Taxation and Tax-Planning
Costas Indianos & Co law firm provides for tax-planning advice to clients wishing to adopt best practices and optimise their international business activities so that their taxation strategy is in line with their business strategy and operational model. Cyprus is a European country with a favourable tax system and a wide network of Double Tax Treaties.
Cyprus tax residence
An individual is tax resident if he lives in Cyprus for one or more periods which exceed the total of 183 days per fiscal year. Residents are subject to tax in Cyprus on their worldwide income, whilst non-residents are subject to tax only on their income derived in Cyprus.
A company is resident if its management and control is in Cyprus.
Individual Taxation & Non-Domiciled Tax Resident
When an individual is tax resident of the Republic of Cyprus because he is present in the Republic more than 183 days in a tax year, tax is imposed on income accruing or arising from sources both within and outside the Republic. Where an individual is not a resident, tax is imposed on income accruing or arising only from sources within the Republic. Chargeable income (after all allowances) is taxed as follows:
-up to EUR19, 500: Nil
-from EUR 19,501-28,000: 20%, Cumulative tax: EUR 1700, 00
-from EUR 28,001-36,300: 25%, Cumulative tax: EUR 3775, 00
-from EUR 36,301-60,000: 30%, Cumulative tax: EUR 10885, 00
-above EUR 60,001: 35%
As per January 1rst 2012, an employer taking up residence in Cyprus with a yearly salary above EUR 100,000 benefits from a 50% tax exemption for a period of 10 years. However, for employments starting on/after January 1rst 2015, the tax exemption does not apply to individuals tax resident during 3 of the 5 tax years or the year preceding the year employment was taken. The exemption applies even if the salary falls below EUR 100, 000 as long as it cannot be proven that the only purpose of the salary was tax exemption.
As per 2015 and until 2020, individuals taking employment and becoming tax resident in Cyprus are allowed 20% tax exemption of up to € 8550 on annual income for the first five employment years.
Non-domiciled tax resident
The 2015 individual tax reforms introduce a new concept of ‘non-domiciled tax-resident’ where foreign individuals classed as tax-resident under the day-counting basis and living in Cyprus qualify as non-domiciled tax-residents unless they have been Cyprus tax resident for 17 years out of the last 20 or, if born in Cyprus.
These foreign individuals considered to be non-domiciled tax-residents will be exempted from the following taxes:
- 17% SDC (Special Contribution for Defense) on dividends
- 30% SCD on interest bank deposits
- 2.25% (3% on 70%) SCD on rental incomes
The tax reform does not apply to companies that do not pay SDC on dividends, and where the company has no ‘nominee’ shareholder, a non-domiciled beneficiary shareholder individual cannot refer to this law to avoid paying the SDC on interest and/or rental income.
All Cypriot companies pay corporate tax except shipping companies which pay tonnage tax.
The corporate tax rate is 12.5% except for royalties.
Advanced tax rulings can be obtained from the Income Tax Authority.
Fixed annual levy of € 350
A fixed annual levy of € 350 applies to all companies including dormant (non-active) companies and companies that do not own any assets or own property not controlled by the Republic of Cyprus. The first levy is imposed on the year of incorporation of the company.
The non-payment of the annual levy will result in de-registration or strike off the company from the Cyprus Registrar of Companies.
Where a company is re-instated in the Registrar within 2 years from de-registration or strike off date, an additional fixed penalty of € 500 will be imposed.
Where a company is re-instated in the Registrar after the 2 year period, the fixed annual levy will be increased up to € 750.
The late payment of the annual levy results in the following penalties:
-In case of delay up to 2 months, 10% penalty.
-In case of delay from 2 to 5 months, 30% penalty.
Dividend income received by a Cyprus tax resident company from a Cyprus tax resident company is tax exempt provided that the dividend is not indirectly received after a four year period following the end of the year which relates to the rise of the dividend income.
Dividend income received in Cyprus from a foreign corporation is wholly exempt from corporation tax in Cyprus and not subject to Special Defense Contribution Tax of 17% as long as the company receiving the dividend owns shares in the company paying the dividend, even if the shareholding is less than 1%. However, this does not apply if more than 50% of the paying company’s activities result in investment income (passive income such as interest from companies, bank accounts, royalties which does not derive from trading, commercial, manufacturing or similar activities) and the foreign tax is significantly lower than the tax rate payable in Cyprus in other words less than 5%.
Furthermore, dividends should be distributed every two years. If a Cyprus resident company does not distribute dividends within two years from the end of the tax year, 70% of accounting profits are deemed to have been distributed, 17% special contribution for defence is imposed on deemed dividend distribution applicable to residents shareholders, deemed distribution is reduce with payments of actual dividends which have already been paid during the two years from the profits of the relevant year, and when an actual dividend is paid after the deemed dividend distribution, then special contribution for defence is imposed only on the additional dividend paid.
Active Interest acquired from the usual activities of the company (such as interest on trading, current accounts, debtors, finance, banking, inter-company finance) is subject to income tax at 12.5%. Passive Interest not acquired from the usual activities of the company credited or received by Cyprus residents (such as interest paid on bank deposits) is subject to Special Defence Contribution Tax of 30%. Interest income from savings bonds and development bonds and all interest earned by a provident fund is subject to special contribution for defence at 3%.
Special Defense Contribution Tax (SDC)
The application of Special contribution for defence to dividend Income and interest Income is described the above two paragraphs.
Payments of dividends, interest and royalties to non-residents
There is no withholding tax on payment of dividends, interest to non-resident individuals or corporations, irrespective of the existence of a Double Tax Treaty or of the country of residence of the recipient. The same applies to royalties as long as the license has been granted for use outside Cyprus. For royalties arising from a license granted for Cyprus, there is a 12.5% tax for Cyprus resident companies and 10% for Cyprus non-resident companies.
NID (Notional Interest deduction)
NID applies in favour of new qualifying equity that is issued by a Cyprus Company as of January 1rst 2015 and further, and that is used in the business for the purpose of generating taxable income.
NID is calculated by multiplying the equity amount by a reference interest rate.
The reference interest rate is equal to the yield of the 10-year government bond of the country where the equity was invested, plus 3%.
NID is deductible against the company’s taxable profits that arise as a result of the new capital input, and cannot exceed 80% of the taxable profit calculated before the deduction.
Gains from disposal of securities – full exemption
There is no taxation on the profits from the disposal /sale of securities for all the companies and individuals that are tax residents of Cyprus irrespective of whether the gain is of capital or revenue. It allows the Cyprus Holding Company to dispose of the shares in a subsidiary with no tax in Cyprus, and allows the disposal of shares of a Cyprus Holding Company with no tax in Cyprus irrespective of the provisions of a relevant Double Tax Treaty.
According to the Law 118(1)2002, securities also known as Titles include shares, debentures, government bonds, founder’s shares or other securities of companies or other legal entities incorporated in Cyprus or abroad and stock options thereon as well as swaps on titles, depositary receipts on titles, repurchase agreements, repos on titles, options on titles, and units & undertakings in UCITS and AIF Funds. Finally, a ruling in Cyprus is possible in order to determine whether an instrument qualifies under the law as Security or Title.
CGT – Capital gains tax
Capital gains realized on immovable property held outside Cyprus are outside the scope of capital gains tax. A capital gain realized on immovable property held in Cyprus is 20%. The full capital gains tax exemption on profits from the disposal of securities does not apply to the disposal of shares of a Cyprus company owning immovable property, the sale of the property and the disposal of the shares being subject to 20% Capital Gains Tax.
Capital gains realized on the sale of shares of a company that owns another company which owns immovable property in Cyprus are subject to capital gains tax provided the value of the property represents more than 50% of the value of the assets of the company whose shares are sold, with the taxation base being market value property, unless it is a related parties transaction that can allow a lower value.
IP Taxation (Intellectual Property)
see relevant IP webpage.
Transfer Pricing – Arm’s length rule
The arm’s length rule is in the income tax law even though transfer pricing is not, therefore the tax Authority can impose taxes on profits from related transactions. In the event profits increase for one party, a corresponding deduction is allowed in favour of the other party to the transaction.
Tax losses & Group relief
Group relief is allowed for 75% group holdings on the current year’s result and companies can transfer losses from the loss making companies to profitable companies as long as the beneficiaries are Cyprus tax resident and belong to the same group for the whole year. In order for two companies to be considered part of the same group both must be subsidiaries of a third company for 75% of their shareholding or one company must be the subsidiary of the other for 75% of its shareholding, in the sense that the holding company holds directly or indirectly 75% or more shares, benefits directly or indirectly to 75% or more of the income and of the assets in case of winding up, of the subsidiary company.
Cross-border group relief is allowed if the subsidiary company surrendering the losses is EU resident and all other possibilities for use of loses in the country of residency or EU member state of any intermediary company have been exhausted.
Non-Cyprus resident intermediary companies are not allowed group relief as they are considered EU tax residents or residents of a country with which Cyprus has Double Tax Treaty or Exchange of information.
Cyprus company losses relating to business abroad are deductible against taxable profits made by the company during the year and any balance can be set off against taxable profits of other group of companies during the same year.
Losses that cannot be included for the current year can be carried forwards for 5 years.
Losses incurred by a Permanent Establishment are deducted from the profits of the Cyprus Company but its future profits will bare corporate tax to match the losses incurred.
EU Parent – Subsidiary Directive
Its application in Cyprus abolishes withholding taxes upon the subsidiary for dividends paid to its mother Company resident in any member state, as long as the mother Company has its tax residence in a member state and possesses 10% or more of the shareholding of its subsidiary for any period of time (the original EU Directive implies 25% and a time period of a few years), however:
Dividends received by a Cyprus company from its EU subsidiary company will no longer be tax exempt if the payment of the dividend is a tax-deductible expense for the company paying the dividend, and
Dividends received via tax-planning that is not based on a substantial transaction reflecting economic reality will no longer be tax exempt therefore anti-avoidance rules apply to unsubstantial transactions for dividends and hybrid instruments.
EU Interest and Royalty Directive
The “Interest and Royalty Directive”, which provides for exemption from withholding tax over interest- and royalty payments between certain affiliated EU-companies. Companies are considered to be affiliated in this sense if one of the companies at the minimum holds 25% of the share capital in the other company or if a third company at least holds 25% of the share capital in each of the two companies (or, upon discretion of the Member States, 25% of the voting rights). Considering its low (12.5%) corporate income tax rate (which is one of the lowest in the EU), the availability of this Directive and the availability of a significant number of double tax treaties, Cyprus is an interesting jurisdiction for setting up a (group) finance company or (group) licensing company within the EU and/or outside the EU. Additional advantage of licensing via Cyprus is the afore-mentioned possibility to obtain tax exemption for the gain upon the sale of the IP used for the licensing activities. There is no withholding tax in Cyprus over interest payments to non-resident creditors, nor is there (as mentioned) withholding tax due over royalty payments in case the license has been granted for use outside Cyprus. The EU-Directives and Cyprus’ double tax treaties in many cases provide for substantial reduction or even elimination of withholding tax over the interest and royalty payments to the Cyprus finance- or license-company. In Cyprus, there are broad possibilities for the credit of any foreign withholding tax still payable over the interest- and royalty payments against Cyprus tax due over the corresponding income.
Unilateral tax credit relief
In practice this means that a tax credit is given in Cyprus on any tax including Special Defence Contribution Tax and Income Tax for any tax paid in the foreign state jurisdiction including underlying local trade tax paid by the subsidiary company or withholding tax on outgoing dividends to Cyprus.
Reorganizations, Mergers, Acquisitions, Amalgamations
The new Cyprus tax legislation has adopted in a liberal version the appropriate EU Commission Merger Directive 2005/56/EC which enables reorganizations (merger, division, transfer of assets and exchange of shares) and amalgamation of companies without corporate tax, capital gains tax or transfer fees. Reorganisations apply to physical or moral entities of member and non-member states of the EU.
However, tax exemption can be disallowed by the tax authority if they consider that the only purpose of reorganization is to avoid tax without any substantial business justification, and they can limit the shares issued for reorganization unless it’s a public listed company.
PE (Permanent establishment)
Profits earned from a permanent establishment abroad are fully exempt from corporation tax in Cyprus, except if more than 50% of the paying company’s activities result in investment income and the foreign tax is significantly lower (by at least 5%) than the 12.5% tax rate payable in Cyprus.
The term PE now includes activities relating to exploration and exploitation of the seabed.
The gross income earned in Cyprus by a non-resident with no PE in Cyprus relating to exploration and exploitation of the seabed is taxed 5%.
Payments made by a non-resident or a person with no PE in Cyprus but with the cost undertaken by a resident associate, the resident associate must withhold & pay the 5% tax to the tax Authorities.
According to articles 354A to 354P of the Cyprus Companies Law Cap113, Cyprus Companies and foreign companies based in Cyprus can be re-domiciled abroad, thus giving the possibility for foreign holding companies to move to Cyprus without creating a problem to their overall tax structure.
Listing in Stock Exchanges
Cyprus companies including the Cyprus Holding Company can list at the Cyprus Stock Exchange or any other proper international stock exchange, as long as the Memorandum & Articles of the Cyprus company is changed into that of a Cyprus Public Company, the Cyprus Public Company lists its shares, and the services of a broker are used for the application for listing and the listing process, and the preparation of the admission documents.
Thin Capitalization Rules
Cyprus laws do not provide for Thin Capitalization Rules, thus Cyprus companies do not have to comply to any debt to equity ratio. This allows the possibility for a Cyprus company to acquire loans and to deduct interest paid to the mother company. However, interest expense in respect of loans used for the purchase of assets outside usual business is not deductible.
Controlled Foreign Company (CFC) Legislation
Cyprus laws do not provide for CFC Legislation and according to the jurisprudence of the European Court of Justice has ruled that CFC rules can not apply when the subsidiary company in a Member State has true economic activities, thus it is to the advantage of businessmen to use the Cyprus company as a subsidiary company or The Cyprus Holding Company as a mother company to which income from zero % jurisdictions or passive activities cannot be related.
Currency profits & losses arising from currency exchange rate fluctuations are not considered for taxation.
Profits & losses arising from trading foreign currencies and/or currency derivatives are considered for taxation.
Business entities in this business can opt to be taxed on the base of profits or losses.
Offshore Drilling Activity
5% withholding tax as from January 1rst 2016 on the gains derived by a non-resident person with no PE (permanent establishment) in Cyprus from services provided in Cyprus in relation to exploration or use or extraction of the continental shelf, including the establishment/use of pipelines and/or other ground or surface or seabed installations.
IP (Intellectual Property Rights)
The new upcoming Cyprus IP law will be aligned with the nexus approach in accordance with OECD Action 5 issued to comply with BEPS. The previous I.P Box does not apply anymore.
Innovation Company Expenses
R&D (research and development) expenses of innovation companies & expenses for acquisition of shares in innovation companies will be deducted from taxable income.
Entertainment business expenses are tax deductible with the exception of a 1% tax on gross income that cannot exceed € 17086.
No Estate Duty / Inheritance Tax
No exit tax
Stamp Duty applies to contracts, documents, etc. which relate to assets in Cyprus irrespective of whether or not these were signed in Cyprus. Transactions related to reorganizations and contracts relating to assets or business outside Cyprus are exempted from stamp duty.
The Standard rate of VAT in Cyprus as of January 2014 is 19%, with a reduced rate of 9% for matters related to restaurant services, tourism and transportation, a reduced rate of 5% on the construction or acquisition of residential property in Cyprus used as primary or permanent residence by locals or foreigners whether residents or non-residents of Cyprus, a reduced rate of 5% or 0% rate for various product supplies, and exemption on financial services, hospital and medical services, postal services, insurance services, rental of immovable property and disposal of immovable property where the application for building permission was submitted prior to 01/05/2004. Added value tax is imposed on the provision of goods and services in Cyprus as well as on the importation of goods into Cyprus.