Cyprus has a long history in the financial and corporate services sector. Cyprus has always been regarded as an exceptional setting for incorporating companies not just because of its advantageous tax system and its straightforward legal structure but also because of the island’s outstanding location at the crossroads of three continents, the low operating costs and its excellent professional services. The strong ties we have with our clients, our long standing cooperation and alliance with our Russian friends are built on solid grounds.
BENEFITS OF CYPRUS TAX SYSTEM
-12.5% headline corporate tax rate
-Foreign source income generally tax exempt
-Profits on transactions in shares tax exempt
-Generous tax deductibility rules reduce effective tax rates
-IP tax regime with an effective tax rate of 2.5%
-No withholding taxes on outbound dividends, interest & royalties, irrespective of the country of destination
– Full compliance with all EU tax directives (Parent / Subsidiary, Interest & Royalties, Reorganisations)
-Unilateral credit relief for foreign taxes
-No CFC legislation
-No thin capitalisation rules
-No detailed transfer pricing rules (arm’s length principle only)
-No capital gains tax (except on real estate situated in Cyprus)
-No taxes on entry, reorganisations and exits
-No wealth taxes and only minimal stamp and local taxes
-No exchange controls
-Most international transactions free of VAT
-Low personal tax regime – Top rate 35%
-OECD approved / EU compliant system
-A tax administration that wants to help foreign investors
-Wide network of favourable tax treaties with almost 50 countries
Tax residency and Tax liability in Cyprus
A company is tax resident in Cyprus if it is managed and controlled in Cyprus. Several factors should be considered to establish where the management and control of a company is exercised. Such factors are:
- the make up and the residence of the Board of Directors
- the place where major decisions are taken
- the place where the major contracts are signed
- the place where the books and records are maintained and the accounting function is operated
Cyprus tax resident companies are taxed on their worldwide income under the Cyprus tax system and they enjoy the wide network of Double Tax Treaties (DTT) of Cyprus as well as all European Tax Directives.
Non–tax resident companies are taxed on income derived from a business activity which is carried out through a permanent establishment in Cyprus and on certain income arising in Cyprus (double tax treaties and double taxation relief exist).
Tax rates and the exempt sources of income
Companies are taxed under Corporation Tax at the flat rate of 12.5%.
Dividend income, Profits from disposal of shares and other securities and Profits from permanent establishments abroad are totally exempt from any tax in Cyprus under certain and easily met conditions.
Capital gains from the disposal of immovable property situated in Cyprus are exempt from Corporation Tax and are taxed under Capital Gains Tax at the flat rate of 20%.
Interest Income not arising from the ordinary activities of the company or closely related to them – passive income – is exempt from Corporation Tax and is taxed at 30% under Special Defense Contribution Tax. Interest Income arising from the ordinary activities of the Company or directly related to them enjoys the low rate of 12.5%.
Rental income, in addition to Corporation Tax, is also taxed under Special Defense Contribution Tax at the effective rate of 2.25%.
Under the general principle, expenses are allowed as a deduction from the taxable profits if they are incurred wholly and exclusively for the production of income, provided that are supported by invoices and receipts, and are not specifically disallowed under the Cyprus Income Tax Law.
Interest incurred by a Cypriot company is generally deductible if incurred for the funding of the acquisition of assets used in a business which derive taxable income. In respect of interest incurred for the direct or indirect acquisition of 100% of the share capital of a subsidiary company will be treated as deductible for income tax purposes provided that the 100% subsidiary company does not own (directly or indirectly) any assets that are not used in the business.
Deemed deduction for IP income
Deemed deduction of 80% on the net profits from the exploitation of the intellectual property is allowed. The net profit is calculated after deducting all direct expenses incurred for the production of the income as well as the amortization of capital expenditure over a 5 year period.
Other specific deductions
Expenses for Business entertainment are allowable whilst being subject to a cap which is the lower of €17.086 or 1% of gross income.
Donations to approved charities are deductible in full.
Employer’s contributions to social insurance and approved funds to employee’s salaries are deductible in full.
Capital allowances on the cost of plant, machinery, buildings and other fixed assets used in the business, are granted as deductions. Capital allowances are granted on the original cost and subsequent expenditure of a capital nature based on specified annual rates.
Additional aspects to consider
The tax loss incurred during a tax year is carried forward and set off against the profits of the next five years.
Losses from a permanent establishment abroad can be set off with profits of the company in Cyprus, however, subsequent profits up to the amount of the loss will be taxable in Cyprus.
The current year loss of one company can be set off against the profit of another, subject to conditions, provided the companies are Cyprus tax residents and are both within the same group. (Group is defined as: *One company holding at least 75% of the voting shares of the other company or *Both of the companies are at least 75% (voting shares) held by another third company).
Unilateral tax credit relief
Relief for taxes paid abroad is given for overseas income that is subject to tax in Cyprus. The relief is given unilaterally irrespective of the existence of a double tax treaty. Where a treaty exists, the treaty provisions apply if more beneficial. The relief shall not exceed the Cyprus Tax Liability for that income.
Reorganizations are fully exempt from corporation tax, capital gains tax, stamp duties and property transfer fees. Also, tax losses can be carried forward to the receiving company. A reorganization generally includes a merger, division, transfer of assets and exchange of shares.
Full access to EU Tax Directives
The Cyprus Tax Legislation is in line with all EU Directives including the Interest and Loyalty Directive, the Parent – Subsidiary Directive and the Directive on Mergers.
Wide network of Double Tax Treaties
Cyprus developed an extensive network of tax treaties, currently with more than 50 countries. Most treaties provide for reduced or nil rates of withholding tax on dividends, interest and royalties paid from the treaty country and the avoidance of taxation in both countries.
No withholding taxes on outgoing payments
Dividends paid to non–tax resident shareholders (companies or individuals) are exempt from withholding tax in Cyprus. Also, no withholding tax is imposed on interest paid from Cyprus as well as on royalties paid from Cyprus in respect of intellectual property exploited outside Cyprus to any company or individual. The nil withholding tax rates apply irrespective of the country of residence of the recipient or whether a relevant tax treaty exists.
Basic administration requirements
- Every company must be registered with tax authorities and TAXISnet
- Every company must keep proper book and records
- Every company must submit annual corporate income tax return to tax authorities electronically through TAXISnet. This return should be certified and submitted by a registered auditor or professional tax advisor.
- Companies that have employees must submit on annual basis the employer’s total payroll return
- Income tax is paid under a self-assessment regime. The payment of tax is effected thought the submission of temporary tax return which should be submitted on 31st July of the year in the profits are generated. Estimated income can be revised anytime before the year end. Provisional tax payments must be made on estimated current year income in two installments. When the temporary tax return is submitted and at the year end. A final payment must be made after the year end by self- assessment so as to bring the total installment payments to the level of the actual tax liability due according to the corporate income tax return.
VAT is imposed on the supply of goods and provision of services in Cyprus, provided the supply of goods or provision of services is not specifically exempt from VAT. In addition, VAT is imposed on the acquisition of goods from the European Union and on the importation of goods from third countries.
Taxable persons charge VAT on their taxable supplies (output tax) and are charged with VAT on services, goods, machinery, etc which they receive (input tax). If output tax in a VAT period (normally 3 months period) exceeds total input tax, a payment has to be made to the VAT athorities. If input tax exceeds output tax, the excess input tax is carried forward as a credit and set off against future output VAT. Under certain circumstances immediate refund of excess input VAT can be obtained.
The standard VAT rate is 19%. The Cyprus VAT Legislation provides also for two reduced VAT rates 5% and 9% as well as for zero rated supplies.
For the supplies of goods and in general for the provision of services to relevant taxable persons within European Union no VAT is charged. The recipient, applies the reverse charge mechanism and without paying VAT it self-charges VAT and at the same time claims it back, provided it relates to supplies for which the right to recover input VAT is granted.
The exportation of goods and in general the provision of services to third countries is zero rated, thereby there is no output VAT and any input VAT can be recovered.
In general, the provision of services to relevant taxable persons in third countries is outside the scope of Cyprus VAT, thereby there is neither obligation to be registered with VAT nor output VAT if registered and any input VAT can be recovered.
Compulsory registration with the Cyprus VAT register
Cases of compulsory registration
Taxable supplies within Cyprus
15.600 (Note 1)
Taxable supplies to persons established in other Member States, where they do not hold a VAT number
15.600 (Note 1)
Taxable supplies to persons established in other Member States, where they hold a VAT number
Distance sales: Sales of goods from Suppliers resident in another EU Member State to non-VAT registered persons in Cyprus
35.000 (Note 2)
For receipt of services from abroad for which the recipient must account for VAT under the reverse charge provisions
15.600 (Note 3)
For acquisition of goods in Cyprus from suppliers resident in other EU member states
10.252 (Note 4)
- The threshold is either the accumulated turnover subject to VAT during the 12 preceding months or the expected turnover subject to VAT within the following 30 days.
- The threshold is the accumulated sales made during any calendar year.
- The threshold is either the accumulated services received during the 12 months preceding any point of time or the expected services to be received within the following 30 days from any point of time.
- The threshold is either the accumulated acquisitions made during any calendar year or the expected acquisitions to be made during the following 30 days.
Voluntary registration with the Cyprus VAT register
Businesses have the option to register voluntarily when they do not meet the registration thresholds or when they have supplies that are outside the scope of VAT but for which the right to claim the related VAT input is granted.
Basic administration requirements once register with Cyprus VAT authorities
- Every VAT registered business must submit quarterly the VAT returns and pay the excess of Output tax over Input tax
- Every VAT registered business must keep proper accounting books and records
Special Contribution to the Defense Fund
Special contribution for defense is imposed on certain income. Non – tax residents are generally exempt from special contribution for defense.
The Special Contribution to the Defense Fund legislation covers the Investment Income with the form of Dividends, Rents, and Interest which is not arising from the ordinary activities of the business or closely related to them to them.
Cyprus Tax resident individuals
Cyprus Tax resident companies
Dividend Income from Cyprus resident companies
Dividend Income from non- Cyprus resident companies
*The exemption does not apply if: -more than 50% of the paying company’s activities result in investment income and, – the foreign tax is significantly lower than the tax burden in Cyprus (below 5%)
Deemed dividend distribution provisions (DDD)
If a Cyprus tax resident company does not distribute dividends that cover 70% of the adjusted for DDD accounting profits within two years from the end of the tax year in which the profits were generated then:
- 70% of adjusted for DDD accounting profits are deemed to have been distributed, and 17% special contribution is imposed to shareholders who are residents in Cyprus.
- Any actual dividends paid reduce this liability, and
- No liability will arise from actual dividends that will be paid in the future from these profits. In case of Cyprus tax residents parent and subsidiary companies where the ultimate shareholders are not Cyprus tax residents, the subsidiary company is not subject to DDD.
Cyprus Tax resident individuals
Cyprus Tax resident companies
Interest Income not arising from the ordinary activities of the business or closely related to them.
Cyprus Tax resident individuals
Cyprus Tax resident companies
Gross Rental Income reduced by 25%*
*as already noted rental income is subject to income tax (corporation, personal) as well.
Capital Gains Tax
Capital Gains tax is imposed (when the disposal is not subject to income tax ie trading activity) at the flat rate of 20% on gains from the disposal of immovable property situated in Cyprus including gains from disposal of shares in companies which own immovable property situated in Cyprus, excluding shares listed on any recognized stock exchange. Expenses that relate to the acquisition and disposal of the property are deductible from the taxable base. Indexation allowance is always granted and lifetime exemptions are available.
Holding Companies: advantages
• The lowest corporate tax rate in the EU at 12.5%
• No withholding tax on dividend income received from subsidiary companies abroad
• Double tax treaties with almost 50 countries, enabling lower withholding tax rates on dividend or other income received from subsidiaries abroad
• may also enjoy no withholding tax on dividends received from EU subsidiaries
• No withholding tax on capital gains and income on the disposal of the shares of the subsidiary’s share capital or the shares of the Cyprus holding company
• No tax on capital gains or income on the liquidation of the Cyprus holding company
• Outward dividends by the Cyprus holding company to its non-resident shareholders are exempt from any withholding taxes
• Profits earned from a permanent establishment abroad are fully exempt from Cypriot tax, subject to certain conditions
• A diversified group of Cyprus companies belonging to a Cyprus holding company can set off Group relief for the utilisation of tax losses with no minimum holding period.
Setting up a cyprus company
Incorporation in Cyprus
The type of company for international trade and investment is a private company limited by shares which is incorporated pursuant to the Companies Law, Cap. 113. There are a number of restrictions on the activities of a private company, and namely companies cannot:
– undertake the business of banking, insurance or rendering of financial services to the public unless a special permission is granted.
Cyprus companies must maintain a registered office address within Cyprus and must also appoint a company secretary who, for practical reasons, should be resident in Cyprus. After the name of a proposed company is approved, the Memorandum and Articles of Association of the company must be signed by subscriber(s) and for at least one share and filed with the Registrar together with the relevant forms. The procedure of company registration requires the involvement of a laywer, member of the Cyprus Bar Association. After incorporation the subscribers of the Memorandum will become members of the company. The Memorandum establishes the basic structure of the company and states its name, objectives, the amount of share capital and division thereof into shares of a fixed amount, and any other matters which affect the basic existence of the company. The Articles of Association govern relations between various members of the company. They deal with the procedures for calling meetings of shareholders, passing resolutions and transferring shares including any restrictions which may apply. A company may alter or add to its Memorandum and Articles of association by passing a special resolution.
All Cypriot companies are required to maintain proper accounting books and records and prepare audited financial statements in accordance with IFRS (except the dormant companies).
Despite of the statutory audit exception granted by the Company Law to small companies (certain criteria exist), the Tax Legislation gives exception only for the dormant companies. Thus the statutory audit is required by all companies. The audited financial statements form the basis for the tax computations and for the preparation of the corporate income tax return which is required by the tax authorities to be certified and submitted by a registered auditor or a professional tax advisor
The financial statements must be submitted together with an Annual Return including details of details the share capital, shareholders, directors and secretary to the Registrar of Companies.
The only fixed taxation for all companies is the Levy of €350 which is payable on annual basis to the Registrar of Companies.
Additional compliance requirements of the Cyprus Tax Legislation, other administration issues as well as possible tax liabilities are outlined in the relevant taxation sections.
The following applies in respect of the Cyprus Private Limited Liability Company:
A. Corporate Information
Shares and Corporate Governance
- Minimum number of directors : One
- Nationality requirements for directors : None
- Corporate directors permitted : Yes
- Minimum number of shareholders : One
- Maximum number of shareholders : Fifty
- Nationality restrictions on shareholders : None
- Company secretary required : Yes
- Registered office: Yes, in Cyprus
- Corporate Company Secretary permitted: Yes
- Minimum authorized : €1
- Minimum paid up share capital : €1
- Capital duty on issued share capital : 0.6% of the nominal value of
- shares issued
- Audited accounts: Required for tax purposes
Public Disclosure (with Registrar of Companies)
- Directors’ Names : Yes
- Shareholders’ Names : Only the registered shareholder is disclosed(Note : Where trustee shareholders are used, details of thebeneficiary are not disclosed to Cyprus government authorities).
B. Legal forms
- Public and Private Companies, limited by shares
- Companies limited by guarantee
- Limited and general partnerships
C. Legal system
- English Common Law (Cyprus Company Law, Chapter 113, based on the English Companies Act of 1948)
D. Government Charges and Fees
- Annual Levy : € 350
- Companies Registry Initial Registration Fee : Flat fee of EUR 102 plus capital duty of 0.6% of the nominal value of the authorized share capital (usually minimized by using low issued capital and high share premium).
E. Formation Procedures for a Cypriot Private Limited Company
- Name : Name checking can be done online, but formal approval is required before a name can be used.
- Shelf Companies : Commonly used and immediately available.
- Formation of New Companies : Memorandum and Articles of Association in Greek are drafted by a Cypriot lawyer, signed by one or more subscribers in duplicate, submitted to the Registrar of Companies together with an English translation.
- Time span for forming New Companies : 3 working days