Taxation in Cyprus
BRIEF REVIEW OF TAXATION IN CYPRUS 2016
One of the main reasons Cyprus has long standing position as a leading International business centre is its legislation. In particular Cyprus’ tax legislation and double tax treaties are at the forefront enabling investors with clear laws and guidelines and competitive tax rates to make their decisions on their investments.
Cyprus tax system is characterized by stability and any amendments adopted are for the benefit of the investors. Recently Cyprus has included new provisions in its tax laws further enhancing the opportunities for foreign entrepreneurs to make Cyprus as their permanent business hub and transferring their base here. Namely the term of domiciliation was introduced whereby a foreign national moving to Cyprus permanently will be exempt from Special defence Contribution on dividends and interest received. This is in addition with the already existing tax exemption of personal Income tax.
CORPORATION TAX AND SPECIAL DEFENCE CONTRIBUTION
A company is taxed in Cyprus if its management and control is in Cyprus. The major factor in deciding that is in effect where the board of its directors are taking a decision which is their usual place of residence.
- In general trading profits are taxed at 12.5% Corporation tax. Trading profits include profit from sale of goods, services, consulting.
- Special Defence Contribution (SDC) on company profit is payable only when the owner of the company is Cyprus tax resident and domiciled. Companies with owners that are not Cyprus tax resident and domiciled are not subject to SDC. The applicable rate is currently 17%. A deemed dividend distribution applies on 70% of the accounting profits its on the proportion of the shareholders that are Cyprus tax resident and domiciled only and if there was no distribution in the last 2 years.
- Profit from a permanent establishment abroad is not taxable in Cyprus.
- Tax losses are allowed to be carried forward for up to 5 years. Group loss relief also applies but special provisions apply.
- Foreign tax levied on income of the company can be deducted on tax arising on the same income in Cyprus.
- Interest received as part of the normal trading (banking, financing) is taxed as part of the trading profit after deducting interest payable and other expenses. If the interest is not part of the normal trading then it is taxed at 30% SDC on its gross amount. Non Tax residents of Cyprus are exempt. Tax residents of Cyprus which are non Cyprus domiciled are also exempt.
- Cyprus does not impose any withholding tax on interest paid to non-resident recipients.
- Royalties earned from sources within Cyprus by a company which is not a resident of Cyprus is liable to ten percent (10%) withholding tax. If such right however is granted to a Cyprus company for use outside Cyprus, then there is no withholding tax and the corporate rate is applied only on the profit margin left in the Cyprus company. An 80% exemption is provided on the income received from royalties. (An amendment to the legislation is imminent)
CORPORATION TAX AND HOLDING COMPANIES
- Dividends received from abroad are exempt. The exemption does not apply if 50% of the income of company paying the dividend arises from investment income and the foreign tax levied on that company’s profit is significantly lower than the tax payable from the company receiving the dividend in Cyprus. In case the exemption does not apply then the dividends are subject to 17% SDC. However the end result is usually nil again because any tax paid directly or indirectly on the dividend in the foreign country (which normally is the case), it can be used as a deduction from the SDC.
- Interest and dividends paid from Cyprus to non residents and non Cyprus domiciled people are exempt from withholding tax. So you can be a tax resident in Cyprus and not domiciled and avoid SDC completely.
- Profits from the sale of shares, bonds, debentures, stocks and other financial instruments are exempt from taxation.
- There are no thin capitalisation rules in the Cyprus tax legislation.
DOUBLE TAX TREATIES – EUROPEAN UNION
Cyprus strong double tax treaty network and favourable tax regime has established it as a financial stronghold in areas such as Russia, Ukraine and the former CIS block countries , India as well as European Union countries. Careful planning using the above can minimize a company’s tax expense.
CAPITAL GAINS TAX
Capital gains tax of 20% applies on the profit sale of immovable property located in Cyprus. Same for shares of companies that own immovable property in Cyprus. Cost is adjusted for inflation. Exemptions and relief’s apply.
There are four tax rates as per the Vat legislation. Standard rate 19% from 2015, reduced rate 9%, reduced rate 5% and Zero rate 0%. According to the category of the good and service offered the above rate are applicable.
PERSONAL INCOME TAX
Cyprus tax residents are taxed on their world wide income. Non Cyprus tax residents are taxed only on the income that arises within and from sources within Cyprus. If a person is resides in Cyprus more than 183 days in a calendar year then is deemed to be tax resident as well.
Personal Income Tax Rates are based on tax bands and for 2015 are:
- EURO %
- 0-19500 0%
- 19501-28000 20%
- 28001-36300 25%
- 36.301 -60000 30%
- 60001 and over 35%
- Exemptions apply.
Interest received by Cyprus tax resident and domiciled person is taxed at 30% SDC and Dividends received at 17%. In order for the SDC to apply a person has to be more than 183 days in a calendar year in Cyprus –therefore tax resident-and also have a Cyprus domicile.
A person is considered having his domicile of origin in Cyprus if he has his regular place of abode in Cyprus as per the Wills and Succession Law except where:
a) The person has a domicile outside of Cyprus as per the Wills and Succession Law and has not been a tax resident in Cyprus for a period of 20 consecutive years preceding the tax year.
b) The person has not been a Cyprus tax resident for a period of 20 consecutive years prior to the introduction of the law.
If the person was a tax resident of Cyprus for at least 17 years out of the last 20 consecutive years, will be considered as domiciled in Cyprus.
Individuals not resident and not domiciled in Cyprus are exempt from SDC.
Special Incentive applies for persons which were not tax resident in Cyprus previously and their earnings exceed €100,000 per year. 50% of the income will be exempt from tax for the next 5 years. Another similar incentive is the 20% or €8550 (whichever is smaller) exemption, for 3 years, of the income of a person that was not tax resident of Cyprus before and starts employment in Cyprus.
Furthermore pension received from abroad is taxed at 5%. The first €3420 are exempt.
SOCIAL INSURANCE CONTRIBUTIONS FOR EMPLOYEES WORKING IN CYPRUS.
- Employees Social Insurance Contributions are 7.8%.
- The employer also contributes on the employee’s salary at a rate of 11.5%.
- Self employed contributions 12.6%.
Minimum and maximum limits exist.
CYPRUS Companies and tax planning
Cyprus companies can be used in many ways as a vehicle in optimizing tax structures and holding investment.
Main uses are
- Investment holding company. A Cyprus company can be used both for investments in the European Union, taking advantage of the EU parent-subsidiary and interest directives, and also out of the EU in countries such as Russia, Ukraine, South Africa which Cyprus has very advantageous Double tax treaty agreements. The income arising from these investment holdings can be exempt from tax in the majority of the cases. For example Profit from sale of shares (and many other titles) are not taxable in Cyprus. Also dividends received are not taxable in Cyprus (see small exemption above) and also when paid from Cyprus company abroad again there is no withholding tax.
- Finance companies. A Cyprus company can act either directly as finance company or intermediary, usually on a back to back loan, from the original lender company possibly from a tax heaven country. Any interest charged is tax deductible from the interest received from the final borrower. The company will be taxed on the net margin of the interest received.
- Trading company. Used to establish presence in the EU with VAT number. Can be used for buying and selling products within Cyprus, EU and the rest of the world. I.e. Cyprus Company buys from China and then sells to UK. Profit is taxable in Cyprus after deduction of business expenses..
- Agency and Royalty company. Similar to trading but can charge commissions on direct deliveries and sales from supplier to final buyer. Same applies with Royalties. Tax is chargeable to profit after deducting expenses. An 80% exemption applies for all royalty income and profit on sale of the Royalty.
- Double Tax Treaties and European Union Directives. Extensive network with very favourable treaties with more than 45 countries. Furthermore all the EU directives apply in Cyprus including the Parent Subsidiary Directive which makes it a gateway for investments to the European Union for non EU investors.
This is a very basic review of Cyprus Tax law and should not be used to form an opinion. For any issues we advice readers to consult us, specifying the details of the matter.
For more information please contact Mr Michalis Louca firstname.lastname@example.org