Summary of tax system
We set out, herewith, a brief summary of the income tax regime in Cyprus:
1. Cyprus Tax Residents
An individual is tax resident in Cyprus if he/she is physically present in Cyprus for an aggregate period exceeding 183 days in the tax year. Tax resident individuals are liable to tax in Cyprus on their worldwide income whereas non-resident individuals are only liable to tax on income accruing or arising in Cyprus.
A company which is managed and controlled in Cyprus, is considered as a tax resident in Cyprus and is liable to tax on income accruing or arising both from sources within and outside republic.
Companies managed and controlled outside of Cyprus are not tax resident in Cyprus and will be taxable in Cyprus on their Cyprus source income only. Therefore, a company deriving income from sources outside Cyprus will not be liable to taxation. non-resident companies cannot take the benefit of any double tax treaties involving Cyprus. On the other hand, if a company wishes to take advantage of the double tax treaty network of Cyprus, it is highly advisable to have the majority of the directors in Cyprus and to provide that all board meetings shall take place in Cyprus.
2. Tax Rate
A uniform corporate tax rate of 12.5% is applied to all companies either operating locally or internationally. This rate applies to profits after the deduction of all expenses incurred wholly and exclusively for the production of income.
3. Profits from the disposal of any securities are exempt from income tax.
Any profits from the disposal of securities, irrespective of whether the profits arise from the company’s trading activities or are of a capital nature, are exempt from tax in Cyprus. Hence, security trading companies can structure their operations via Cyprus and achieve nil taxation and at the same time enjoy EU identity and regulations. In accordance with the tax legislation “Securities” are defined as shares, debentures, Government Bonds, founder’s shares or other shares of companies or other legal entities, which have been incorporated in Cyprus or abroad and any kind of options thereon.
4. The treatment of dividends is as follows:
(a) Dividends are exempt from income tax for non tax residences.
(b) Dividends received or deemed to be received by a resident of Cyprus are subject to a special “special contribution” tax at a rate of 20% for the years 2012 and 2013 and 17% for the year 2014 onwards , except in the following cases:
(i) A company that is a resident of Cyprus is exempt from the special contribution tax on dividends if it receives the dividend from another company, which is a resident of Cyprus.
(ii) A company that is a resident of Cyprus is exempt from the special contribution tax on dividends if it receives the dividend from another company which is not a resident of Cyprus. This exemption will not apply if:
(a) the payer engages directly or indirectly more than 50% in activities which lead to investment income and
(b) the foreign tax burden of the payer is substantially lower than the tax burden of the recipient.
5. Deemed Dividend Distribution
Where a Cyprus resident company does not distribute dividends within two years from the end of the tax year in which the profits were generated, then:
70% of the adjusted accounting profits are deemed to have been distributed;
20% special defence contribution is imposed on the deemed dividend distribution applicable to Cyprus resident shareholders;
Deemed distribution is reduced with payments of actual dividends which have already been paid during the relevant year or paid during the two following years from the profits of the relevant year.
In case the Cyprus Company is ultimately wholly owned by non-resident individuals, defence contribution provisions will not apply.
6. The treatment of interest is as follows:
(a) If the interest is received in the recipient’s ordinary course of business or in close relation to it, it will be taxable as trading income at the corporate tax rate of 12, 5%.
(b) If the interest is received not in the recipient’s ordinary course of business or in close relation to it, it will not be subject to income tax but a special “special contribution” tax at 15% up to 28/04/2013 and 30% as from 29/04/2013. which is levied on the gross interest received
Interest from Government Savings Certificates, Government Bonds and deposits with the Housing Finance Corporation, as well as interest earned by approved provident funds, is subject to defence contribution at 3%.
7. Permanent Establishment Outside Cyprus:
Profits generated by a company resident of Cyprus from a permanent establishment outside Cyprus are exempt from taxation.
8. Capital Gains Tax:
No capital gains tax for immovable property outside Cyprus.
Gains from the disposal of immovable property situated in Cyprus including gains from the disposal of shares in companies which hold such immovable property in Cyprus, will incur a capital gains tax at the rate of 20%.
9. Cyprus International Trust:
Cyprus International Trusts are not subject to tax in Cyprus. This provision means:
All income of a Cyprus International Trust, whether trading or otherwise, is not taxable.
Dividend, interest and other income received by a Cyprus International Trust from a Cyprus company, is not taxable or subject to withholding tax.
Gains on the disposal of assets held by a Cyprus International Trust are not subject to capital gains tax.
10. Shipping Companies:
Where a Cyprus shipping company owns ships under the Cyprus flag and operates in international waters, no income tax will be payable on profits earned or dividends paid.
11. Value Added Tax:
Value Added Tax (VAT) is imposed on the provision of goods and services in Cyprus, on the acquisition of goods from the European Union and on the importation of goods into Cyprus.
The standard rate of VAT is 18% from 14 January 2013 and 19% from 13 January 2014.