Brief Outline of the Cyprus Tax System
- - All companies that are tax resident of Cyprus are taxed on their income accrued or derived from all chargeable 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 a resident of Cyprus if it is managed and controlled through Cyprus.
- - Corporation tax rate is 12.50% which is the lowest corporation tax rate in EU.
- - The profits of a Cypriot company from trading in shares and other equities are free of any tax in Cyprus. Securities include shares, bonds, debentures, founders’ shares and other securities of companies or other legal persons, incorporated in Cyprus or abroad and options thereon. A circular has been issued by the tax authorities in 2008 that clarifies what is included in the term “securities”.
- Dividend income is exempted from corporation tax (such dividend income may be subject to special defence contribution tax).
- - Interest income not derived from the company’s ordinary business activities is exempted from corporation tax. Such interest is subject to special defence contribution tax.
- - Profits of a permanent establishment abroad are not taxed in Cyprus, under certain conditions.
- - All expenses incurred wholly and exclusively in earning the income of the company and supported by proper valid evidence are tax deductible, including donations to approved charities (with receipts), employers’ contributions to social insurance and approved funds on employees’ salaries and also entertainment expenses (lower of €17.086 or 1% of the gross income of the company)
- - Company losses can be carried forward indefinitely.
- - Any tax suffered abroad on income subject to income tax can be credited against any income tax payable on such income irrespective of the existence a double tax treaty.
- - Cyprus has signed an impressive number of treaties for the avoidance of double taxation. There are currently treaties covering approximately 45 countries. This offers significant possibilities for international tax planning through Cyprus.
Special defence contribution
- - All residents of the Republic are subject to special defence contribution at 17% on dividend income. Non residents are not subject to defence contribution. The following exceptions apply for dividend income:
i. Dividend paid from one Cyprus tax resident company to another Cyprus tax resident company is exempted from special defence contribution tax. This excludes dividends paid indirectly after 4 years from the end of the year in which the profits which were distributed arose.
ii. Dividends received directly or indirectly from dividends on which defence contribution has already been paid.
iii. Dividends received from non-resident companies. The exemption does not apply if the payee company engages more than 50% in activities, which lead to investment income and the foreign tax is substantially lower than the tax burden of the Cypriot company. The tax authorities have clarified through a circular that “significant lower” means a tax burden rate below 5%. When the exception does not apply, the dividend income is subject to special contribution for defence at the rate of 17%.
- Interest income that has been derived from sources that are considered not to be normal activities is subject to special defence contribution at the rate of 30%. Such interest is excluded from corporation tax.
Deemed dividend distribution
- - A company resident in the Republic is deemed to have made a distribution of 70% of its profits after tax (after tax in addition to corporation tax includes special defence contribution tax, capital gains tax and any tax paid abroad that has been credited against income tax and/or special defence contribution tax for the relevant year) in the form of dividends at the end of the two years from the end of the tax year in which the profits relate and must account for 17% special defence contribution thereon. The amount of deemed dividend is reduced by the amount of actual dividend distributed during the two preceding years and during the tax year to which the profits relate. The deemed distribution provisions do not apply to profits which relate directly or indirectly to non-resident shareholders. In case of two tier structures of Cyprus companies (parent with subsidiary) owned 100% by non-resident shareholders, the tax authorities have clarified that defence contribution does not need to be paid by the subsidiary. In cases where the subsidiary is not ultimately held 100% by non-cyprus tax resident shareholders defence contribution paid by the subsidiary or deemed distribution is refundable to any non-resident shareholders upon receipt of an actual dividend.
- - The cumulative profits of the last five years prior to the company’s dissolution, which have not been distributed or deemed to have been distributed, will be considered as distributed on dissolution and will be subject to special contribution for defence at the rate of 17% (3% for collective investment schemes). This provision does not apply in the case of dissolution under reorganization. This applies only in the case that the shareholder is a Cyprus resident individual.
Reduction of share capital
- - In the case of reduction of the capital of a company, any amounts paid or due to the shareholders over and above the paid share capital will be considered as dividends distributed subject to special defence contribution at the rate of 17% after deducting any amounts which have been deemed as distributable profits. This applies only in the case that the shareholder is a Cyprus resident individual.
Disposal of assets to shareholders at less than market value
- - When a company disposes of an asset to an individual shareholder or relative of his up to second degree or his spouse for a consideration less than its market value, the difference between the consideration and the market value will be deemed to have been distributed as a dividend to the shareholder. This provision does not apply to assets originally gifted to the company by an individual shareholder or a relative of his up to second degree or his spouse. This applies only in the case that the shareholder is a Cyprus resident individual.
Assessment and collection of corporation tax
- - A company is required to prepare audited financial statements and submit tax computations and income tax return to the income tax office annually. All the above documents must be submitted following the year of assessment (i.e. for the year 2013 of assessment the deadline is the 31st March 2015).
- - However, the self-assessment form together with the payment of the income tax due must be submitted not later than on the 1st of August of the following year. Payments made after the 1st of August carry interest and/or penalties.
- - The Cyprus Income Tax Law also provides that companies must estimate their taxable profits before the end of the year of assessment and submit during that year a provisional assessment on the basis of which the corporation tax is payable in three installments. If the taxable income declared on the provisional assessment is less than 75% of the taxable income as it is finally determined when audited financial statements are prepared, then a surcharge is levied on the difference of the income tax payable. A provisional assessment may be revised at any time before the year-end. If a company estimates that it will not have any chargeable income, the submission of the provisional assessment is not required.
- - In cases where the tax paid with the provisional assessment exceeds the tax that is payable according to the final tax computation any amounts which are repayable to the company will be repaid with interest.
Cyprus Double Tax Treaties
- - The great majority of the tax treaties of Cyprus follow the model treaty of the Organization in Economic Cooperation and Development (OECD). Provisions are changed to reflect the different tax systems and the economic priorities of the treaty partners.
- - Cyprus has conducted tax treaties with various countries. Currently there are treaties with approximately 45 counties. The existence of these treaties combined with the low tax paid by the Cyprus companies offer excellent opportunities for international tax planning through Cyprus, taking under consideration the following:
- - Any tax paid in the country with which Cyprus has a treaty, is deducted from the Cyprus tax payable on the same income.
- - Cyprus companies are not required to withhold tax on payments made from Cyprus, in respect of dividends, interest and royalties.
- - Cyprus is one of the few countries in the world, which has conducted tax treaties with almost all East European countries.
- - Cyprus is not considered to be a tax heaven by most tax jurisdictions and thus free from suspicion usually associated with tax heaven operations.
Tax sparing credits
- - A number of other benefits are also available through the use of Cyprus' Double Tax Treaties. A very important benefit that appears in a number of Cyprus Treaties is the availability of tax sparing credits. Tax sparing credits are the tax credits not only in respect of tax actually paid in Cyprus, but also the tax which would have been otherwise payable had it not been for the incentives granted in Cyprus which result on exemption or reduction in tax.
International Tax Planning
- - Tax planning is the arrangement of the one's financial and business affairs in such a manner as to attract either locally or abroad the minimum tax, without contravening any law or defrauding the revenue by not declaring profits or by other deceitful means. Cyprus, thanks to its favorable tax regime and its wide network of double treaties, holds an important position in international tax planning.
Applicability of Cypriot Companies
- - When working on tax planning and trying to include in the scenario a holding company, a financing company of a trading company, the Cypriot company regime, may surely give an excellent and tax efficient solution.
A Cypriot company is an ordinary company that, besides holding participation in domestic and foreign entities, it may be engaged in other activities such as trading and manufacturing or financing.
The main advantages of a Cypriot Company concerning the specific sections mentioned above are analyzed in “INFORMATION CENTRE” section.