable up to the amount of losses allowed.
Transfers of assets and liabilities between companies can be effected without tax consequences within the framework of a reorganisation and tax losses can be carried forward by the receiving entity.
Special Type of Companies:
From 1 January 2010 the new Merchant Shipping Law applies. The law provides full exemption to shipowners, charterers and shipmanagers from all profit taxes and imposes tonnage tax on the net tonnage of the vessels.
Rate per tonne
First 1,000 tonnes EUR 0.3650
Next 9,000 tonnes EUR 0.3103
Next 15,000 tonnes EUR 0.2008
Next 15,000 tonnes EUR 0.1278
Each tonne above 40,000 EUR 0.0730
An option exists for ship managers to pay Tonnage Tax at 25% of the rates applicable to shipowners and charterer. If the choice is not made, profits are taxable under 12.5% corporation tax.
Profits of insurance companies are liable to corporation tax similar to all other companies except in the case where the corporation tax payable on taxable profit of life insurance business is less than 1.5% on gross premium. In this case the difference is paid as additional corporation tax.
International Collective Investment Schemes (ICISs)
The sole object of an ICIS is the collective investment of funds of the unit holders. ICISs are liable to corporation tax similar to all other legal entities depending on the legal status of the ICIS.
International trusts are governed by the International Trusts Law of Cyprus. International Trusts are not taxed in Cyprus. In fact, Cyprus International Trusts enjoy important tax advantages, providing significant tax planning possibilities.
Other taxes on corporations
Capital duty:Capital duty is payable on authorised share capital and the issuance of shares at a rate of 0.6%.
Payroll tax:Employers are required to withhold personal tax on salaries of employees under the PAYE system.
Real property tax:Tax is imposed annually on the market value of immovable property. Rates range from 0% to 0.4%.
Capital gains tax:Capital gains tax of 30% is imposed on gains from the disposal of immovable property situated in Cyprus and gains from the disposal of shares in an unlisted company that owns immovable property situated in Cyprus.
Social security:Employers must make social insurance contributions amounting to 8% of gross salary. The maximum amount of annual earnings on which the contributions are payable is 42,030 euro. Additionally employers are required to make a contribution of 2% to the social cohesion fund on all earnings of employees.
Stamp duty:Stamp duty is payable of a document if it relates to property situated in Cyprus or to an act to be performed or done in Cyprus. Stamp duty on commercial contracts are charged at rates that vary according to the contract amount. A ceiling of 17,036 euro per document applies.
Transfer tax:Transfer of immovable property are subject to fees ranging from 3% to 8% calculated on the market value of the property as estimated by the land registry department.
Transfer pricing:The arm’s length principle requires that the transaction between related parties be carried out at market value and on normal commercial grounds.
Controlled foreign companies:No
Other:Under general anti-avoidance provision, any artificial or fictitious transaction may be disregarded and the commissioner of income tax may assess tax on the person concerned.Disclosure requirements:NO
Administration and Compliance
Tax year:The tax year is the calendar year. The accounts of a company may be closed on a date different from 31st of December, in which case taxable profits are apportioned on a time basis relevant to the tax years.Consolidated returns:Taxation on a consolidated basis is not permitted and each company is required to submit a separate return. A setoff of group losses is possible provided there is a 75% parent subsidiary relationship, including subsidiaries under 75% control of a common parent company. Group loss relief is available only between resident companies.Filing requirements:Tax returns must be filed by 31st December following the accounting year end. Companies are required to pay provisional tax in 3 equal instalments on 1st August, 30th September and 31st December. Any underpayment payable is due by 1st August of the following year. If the income declared for the payment of the provisional tax is lower than 75% of the income as finally determined, an additional amount equal to 10% of the difference between the final and provisional tax is payable.
Personal Income Tax
Basis of taxation
All Cyprus tax residents are taxed on all income accrued or derived from all sources in Cyprus and abroad. Individuals who are not tax residents of Cyprus are taxed on income accrued or derived from sources in Cyprus. An individual is tax resident in Cyprus if he spends more than 183 days in any one calendar year in Cyprus.
Personal tax rates
The following income tax rates apply to individuals:
Taxable Income (Euro) Tax Rate (%) Tax (Euro) Tax (Euro)
0-19,500 0 0 0
19,501- 28,000 20 1,700 1,700
28,001-36,300 25 2,075 3,775
36,301-60,000 30 7,110 10,885
60,001 and over 35
Foreign pension is taxed at the rate of 5%. An annual exemption of 3,417 euro is granted.
The following are exempt from income tax:
-Interest income under certain conditions: 100%
-Dividend income: 100%
-Individuals exercising an office or employment in Cyprus, whose residence was outside Cyprus before the commencement of the employment, are granted a tax exemption for 20% of their remuneration, or 8,543.01 euro, whichever is the lower, during a period of three years starting at the beginning of the year following the year of commencement of their employment
-Remuneration from salaried services rendered outside Cyprus for more than 90 days in a tax year to a non-Cyprus resident employer or to a foreign permanent establishment of a Cyprus resident employer: 100%
-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 disposal of securities: 100%
Stamp duty:Stamp duty is payable of a document if it relates to property situated in Cyprus or to an act to be performed or done in Cyprus
Capital acquisitions tax:NO
Real property tax:Tax is imposed annually on the market value of immovable property rates range from 0% to 0.4%
Capital gains tax:Capital gains tax of 30% is imposed on gains from the disposal of immovable property situated in Cyprus and gains from the disposal of shares in an unlisted company that owns immovable property situated in Cyprus
Social security:Employees are required to make social insurance contributions at a rate of 6.3% of their salary up to a maximum amount of 46,032 euro. Self-employed individuals contribute at 11.6%
Value Added Tax
Taxable transactions:VAT is levied on the sale of goods, the provision of services and the import of goods from outside the EU.Rates:As from 13 January 2014, supplies of goods and services that are currently taxable with the standard VAT rate of 18% will be taxable with 19% and the reduced rate of VAT, which applies to hotel and restaurants, will be increased from 8% to 9%.Examples of supplies that will be subject to the reduced rate of 9% as from 13 January 2014 include:
– Restaurant and catering services
– Hotel and tourist accommodation etc
Please note that the supplies of goods and services that fall under the zero VAT rate, are exempt from VAT or subject to the reduced VAT rate of 5%, will continue to have the same treatment for VAT purposes after 13 January 2014.Transitional provisions: Under certain conditions, taxable persons may have the right to choose which VAT rate to impose on the supply of goods affected by the changes in the VAT rate. These are as follows- When goods are supplied before 13 January 2014 and the payment is made and/or the invoice is issued after 13 January 2014, then the taxable person may apply the VAT rate of 18%
– When a deposit is received before 13 January 2014 and the goods are supplied and/or the invoice is issued after January 2014, then the taxable person may apply the VAT rate of 18% only on the amount of the deposit received- In relation to the provision of services and where part of the service is provided before 13 January 2014 and part of the service is provided after 13 January 2014, the taxable person may charge 18% VAT for the part of the work that was performed before the change in the VAT rate and charge the new VAT rate (19%) for the part of the work that will be performed after the change in the VAT rateObligations of the taxable persons that are affected by the above changes: As per the provisions of the legislation, all taxable persons need to undertake a stock count of the products affected by the above VAT rate changes. The stock count needs to be both quantitative and qualitative. The stock count needs to take place at the end of the business day prior to the change in the VAT ratesCredit notes for invoices issued before the VAT rate changes: In the case where credit notes are issued after 13 January 2014 and relate to invoices issued before that date, the VAT rate that should be applied to those credit notes is the rate that was applicable at the time of supply of the goods or the provision of service.Registration:The registration threshold for VAT purposes is 15,600 euro. For intra-community acquisitions of goods the registration threshold is 10,251 euro.Filing and payment:The deadline for the submission of quarterly VAT returns is the 10th of the second month following the relevant period. Payments of VAT must be made by the same date.
Special contribution for defence
Special contribution for defence is imposed on income earned by Cyprus tax residents. Non-tax residents are exempt from special contribution for defence.
Submission of tax returns
The tax year is the calendar year. Tax on employment income is withheld by the employer under the PAYE system and remitted to the tax authorities. Self-employed individuals pay tax through the provisional and self-assessment systems. Tax returns must be filed by 30th of April following the tax year for employees, 30th June for self-employed persons who are not required to file audited accounts and 31st of December for self-employed persons whose returns are accompanied by audited accounts. Sole proprietors with an annual turnover more than 68,344 euro are obliged to prepare audited financial statements.