The tax profile
It is almost impossible to attract overseas enterprises without having in place an attractive tax system. Cyprus has moved decisively in this direction and has significantly improved its tax framework in a serious and responsible manner, abiding at the same time by all relevant EU directives. Cyprus prides itself today in possessing a modern and flexible tax system that is utilised by many overseas enterprises.
Furthermore, tax costs play a significant role in investment decisions. Investors aim for maximising after tax return on investment. Therefore investment structures which have the least tax leakage are preferred by investors and are recommended by advisors.
The main aims of the new tax reform (that took place in 2002) were to conform to EU and OECD requirements, as well as, the maintenance and enhancement of the competitiveness of Cyprus as an international business centre. The main elements of the refreshed tax regime of Cyprus are:
Low corporation tax
All companies are subject to a uniform tax rate of 12,5% except for public law organisations which are taxed at 25%. The 12,5% tax is the lowest corporate tax rate in the European Union and one of the lowest in the world. A company is tax resident in Cyprus when its management and control is exercised in the Republic. Its taxable income includes both, income earned in Cyprus and abroad. A non-Cyprus tax resident is taxed only on income earned in Cyprus.
Tax on dividends
Cyprus tax-resident companies are exempt in respect of dividends received from other Cyprus resident companies. The exemption is extended, subject to conditions, to dividends from non-resident companies. Resident companies are required to have distributed at least 70% of their after-tax profits in the form of dividends at the end of the two year period since the end of the respective accounting year. In the case that the distribution does not take place within the time limits mentioned above, 70% of the profit will be considered as distributed (deemed distribution), subject to special defence contribution at the rate of 17%. In this way, tax avoidance, though the accumulation of profits and the creation of companies by individuals as a means of lowering their tax burden, is prevented. These mandatory distribution provisions do not apply to profits accruing to non-resident shareholders.
Tax on interest
Interest income arising from, or closely connected to, the ordinary activities of the company is taxed at the corporate tax rate of 12,5%. Moreover, 100% of all other interest income is exempt from income tax and is subject to special defence contribution at 30%.
Tax treatment of losses
Tax losses can be carried forward and set off against future profits for a term of five years. In addition, the loss of a Cyprus tax resident company can be set off against the profit of another company in case they belong to the same group of companies. Companies belong to a group when one company holds ordinary voting shares of at least 75% of another company. Losses from a permanent establishment abroad can be set off against profits earned by a company in Cyprus.
Profits of permanent establishments abroad
The profits of permanent establishments abroad are not subject to tax in Cyprus. The exemption is not available if the permanent establishment directly or indirectly is engaged more than 50% in activities which result in investment income and the foreign tax suffered is significantly lower than the tax payable in Cyprus.
Transfers of assets and liabilities between companies in the course of reorganisations, such as mergers, demergers, transfer of activities in exchange of shares, are not subject to tax.
Disposal of securities
Profits gained from the sale of securities are exempt from tax for all companies.
Double tax treaties
Cyprus has over 50 double tax treaties
Foreign tax credit
Tax paid abroad on income that is subject to tax in Cyprus is credited against Cyprus tax payable on the same income.
Personal income tax
Individual tax resident of Cyprus is an individual who stays in the Republic for 183 days in the year of assessment. Cyprus tax residents are taxed on income earned both in Cyprus and abroad. On the contrary, non-tax residents are taxed on income earned only from Cyprus sources. 20% exemption of emoluments or € 8.550 (whichever is the lowest), is granted in the case of non-residents starting employment in the Republic for a period of 3 years after the 1st of January following the year of commencement of the employment. The tax rates are among the lowest in Europe with the higher rate being 35% for taxable income over € 60.000. Dividends are exempt from income tax and are subject to a special defence contribution at the rate of 17%, applicable only to tax residents. Likewise, interest income is exempt from income tax and is subject to a special contribution for defence at the rate of 30% in the case where the individual is tax resident in Cyprus. Interest income from saving bonds, development bonds, deposits with the Housing Finance Corporation and interest income earned by provident funds is subject to a special contribution for defence which is at the lower rate of 3%. Salaried income earned abroad for services rendered to a non-Cyprus resident employer or foreign permanent establishment of a Cyprus resident employer, for a period of more than 90 days in a tax year, is not subject to tax. Finally, income received in the form of retirement gratuity, compensation for death or injuries, provident fund, pension fund, or other approved funds, is exempt from tax.
Value Added Tax
The VAT rate is set at 19%. Cyprus also has two reduced rates. The reduced rate of 9% applies for hotel accommodation, restaurants and catering services. It also applies for domestic transport of passengers and their accompanied baggage by taxi, by tourist, excursion and intercity buses. A reduced rate of 5% is imposed on a variety of other products and services such as, food for human consumption, medicines, books, magazines, newspapers, liquid gas, the delivery of non-bottled water, the transport of passengers and their baggage by urban and rural buses, certain foodstuffs excluded from the zero rate, fertilisers, animal foodstuffs, seeds, live animals etc. Zero-rated goods and services include exports. Exempt from VAT are land for building purposes, healthcare, education, insurance and financial services, postal services etc.