Cyprus, by virtue of its exceptionally advantageous tax system, is emerging as the most favoured jurisdiction in Europe to conduct international business from.
There is a uniform Corporation Tax Rate at 10%, which is the lowest in European Union and there is no distinction anymore between local and international companies. The maximum tax rate for resident individuals is 35%. The old, complex tax regime was replaced by a new system that eliminates discrimination and differential treatment between different categories of business and is simple and transparent. In addition the increase in the rate of VAT to 15% (still the lowest rate in Europe, 17% from March 2012) made possible a reduction of certain taxes and the abolition of others.
The main tax advantages of Cyprus Companies are as follows:
1. Cyprus has the lowest tax regime in Europe. Corporation tax on net profit is only 10%.
2. Extensive network of double tax treaties providing zero or low withholding tax rates on interest, dividends and royalties.
3. Interest paid to non-resident group companies is tax deductible.
4. There are no thin capitalization rules.
5. There are no transfer pricing rules but transactions between related parties should be “at arm’s length”.
6. No withholding tax on dividends paid to non-residents shareholders.
7. Cyprus is a member of the European Union since May 2004 and fully adopts the European Union Directives. Cyprus holding companies can now receive tax-free dividends from their EU subsidiaries in cases where the Parent – Subsidiary Directive applies, subject to any anti-avoidance provisions in the jurisdiction of the paying company. Interest and Royalties can also be free of withholding taxes through the application of the Interest and Royalties Directives.
8. There is no holding period requirement for dividends or capital gains exemptions.
9. Capital Gains are not taxable in Cyprus except for the 20% tax on gains on immoveable property that is located in Cyprus, and on any gain from the sale of shares in companies that own immoveable property in Cyprus. All other gains of a capital nature are not taxable.
10. Any gains realized on disposal of securities / shares in subsidiaries are not subject to taxation in Cyprus. This applies to all gains including capital gains and gains from trading in securities.
11. There is no general Controlled Foreign Corporation (CFC) legislation.
12. Taxes withheld abroad can be credited against corresponding Cyprus Tax even in cases where there is no double tax treaty between Cyprus and the other country. Also, where tax was withheld on dividends by an EU country the tax credit includes the share of tax paid on the gains of the company paying the dividend and the gains of its subsidiaries.
13. Losses can be offset against other sources of income and can be carried forward indefinitely. In addition losses of a company can be set off against profits of another company of the same Group (Group of Cyprus tax-resident companies) and world-wide losses can be set off against taxable income of the same year or carried forward.
14. Advantageous tax system for pensioners and expatriates.
15. Reorganisations, Acquisitions, Amalgamations Cyprus Tax Law adopted the Merger Directive of the European Union, but took into account emerging EU policies. The Cyprus Tax Law covers domestic and foreign reorganizations, and reorganizations abroad that have effect in Cyprus; these are exempted from all taxes including Capital Gains Tax, VAT, Stamp Duties and Land Transfer Fees.
16. Cyprus Companies can be used for supply of goods in the European Union, triangular trade and distance sales and take full advantage of the large European Market.
All companies tax resident of Cyprus are taxed on their income accrued or derived from all sources in Cyprus and abroad. A non-Cyprus tax resident company is taxed on income accrued or derived from a business activity which is carried out through a permanent establishment in Cyprus and on certain income arising from sources in Cyprus.
A company is resident of Cyprus if it is managed and controlled in Cyprus.
Corporation Tax Rates
The corporation tax rate for all companies is 10%
Personal Income Tax
All Cyprus Tax residents are taxed on all income accrued or derived from all sources in Cyprus and abroad. Individuals who are not Cyprus tax residents are taxed on income accrued or derived from sources in Cyprus only. An individual is considered Cyprus Tax resident if he/she spends in Cyprus more than 183 days in any one calendar year.
Days in and out of Cyprus are calculated as follows:
• The day of departure from Cyprus counts as a day of residence outside Cyprus.
• The day of arrival in Cyprus counts as a day of residence in Cyprus.
• Arrival and departure from Cyprus in the same day counts as one day of residence in Cyprus.
• Departure and arrival in Cyprus in the same day counts as one day of residence outside Cyprus.
Personal Tax Rates
Chargeable Income Tax rate Tax Accumulated Tax
€ % € €
0 – 19.500 nil nil nil
19.501 – 28.000 20 1.700 1.700
28.001 – 36.300 25 2.075 3.775
36.300 – 60.000 30 7.110 10.885
60.000 and above 35
The first €3.420 per annum of any foreign pension is free of tax and the excess over that amount is taxed at the rate of 5%. A person may elect in any year to have his/her pension included in his/her chargeable income so as to utilize personal allowances.
VAT is imposed on the provision of goods and services in Cyprus, as well as on the acquisition of goods from the European Union (EU) and the importation of goods into Cyprus.
Taxable persons charge VAT on their taxable supplies (output tax) and are charged with VAT on goods or services which they receive (input tax).
If output tax in a VAT period exceeds total input tax, a payment has to be made to the state. If input tax exceeds output tax the excess input tax is carried forward as a credit and set off against future output VAT. Refund of excess input VAT can be obtained in the following cases:
1. a period of three years has elapsed from the date the VAT became refundable
2. input VAT which cannot be set off against output VAT until the last VAT period of the year which follows the year in which the VAT period in which the credit was created falls
3. the input VAT relates to zero rated transactions
4. the input VAT relates to the purchase of capital assets of the company
5. the input VAT relates to transactions which are outside the scope of VAT but would have been subject to VAT had they been carried out within Cyprus
6. the input VAT relates to exempt financial and insurance services provided to non EU resident clients (services for which the right to recover the related input VAT is granted).
The legislation provides for the following four tax rates:
• Zero rate (0%)
• Reduced rate of five per cent (5%)
• Reduced rate of eight per cent (8%)
• Standard rate of fifteen per cent (15%) (17% from March 2012)
Double Tax Treaties
Cyprus has entered into almost 50 double-tax treaties (unusually for a low-tax jurisdiction). The general effect of these treaties is that Cyprus-registered offshore entities that have tax exemptions in Cyprus will have the same exemptions in the treaty countries.
Most of Cyprus’s treaties follow the OECD Model Convention, although the US Treaty follows the most recent model of United States Agreements. Normally speaking, therefore, the country of residence will give a credit for taxes paid in the other treaty country. The Cyprus offshore entity qualifies for treaty protection under all the extant treaties except those with Canada, France, the UK and the USA, and even in those cases the limitations apply only to flows of income to Cyprus, and not to income flows from Cyprus to the countries concerned.
About the Author
Aristides Trimindis is the Managing Director of Istos Global Limited an independent Firm offering Cyprus Accounting, Audit, Cyprus Taxation and Advisory services. Istos Global can also help you Register Company in Cyprus.