Cyprus’ tax system is in full compliance with EU requirements and also with the OECD requirements against harmful tax practices.
The main features of the tax system of Cyprus are as follows:
Scope of tax
Tax is imposed on all Cypriot resident persons (individuals and corporations) on their worldwide income. A corporation is tax resident in Cyprus when its management and control is exercised in Cyprus. An individual is tax resident in Cyprus when spending more than 183 days of a calendar year in Cyprus.
The Corporation Tax rate is 12,5 percent, amongst the lowest in EU.
Corporations do not pay any tax on dividends received from other Cypriot tax resident companies.
The exemption from tax also applies to profits of a PE the Cypriot company has in another jurisdiction, subject to certain conditions.
The exemption will not be granted if:
When dividend income is not exempt, it is subject to 17 percent (20 percent in 2013) defence tax contribution. Tax credits or taxes paid abroad, are deductible in Cyprus.
Directly or indirectly more than 50 percent of the activities of the paying company/PE result in investment (passive) income, and
The paying company/PE is subject to tax rate substantially lower than the Cyprus rate (“substantially” lower is defined as 6 percent or less)
If the profits of the PE are not exempted, they are subject to corporation tax of 12,5 percent. Tax credits for taxes paid abroad apply.
When interest income is the result of the ordinary activities of the company or is closely connected to the ordinary activities of the company, it is subject to tax like any other “active” trading income. If the interest income fails the test of active trading income, then it is subject to defence tax contribution at 30 percent and exempt from corporation tax.
Group finance interest income is considered as trading income.
Capital Gains Tax
Capital Gains Tax (CGT) is only imposed on the sale of land and buildings situated in Cyprus, or of shares in non-listed companies that own such property. There is no CGT on the sale of any other asset including real estate outside Cyprus and shares.
As far as shares are concerned, gains as well as trading profits from the disposal of titles are exempt from all taxes. Titles are described as shares, bonds, debentures and similar titles as well as rights thereon (options, futures, etc).
Cypriot tax legislation does not contain specific provisions relating to thin capitalization of companies ie dept to equity ratio restrictions. A Cypriot holding company may, therefore, be capitalized with loans without any risk that interest paid at arm’s length to its parent company will not be deductible.
Controlled Foreign Company (CFC) legislation
Compared with many other jurisdictions, Cyprus CFC legislation is limited, targeting only certain types of income that are not derived from real business activities to create a distinction between participation (active) and investment (passive) income.
The CFC provisions will be triggered if more than 50 percent of the company’s activities result directly or indirectly in investment income, and the foreign tax burden of the non-resident company paying the dividend is substantially lower than the tax burden of the Cypriot company.
Other significant provisions
Losses can be carried forward up to five years.
Group tax loss relief is available for companies forming part of a group, as defined under the law, thus allowing losses of one company to be set-off against profits of another company within the group.
Mergers, acquisitions and spin offs as per the same rules as the relevant EU Directive, can be effected without tax cost.
There are no thin capitalization rules (companies can be funded almost exclusively by debt) and no CFC rules.
Royalties (IP “box regime”)
The provisions introduced in 2012 provide exemptions from tax on income related to Intellectual Property (IP). More specifically:
The above exemptions are also available for IPs acquired or developed before January 2012.
80 percent of worldwide royalty income generated from IP owned by Cypriot resident companies net of any direct expenses, is exempt from income tax
80 percent of profit generated from the disposal of IP owned by Cypriot resident companies net of any direct expenses, is exempt from income tax
Effective tax rate of 2,5 percent or less
Any expenditure of a capital nature for the acquisition or development of IP is claimed as a tax deduction in the year in which it is incurred and the immediate four following years on a straight line basis
No withholding taxes on payment or royalties apply when distributed out of Cyprus, provided that the holder is not a Cyprus resident and the royalty is used outside of Cyprus
Cyprus has an extensive worldwide network of double tax treaties
The EU Directive on Interest and Royalties providing for nil withholding taxes between EU countries and which extends also to Cyprus
Cyprus does not impose any withholding tax on dividend, interest and royalty payments made to non-Cypriot resident recipients.
In the case of royalties, the exemption applies for royalty payments when the right/asset is used outside of Cyprus.
When the royalties are connected with the use of the right/asset within Cyprus, there is a 10 percent withholding tax subject to treaty provisions, and where applicable, to the EU Interest and Royalties Directive.
Under Cypriot law all expenses incurred for the generation of income are deducted before arriving at the taxable income.
Double Tax Treaty (DTT) network and EU Directives
Cyprus has an extended network of DTTs. Several others are under negotiation. Where there is no DTT, a Cyprus company can benefit from EU Directives to eliminate withholding taxes when collecting income from the EU. Unilateral tax credit on foreign taxes withheld at source is also available.
EU Parent Subsidiary Directive
This Directive, as amended, was transported into Cypriot law in the form of the Income Tax Law and the Special Contribution for Defence Law. These laws establish a liberal system of double taxation avoidance. The new tax regime extends to non-EU countries, as the laws distinguish only between residents and non-residents of Cyprus.
On the taxation of dividends, the Cypriot tax laws are even more liberal than the Directive. Foreign dividends are exempt. On a holding period, the second derogation of the Directive allows a member state not to apply the Directive. This applies to parent companies in that country that have not maintained a qualifying holding in a subsidiary company in another member state for at least two years. It also applies to subsidiary companies in a country in which a parent company in another member state has not maintained such a holding for the same period, both in respect of incoming and outgoing dividends.
The recent tax rules for reorganization of companies such as mergers, divisions, transfers of assets (including immovable property) and exchanges of shares follow the EU Merger Directive. They extend the Directive to domestic reorganizations, cross-border reorganizations involving EU member and non-EU member states and reorganizations abroad with tax implications in Cyprus. Such reorganizations do not lead to recognitions of income at company and shareholder levels and any gains made are exempt from Cypriot tax.
Losses incurred before a reorganization may be carried forward indefinitely by the new entity and losses from one activity may be offset against profits from another.
No stamp duty is payable on documents effecting a reorganization.
To view the full publication - Cyprus Efficient Structures (Revised, 2014), click here.
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