Notes on Cyprus company taxation

 

Forms of taxation

 

Corporation tax

 

Corporation tax at the rate of 10% (the lowest standard rate in the European Union) is imposed on all companies that are tax-resident in Cyprus. This happens when the companies are managed and controlled in Cyprus. Where the company’s board of directors meets is an important factor in establishing where the company’s management and control is exercised.

 

No corporation tax is payable on the profits earned or the dividends paid by a Cyprus shipping company which owns ships under the Cyprus flag and operates in international waters, or on the salaries of officers and crew of such ships.

 

Ship and crew management businesses (corporate or unincorporated) have the option to be taxed either at the rate of 4,25% or at rates equal to 25% of rates used to calculate tonnage tax on vessels under management which are registered outside Cyprus. If no election is made by 30 November of the previous year (annually), tonnage tax will be imposed.

 

Insurance companies pay tax like other Cypriot companies except where the corporation tax payable is less than 1,5% of their gross premiums. In these cases, the difference is paid as additional corporation tax.

 

Special contribution for defence tax

 

This is a special tax imposed on rent, interest and dividends of Cyprus tax-resident companies at the rates of 3%, 10% or 15%. Please see below.

 

Capital gains tax

 

Capital gains tax is imposed at the rate of 20% on gains of Cyprus tax-resident companies from the disposal of immovable property situated in Cyprus, including gains from the disposal of shares in private companies which own immovable property situated in Cyprus. Therefore, gains from the disposal of shares in companies that are listed on any recognised stock exchange are exempt from capital gains taxation (see 'profits from sale of securities' below).

 

Value Added Tax (VAT)

 

VAT registration is compulsory for businesses which have had turnover of EUR 15.600 or more during the 12 months preceding the end of a reference month or for those that expect to make turnover of EUR 15.600 or more in the 30 days following any reference time.

 

A company can voluntarily register to VAT and claim input VAT paid on its purchases and other expenses, even though its turnover is below the threshold of EUR 15.600, except where it makes fully exempt supplies. Exempt supplies include insurance and financial services, medical services, rents and disposal of used immovable property and new immovable property where the application for planning permission was filed before 1 May 2004.

 

VAT is taxed at the zero rate (0%), the reduced rates of 5% and 8% and the standard rate of 15%.

 

Supplies of goods to other European Union member states are zero-rated. Exports, international air and sea transport services, the supply of medicines, food and commissions received from abroad are also some zero-rated supplies.

 

Goods and services taxed at the reduced rate of 5% include hotel accommodation services, supplies of goods made in the course of catering with the exception of alcoholic drinks (taxed at the standard rate of 15%), supplies of books, newspapers and magazines, gas, bottled and non-bottled water and the services of authors, composers, artists and critics of works of art.

  

Expense deductibility

 

All expenses incurred wholly and exclusively in generating the Company’s income are deducted before arriving at taxable profit.

 

Capital allowances

 

Annual wear and tear allowances, given as a percentage on the cost of acquisition of the Company’s fixed assets, are deducted from income chargeable to corporation tax.

 

Dividend distributions

 

Dividends received by a Cyprus tax-resident company by another Cyprus tax-resident company are exempt from both corporation tax and special contribution for defence tax.

 

Dividends received by a Cyprus tax-resident company from a foreign tax-resident company are exempt from corporation tax. Such dividends are also exempt from defence contribution tax (15%) provided that less than 50% of the foreign tax-resident company’s activities result directly or indirectly in investment income and the foreign tax is not significantly lower than the tax payable in Cyprus (interpreted as not being less than 5%).  .

 

Cyprus does not impose any withholding tax on dividends and other profit distributions paid by a Cyprus tax-resident company to individual or corporate shareholders that are not Cyprus tax-resident.

 

Profits from sale of securities

 

These are wholly exempt from both corporation tax and special contribution for defence tax.

 

As mentioned above, profits of Cyprus tax-resident companies from the disposal of shares in private companies which own immovable property situated in Cyprus are subject to capital gains tax at the rate of 20%.

 

Interest

 

Interest income of a Cyprus tax-resident company arising from the ordinary activities or closely related to the ordinary activities of the Company is taxed to corporation tax, together with the Company's other income after expense duduction, at the rate of 10%. This type of income would cover group finance interest income.

 

Interest income of a Cyprus tax-resident company not arising from the ordinary activities or closely related to the ordinary activities of the Company is taxed separately at the rate of 10% to special contribution for defence tax. 

 

Cyprus does not impose any withholding tax on interest paid by a Cyprus tax-resident company to persons (natural or legal) that are not Cyprus tax-resident.

 

Royalties

 

Cyprus does not impose withholding taxes on royalty payments to non-Cypriot tax resident recipients (individual or corporate) when the right or asset giving rise to the royalty is used outside Cyprus. When this right or asset is used within Cyprus, there is a 10% withholding tax.

 

Rental income

 

This is taxed at 10% corporation tax. Additionally, it is subject to 3% special contribution for defence tax when reduced by 25%, resulting in a combined tax burden of 12,25%.

 

Permanent establishment abroad

 

Profits of a Cyprus tax-resident company’s permanent establishment abroad are wholly exempt from Cyprus taxation.

 

Losses of a permanent establishment abroad can be set off with profits of the company in Cyprus. When this is the case, subsequent profits of the permanent establishment abroad are taxable up to the amount of losses utilised by the Cyprus company.

 

Group loss relief

 

The current year tax loss of one company can be set off against the current year taxable profit of another company part of a group which is tax-resident in Cyprus.

 

Group is defined as either one company holding directly or indirectly 75% of the shares of another company in a vertical relationship or one company holding directly or indirectly at least 75% of the voting shares of two or more companies in a horizontal relationship.

 

Reorganisations

 

Transfers of assets and liabilities between companies in the context of reorganisations that may include mergers, de-mergers, transfers of activities and exchanges of shares, can be effected without any tax consequences.