Cyprus imposes corporation tax on 'companies': this term includes all companies incorporated or registered under any Cyprus law, and any foreign company which carries on business or has an office or place of business (permanent establishment) in Cyprus.
As from 2003, Cyprus applies a residence-based taxation regime. "Resident in the Republic", when applied to a company, means a company whose management and control is exercised in the Republic; and "non-resident or resident outside the Republic" will be construed accordingly.
A Company is considered to be tax resident in Cyprus if its management and control is exercised in Cyprus. In order to achieve tax residency, several factors are taken into consideration by the Tax Authorities such as the make-up of the Board of Directors, the place where major decisions are taken and major contracts are signed. Tax residency is required in order for a company to be taxed under the Cyprus tax laws and also for taking advantage of all European directives as well as the Double Tax Treaty (DTT) network that Cyprus has secured for tax resident persons.
As from 1st January 2015 onwards, if an adjustment in the income of one party has been made in accordance with the arm’s length provisions of Section 33 of the Cyprus income tax legislation, then a corresponding deduction/expense should be given to the other party of the transaction. Thus, if for example a deemed interest income is imposed on an interest free loan provided by one Cyprus company to another, then a corresponding deemed interest expense should be given to the Cyprus company receiving the respective loan.
Due to the global initiatives in the international tax sector, particularly the OECD/G20 initiative and the base erosion and profit shifting (BEPS) action plan, the profit margins (0,35% or lower) that used to be applicable for tax purposes on back to back financing arrangements, have ceased to be acceptable as from 1st of July 2017 (increased to 2,29% if simplification rules are applied).
The term “intra-group financing transaction”, refers to any activity consisting in the granting of loans or cash advances to related entities, remunerated (or that should be remunerated) by interest to related companies, financed by financial means and instruments, such as debentures, private loans, cash advances and bank loans.
In view of the above, for companies involved in such intra-group financing transactions, two separate tax computations should be submitted for the accounting period of 2017. One for the period 01/01/2017-30/06/2017 and one for the period 01/07/2017-31/12/2017.
However, from the 1st of July 2017 onwards, the tax computation will be based on the arm’s length principle, being the international standard adopted by OECD member states.
This means that for each intra-group financing transaction conducted (for example a loan agreement) the Company has to determine through a transfer pricing (TP) study, that the agreed remuneration (for example interest) complies with the arm’s length principle i.e. corresponds to the price which would have been accepted by independent entities in comparable circumstances. If according to the transfer pricing study, a higher interest rate should be imposed on the loan agreement, the tax computation will be adjusted accordingly.
For the sake of simplification, a back to back intra-group financing arrangement will be deemed to comply with the arm’s length principle, if the company receives a minimum after tax return of 2% (or 2,29% before tax) on the assets generating the interest income (simplification measures). Even in such a case, the Tax Authorities may still request the submission of a transfer pricing study.
Corporate tax for resident companies is imposed at the rate of 12,5% for each year of assessment upon the taxable income derived from sources both within and outside Cyprus. However, in arriving at the taxable income, deductions on such income and exemptions must be taken into account; all relevant expenses for the production of that income are deductible expenses whereas dividends, capital gains or profits from the sale of shares and other securities are also tax exempt.
There is no minimum holding requirement for the exemption of foreign dividends from taxation in Cyprus when received by a Cyprus tax resident company. This makes it easier for portfolio investors to benefit from the dividend participation exemption.
Therefore, the requirement is that the dividend from abroad tax exemption (i.e. no tax) will not apply only when:
The above exemptions do not apply (as from 1st January 2016), for dividends which are tax deductible for the paying company.
“Permanent establishment” is a fixed place of business, through which the business of an enterprise is wholly or partly carried on. "Permanent establishment" has the same meaning as defined in the OECD Model Tax Convention
For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
The term "permanent establishment" includes especially:
A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.
Not with standing the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include:
Losses of a permanent establishment outside the Republic Tax losses arising from a permanent establishment maintained outside the Republic can be offset against taxable profits of the company arising in the Republic in the same year. However, any subsequent taxable profits from such a permanent establishment are taxable up to the amount of tax losses previously offset.
Allowable Deductible expenditure needs to be incurred 'wholly and exclusively' for the business; however, mixed private/company expenses can often be apportioned. Among others, the following expenses are allowable:
Non-deductible expenses
The following expenses cannot be deducted from the income in the computation of taxable income:
Effective from the 2015 tax year, any exchange differences, both gains and losses, and irrespective of whether they are realised or unrealised, will no longer be taxable or tax deductible, irrespective of the purpose for which the funds in a foreign currency have been used for. This provision will not apply in the case of companies trading in foreign currencies and related derivatives. However, such companies will be able to may make an irrevocable election not to be taxed on unrealised gains or losses, and to be taxed only when such gains or losses are realised.
Taxable Losses carried forward
Previously, any trading losses that have arisen in the Cyprus Company could be set off against its profits and any excess could be carried forward, indefinitely.
However, according to the relevant Amendment with the Law 188(I)/2012, article 13(1), the taxable loss of a specific year can be carried forward only to the next five years.
The restriction of five years means that for the taxation of year 2012 (year the law becomes effective), the taxable losses which can be claimed from the taxable income of year 2012 should be the losses relating to years 2007 to 2011 (five years).
Circular – ‘Titles’
Circular 2009/06 (amending Circular 2008/13) was issued by the Income Tax Authorities listing the financial instruments that fall within the definition of ‘titles’. The full list is as follows:
The circular applies for tax years 2003 and onwards.
Therefore, profits from the sale of the above titles are not taxed in Cyprus.
One crucial point to mention is that promissory notes, bills of exchange and cryptocurrencies are NOT titles according to the Income Tax Law. Therefore, any profit from the sale of promissory notes is taxed at 12,50%.
Group relief provisions
The Group Relief rules provide for group relief of tax losses among companies of the same group. A company will be considered as member of a group if:
Group tax losses may be set off as long as both companies are Cypriot tax residents and are members of the same group during the whole year of assessment. Only the loss of any year of assessment of a company can be set off against the other company's profits of the corresponding year of assessment. Losses brought forward will not be available for Group Relief. In addition, where a company has been incorporated by its parent company during the tax year, this company will be deemed to be a member
of this group for group relief purposes for that tax year.
As from 1st January 2015, interposition of a non – Cyprus tax resident company(ies) will not affect the eligibility for group relief as long as such company(ies) is/are tax resident of either an EU country or in a country with which Cyprus has a tax treaty or an exchange of information agreement (bilateral or multilateral). A partnership or a sole trader transferring a business into a company can carry forward tax losses into the company for future utilisation.
The group loss relief is extended to include qualifying group subsidiary companies that are also tax residents in any EU member state. However, this will only apply provided the group subsidiary company has exhausted all the means available for using the available tax loss in its respective country of residence or in the country where its immediate holding company resides.
Cyprus Withholding Tax
Payment of dividends, interest and capital distributions made by a Cypriot company to non-resident shareholders are free from any withholding taxes
Provisional tax
For every year, the Company should submit Provisional Tax Assessment on 31 July of the specific year, and pay the tax relating to the year by two instalments.
Provisional tax instalments made by companies and self-employed individuals are two (from three that previously applied) and these instalments are due on 31 July and 31 December each year.
Then, when the Tax Form for the specific year is prepared, in case the profit per the Assessment is more than 75% of the actual profit per the Tax Form, then the penalty of 10% on the tax payable is not levied.
However, the Company can submit a Revised Provisional Tax Assessment until the 31st of December of the specific year, in order to change the profit estimate and pay the total tax and thus, avoid the 10% penalty.
Reorganisations
Transfers of assets and liabilities between companies in the context of reorganisations can be effected without any tax consequences.
Reorganisations include mergers, demergers, partial divisions, transfer of assets, exchange of shares and transfer of registered office of a European Company (SE) or a European Cooperative Company (SCE).
Tax losses can be carried forward by the receiving entity.
Annual wear and tear allowances on assets
These are calculated as a percentage on the cost of each asset used in the business and the relevant amount is deductible from the taxable income.
Special contribution for defence
As per Article 3 of the Special Contribution for the Defence of the Republic Law No. 117(I)/2002, Cyprus tax resident individuals and companies and also individuals domiciled in Cyprus, are liable to Special Defence Contribution (“SDC”) as follows:
Deemed dividend distribution
Under the deemed distribution provisions, a Cyprus company should distribute as dividends at least 70% of its accounting profits (after tax) within two years from the end of the year in which the relevant profits were generated. If the above dividend distribution provisions are not satisfied, then the Cyprus Company will be considered to have declared such dividends, and SDC is applicable.
Deemed dividend distribution is reduced with payments of actual dividends which have already been paid out from the profits of the relevant year.
SDC is charged to the extent that the ultimate direct and/or indirect shareholders of the company are individuals who are both Cyprus tax resident and Cyprus domiciled.
As of 16 July 2015, the deemed distribution provisions should not apply to the extent that the ultimate direct/ indirect shareholders of the company are individuals who are Cyprus tax residents, but non- Cyprus domiciled.
For the purpose of calculating the amount of the deemed distribution, the term profits means the accounting profits arrived at using generally acceptable accounting principles, after the deduction of any transfers to reserves as specified by any law. Any losses brought forward, group losses as well as any amounts, including any additional depreciation, which emanate from the revaluation of movable and immovable property are ignored.
The term tax includes:
Capital Reduction
In the case of a capital reduction of a company, any amounts paid or due to the shareholders over and above the previously paid-in equity, will be considered as dividends distributed subject to special defence contribution at 17% after deducting any amounts which have been deemed as distributable profits.
The redemption of units or shares in a Collective Investment Scheme is not subject to the above provisions.
Before 16 July 2015, the above three provisions applied only if the ultimate shareholders (direct or indirect) are individuals who are tax residents in Cyprus. As from 16 July 2015, the above provisions apply only if the ultimate shareholders (direct or indirect) are individuals who are both tax residents in Cyprus and domiciled in Cyprus.
Disposal of assets to shareholder at less than market value
When a company disposes of an asset to a shareholder who is individual or a relative of his up to second degree or his spouse for a consideration less than the market value of the asset, 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 for assets originally gifted to the company by a shareholder who is individual or a relative of his up to second degree or his spouse.
Company dissolution
In the case that a company is dissolved, the accumulated profits of the last 5 years prior to the 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). The above provision is not applicable if there is a dissolution under a reorganisation.
Non – domiciliation rules
The Special Contribution for the Defence of the Republic Law (SDC) imposes tax on certain categories of income (interest, rents, dividends) received by persons who are considered to be residents for tax purposes of Cyprus, subject to any available exemptions. The SDC Law also includes provisions for the deemed distribution of profits of Cypriot tax resident companies to the extent that the shareholders of such companies are Cypriot tax residents.
With the introduction of the concept “domicile in the Republic” in the SDC Law, non-domiciled individuals will be exempt from Special Defence Contribution on their dividend, interest and rental income, even if they spend more than 183 days in Cyprus (Cyprus tax residents). Therefore, non-domiciled (or “non-dom”) Cyprus tax resident individuals will be exempt from both income tax and SDC on dividend income and interest income. This amendment aims to attract high net worth individuals to reside in Cyprus.
The new provisions define domicile in accordance with the rules of the Wills and Succession Law:
A person who has a domicile of origin in Cyprus will be treated as “domiciled in Cyprus” for SCD purposes with the exception of:
Irrespective of his/her domicile of origin, an individual who remains a tax resident of Cyprus for a period of at least 17 years out of the last 20 years prior to the tax year in question, shall be deemed as domiciled in Cyprus for SDC purposes.
The law includes anti-abuse provisions as per which the tax authorities have the right to disregard the transfer of property made by a person who is domiciled in Cyprus to a relative up to a third degree of kindred who is not domiciled in Cyprus in case such transfer was made with the aim to avoid the imposition of SDC as a result of the introduction of “non-domicile” rules. The non-domicile rules are expected to further encourage the relocation of corporate executives and encourage high-net-worth individuals to take up residency in Cyprus.
The non-domicile rules are effective as of the date of publication in the Official Gazette of the Republic (17th of July 2015).
Capital Gains Tax
Capital Gains Tax (“CGT”) applies to the gains of an individual or company arising from the disposal or disposition of chargeable property situated in Cyprus and shares in companies which directly or indirectly own immovable property situated in Cyprus.
Such gains are not subject to income tax. The Law in question is the Capital Gains Tax Law 52/80 as amended.
Chargeable property means:
The gain made from a chargeable disposal or disposition of property is subject to CGT at the rate of20%.
Certain disposals are exempt from CGT. These are the following:
Determination of capital gain
Liability is restricted to gains accruing since 1 January 1980. The costs that are deducted from the gross proceeds on the disposal of immovable property are the market value of the property at 1 January 1980, or the costs of acquisition and improvements of the property, if made after 1 January 1980, as adjusted for inflation up to the date of disposal based on the consumer price index (CPI) in Cyprus. Expenses that directly relate to the acquisition and disposal of immovable property (e.g. transfer and legal fees etc.) are also deducted, subject to certain conditions.
Lifetime Exemptions
The Transfer of Immovable property is made at the District Lands Office.
Transfer fees are charged by the Department of Land and Surveys to the acquirer on transfers of immovable property.
The transfer fees are calculated on the market value of the property or lease/sublease as estimated by the Department of Land and Surveys at the following rates:
The following transfers are exempt from transfer fees:
Transfer fees are reduced by 50% in cases where the purchase of immovable property is not subject to VAT.
On the transfer of immovable property by donation between spouses, spouses and children or relatives up to third degree of kindred, transfer fees are calculated on the value of the property as at 1 January 2013 at the following rates:
Cyprus IP Rights Box Regime
Background Information
As part of the amendments in the Cyprus Income Tax Laws towards the end of May 2012, and as part of the government’s programme to stimulate the economy, a series of incentives and exemptions relating to income from IP rights, commonly known as an IP rights box have been introduced. The amendments were effective from January 1, 2012.
Under the old IP regime, qualifying intangible assets are those defined in the Patent Rights Law, the Intellectual Property Law and the Trademarks Law.
In calculating the taxable profit, an 80% deemed deduction applies to the net profit from the exploitation and/or disposal of such intangible assets.
Any capital gain from the sale of such intangible asset by any person who did not enjoy the tax benefits of the provisions of the old IP regime is exempt from tax.
The net profit is calculated after deducting from the income and/or profit that is generated from the exploitation and/or disposal of such intangible assets, all direct expenses associated with the production of this income or profit, as well as a 20% annual capital allowance, applicable on the cost of acquisition and/or development of such an intangible asset.
Where a net loss is created, only 20% of such loss is eligible to be surrendered to other group companies (under the group relief provisions) or to be carried forward to subsequent years (subsequent to the 5-year rule restriction).
Transitional provisions have been included for taxpayers who have previously entered the old IP Box regime. More specifically those taxpayers shall be able to continue to benefit from the application of the old IP regime until 30 June 2021, with respect to IPs which:
a. were acquired before 2 January 2016, or
b. were acquired directly or indirectly from a related person during the period from 2January 2016 until 30 June 2016 and which assets at the time of their acquisition were benefiting under the IP Box regime or under a similar scheme for intangible assets in another state, or
c. were acquired from an unrelated person or developed during the period from 2 January2016 until 30 June 2016.
For intangible assets which were acquired directly or indirectly from a related person during the period from 2 January 2016 until 30 June 2016 and which do not fall under the above provisions, a transitional period until 31 December 2016 will apply.
The income qualified for the application of the current IP Box regime now includes embedded income and income from intangible assets for which only economic ownership exists.
New IP regime
The provisions of the new IP regime are effective from 1 July 2016.
The new IP regime apply only to patents and patents equivalents, copyrighted software, utility models and other IP assets that are non-obvious, useful and novel (Qualifying IP assets). These are assets acquired, developed or exploited by a person in furtherance of his business, which is the result of research and development activities and for which economic ownership exists. Any marketing related IP assets such as trademarks will not be treated as qualified assets.
Qualifying profits are determined under the Organisation for Economic Co-Operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Action 5 nexus approach. In calculating the taxable profit, an 80% deemed deduction applies to the qualifying profits from the exploitation of such qualifying intangible assets which is calculated based on a specific formula that follows the modified nexus approach.
Capital Gains arising from the disposal of a qualifying asset are not included in the qualifying profits and are fully exempt from income tax.
The taxpayer may choose to forego the whole or part of the deduction in each year of assessment. Where the calculation of qualifying profits results in a loss, only 20% of this loss may be carried forward or group relieved.
The Nexus Approach provides that there should be sufficient substance and an essential nexus between the expenses, the IP assets and the related IP income in order to benefit from a new Cyprus patent box regime. Qualifying profits will be calculated by using the following ratio:
Qualifying expenditure excludes though the R&D costs of outsourcing to related parties, contrary to the cost of outsourcing to unrelated parties which are considered as part of ‘qualifying expenditure”, the cost of the acquisition of intangible assets and costs which cannot be directly connected to a specific qualified IP asset.
In addition, an up-lift expenditure equal to the lower of:
Expenditure of acquiring a non-qualifying intangible asset in accordance with the new rules or which does not qualify for the transitional provisions and the asset is used in furtherance of the business of the taxpayer can be amortized over the period of its useful life (maximum of 20 years) in accordance with the accepted accounting principles.
Goodwill does not qualify for amortization.
Introduction of a Notional Interest deduction (NID) regime on equity
Companies (including permanent establishments of foreign companies) will be entitled to a NID on equity.
Companies that attract or introduce new equity/capital would be able to claim a NID of up to 80% of their taxable income, reducing their overall effective tax rate to as low as 2,5%.
The NID would be calculated as follows: NID = qualifying equity x reference rate. Qualifying equity will include share capital and share premium issued (provided it is fully paid) on or after 1st January 2015. New equity does not include amounts that have been capitalised as equity and which are the result of a revaluation of movable or immovable property.
Reference interest rate means the interest rate on the 10-year government bond rate (as at the end of the year preceding the relevant tax year) of the country in which the qualifying equity is invested in, increased by 3%, subject to a minimum rate equal to the 10-year Cyprus Government bond rate increased by 3%.
The notional interest would be deductible according to the same rules as actual interest expense, i.e. the degree of tax deductibility would depend on the way the new equity/capital will be utilised. In the event of losses, the NID will not be available. Consequently, this means that the NID cannot create or increase a tax loss. Taxpayers can elect not to claim the NID or claim part of it for each year.
The law includes a number of anti-abuse provisions. Where the capital originates directly or indirectly from loans obtained by another Cyprus company that has itself received a tax deduction for interest expense, then the NID will be reduced by that same amount. Similarly, where new capital originates either directly or indirectly from new capital introduced to another Cyprus company, only one company will be entitled to the NID.
The NID provides a significant tax incentive for existing companies to re-capitalise their operations. Furthermore, it aims to attract new companies to set up their operations in Cyprus and benefit from this tax incentive.
The NID regime is effective as of 1st January 2015.
Tonnage tax regime
Shipping companies
Taxation for shipping activities is governed by the Merchant Shipping (Fees and Taxing) Legislation which provides for exemption from Income tax on the shipping activities. It, however, provides for the Tonnage Tax System (TTS) which applies to qualifying ship owners, managers and charterers. TTS can apply to qualifying community ships (ships registered to the Shipping Registry of an EU member or of a country within the European Economic Area) and to non-community ships.
Non-community vessels owners
They must comply with certain conditions in order to enjoy the perks of being taxed under the TTS. ¬These include among others:
1. At least 60% of the fleet should comprise of EU flagships. e percentage is measured in terms of tonnage.
2. If the fleet is less than the requested 60%, theTonnage Tax regime can still be utilized if:
a. the commercial and strategic management of the fleet must be carried out from the EU/EEA.
b. A share of the fleet should comprise of EU flag ships and this share shall not be reduced in the following 3 years from the first year of TTS election.
The main advantages that Cyprus has to offer in brief are:
o Profits from exploitation of a qualifying ship employed in a qualified activity
o Profits from the disposal of a qualifying ship
o Profits from rendering crewing and/or technical ship management services to a qualifying ship
o Full tax exemption of dividends paid out of profits falling within the Tonnage Tax regime
o No capital gains tax on the sale or transfer of a Cyprus-registered vessel or the shares of a vessel owning company
o No income taxon the wages of officers and crew
o No estate duty on the inheritance of shares
Important general notes:
TheCyprus Alternative Investment Funds (AIFs) and Undertakings for Collective Investment in Transferable Securities (UCITS)
The Alternative Investment Funds, as these are explicitly stated in the Alternative Investment Funds Law 124(I)/2018, are collective investment undertakings, which:
Three types of AIF are allowed to be established in Cyprus:
The various legal forms inwhich either type of AIFs can manifest are as follows:
AIFLNP:
AIF/RAIF:
UCITS:
A UCITS is an undertaking the sole object of which is the collective investment of capital raised from the public in transferable securities and/or other liquid financial instruments, as such are referred to in the UCI Law. It also operates on the principle of risk spreading and the units/shares of which are, at the request of the investor, redeemed or repurchased, directly or indirectly, out of this undertaking’s assets.
UCITS can take the following legal forms:
Taxation of funds
Funds whose management and control is exercised in Cyprus are considered tax residents in Cyprus and are subject to taxation in Cyprus. In cases where the funds have compartments, each compartment is taxed separately. Under circumstances and depending on the legal form of the fund, some funds may be transparent for tax purposes.
Additional key provisions which are relevant to funds are set out below:
Sale of Fund Units
There is no capital gains tax on the gains arising from the disposal or redemption of units in funds unless the fund owns immovable property in Cyprus.
However, even if it owns immovable property in Cyprus, no capital gains tax arises if the Fund is listed on a recognised stock exchange.
StampDuty
No stamp duty obligation exists in cases of subscription, redemption, conversion or transfer of fund’s units.
No creation of a permanent establishment
In accordance to the Cyprus tax legislation, a permanent establishment does not exist:
Management services
Management fees charged toinvestment funds for collective management services are exempt from VAT, undercertain conditions.
Variable remuneration of individuals employed in the Funds industry
Employees and/orexecutives of the following investment fund management companies are free toelect a different mode of personal taxation:
The variable remuneration of the employees and executives of the above investment fund management companies, which is effectively connected to the carried interest, is taxed at the flat rate of 8% with a minimum tax liability of €10.000 per annum. ¬The particular special mode of taxation is available for a period of 10 years.
Other special modes of taxation include the following:
Controlled foreign company (CFC) rule:
Multinational companies sometimes shift profits from their parent company in a high tax country to controlled subsidiaries in low or no tax countries, in order to reduce the Group’s tax liability. The proposed Controlled Foreign Company (CFC) rule should discourage them from doing this.
The CFC rule will allow the Member State where the parent company is located to tax certain profits that the company parks in a no or low tax country. The CFC rule will be triggered if the tax paid in the third country is less than half of that which would have been paid in the Member State in question. The company will be given a tax credit for any taxes that it did pay abroad. This will ensure that profits are effectively taxed, at the tax rate of the Member State in which they were generated.
With the proposed CFC rule, the EU Member State can tax the subsidiaries profits as though they had not been shifted to the no-tax country, thereby ensuring effective taxation at the tax rate of the Member State concerned.
Interest Limitation Rules:
In order to discourage artificial debt arrangements designed to minimise taxes interest limitation rules are adapted which provide that borrowing costs shall be deductible in the tax period in which they are incurred only up to 30% of the taxpayer’s earnings before interest, tax, depreciation and amortisation in a tax year.
General Anti-abuse rule:
General Anti-abuse rule comes to counteract aggressive tax planning when other rules don’t apply. It provides that for the purposes of calculating the corporate tax liability, the tax authorities can ignore an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, are not genuine having regard to all relevant facts and circumstances.
Exit Taxation:
In order to prevent companies from avoiding tax when re-locating assets new exit rules ensure that Member states can impose tax on the value of the of the market value of the transferred assets, at the time of exit of the assets, less their value for tax purposes.
Hybrid mismatches:
Hybrid mismatch rules provide that when a hybrid mismatch:
Effective date of the changes:
The interest limitation rules, CFC rules, and GAAR, which should be transposed into Cyprus shall be effective from 1 January 2019.
Exit tax rules, as well as rules regarding hybrid mismatches will be effective from 1 January 2020, in line with the dates provided in the Directives.
VAT applies on the supply of goods and on the provision of services within the Republic, as well as on the acquisition of goods from Member states of the EU and importation of goods from third countries.
A taxable person is any person, who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity. Through the relevant legislation, taxable persons charge VAT on their taxable supplies (output tax) and are charged by other taxable persons with VAT on goods and services they receive (input tax). Where, output tax is in excess of the input tax, a VAT tax liability is created, and a payment is due to the Republic. Otherwise, when a credit is created, it is either set off against future VAT tax liabilities or an immediate refund is made to the taxable person.
Immediate refund of excess input VAT can be obtained in the following cases:
No VAT cash outflow arises on intra-community acquisition of goods (with the exception of goods subject to excise taxes) as VAT is accounted by using the acquisition accounting method. -This involves a simple accounting entry in the books of the business whereby 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, thereby creating no cost to the business. In cases the acquisition relates to a transaction for which the right to recover the input VAT is not granted, the trader must pay the VAT that corresponds to the acquisition.
Taxable transactions are those executed for a consideration within Cyprus by a taxable person acting as such. These include the following:
VAT rates
The VAT legislation provides for the tax rates shown below:
Exemptions
Transactions involving the below goods or services are exempt from VAT:
VAT on immovable property
1. Leasing of immovable property
As of 13 November 2017, VAT at the standard rate must be charged on lease of immovable property when the lessee is a taxable person and is engaged in taxable activities by at least 90%. The lessor has the right to opt not to impose VAT on the specific property. Th¬e option is irrevocable.
As of 2 January 2018,undeveloped building land sale attracts VAT at the standard rate of 19%.Undeveloped land is defined as land intended for the construction of one or more structures that should be used in carrying out a business activity. VAT does not apply on purchases or sales of land which is located in livestockzones or areas which are not intended for development.
As of 2 January 2018, anytransactions taking place during the process of loan restructurings or forcompulsory transfer to the lender (financial institution), should be taxedunder VAT accounted under the reverse charge provisions.
As of 1 January 2019,leases of immovable property which effectively transfer the risks and rewardsof ownership of immovable property are considered to be supplies of goods. Theyalso become subject to VAT at the standard rate.
Imposition of the reduced rate of 5% on the acquisition and/or construction of residences for use as the primary and permanent place of residence.
As from 8 June 2012, the reduced rate of 5% applies to the acquisition and/or construction of residences to be used by eligible persons (residents of the Republic or/and other EU member states or other non-EU member states) as the primary and permanent place of residence, only after obtaining a certified confirmation from the Commissioner.
The statutory declaration may be filed at any stage at the time of construction of the residence or in case of supply prior to the eligible person obtaining possession. As from 18 November 2016, the reduced rate of 5% applies for the first 200 square meters of the residence’s buildable area as determined by the building coefficient (and not on the first 200 square meters of a residence which does not exceed 275 square meters as was the case up until 17 November 2016).
In case of families with more than 3 children the allowable total covered area increases respectively.
Under the new provisions of the law which apply as from 18 November 2016, a person who has exercised the right to purchase a residence with a reduced rate of VAT is eligible to exercise this right again for the purposes of the purchase of another residence before 10 years have elapsed only if that person has ceased to use the residence as the primary and permanent place of residence before the period of 10 years has elapsed, has notified the Tax Commissioner accordingly and has paid the difference in the VAT between the reduced VAT rate and standard VAT rate as were applicable during the time of delivery or construction of the residence.
Persons who have already acquired a residence on which the reduced VAT rate was imposed, can re-apply and acquire a new residence on which the reduced VAT rate will be imposed, irrespective of whether the 10-year prohibition period for using the initial residence has lapsed or not. A condition for this to apply is that in case the 10-year period of using the residence as the main and permanent place of residence has not lapsed, the persons must return to the Tax Department the difference in the VAT between the standard and reduced VAT rates applicable at the time of the acquisition or construction of the residence.
Persons who make a false declaration to benefit from the reduced rate are required by law to pay the difference of the additional VAT due. Furthermore, the legislation provides that such persons are guilty of a criminal offence and, upon conviction, are liable to a fine, not exceeding twice the amount of the VAT due, or imprisonment up to 3 years or may be subject to both sentences.
Imposition of the reduced rate of 5% on the renovation and repair of private residences
¬The reduced rate of 5% applies to all the residences in which renovations and repairs are necessary. Th¬ere is a condition though, that a period of 3 years has lapsed from the first day the residence was used. In cases where the value of the materials intended to be used in the renovation and repair works exceed by more than 50% the value of the services, then the value of these materials is subject to the standard VAT rate.
Additionally, the reduced rate of 5% is applicable to the renovation and repairs of old private residences, for which a period of 3 years has lapsed from the first day the residence was used, and which are used by vulnerable groups of people or which are residences located in remote areas.
Domestic reverse charge on electronic devices
The provisions for domestic reverse charge on electronicdevices have become effective as of 1st October 2020.
Zerovs Exempt supplies
The difference between zero rate and exempt supplies is that businesses that make exempt supplies are not entitled to recover the VAT charged on their purchases, expenses orimports.
Irrecoverableinput VAT
There are some caseswhere VAT input cannot be recovered:
Obligation for registration
Individuals and companies have the obligation to register if their turnover for the prior 12 months exceeded the threshold of €15.600 or if they expect that their turnover will exceed the threshold in the next 30 days. However, there are businesses that can register voluntarily. Such businesses are those whose turnover does not exceed the threshold or those whose supplies are outside the scope of VAT.
Obligation for registration also exists when the businesses acquire goods from other EU member states which are more than €10.251,61 during any period. Obligation for registration arises for businesses who are engaged in activities involving supply of services in the EU, for which the recipient shall apply VAT under the reverse charge provisions. Similarly, businesses in Cyprus which carry activities through the receipt of services from abroad, for which the Cyprus business is obliged to apply VAT through reverse charge provisions, an obligation exists if these services exceed the threshold of €15.600. No registration threshold exists for the provision of intra-community supplies of services.
VAT declaration
¬The businesses shall submit electronically the VAT returns on a quarterly basis. In case where VAT is payable i.e. VAT output is more than the VAT input, the payment must take place the 10th day of the second month following the end of the VAT period.
VAT registered persons have the right to request for a different filing period. Th¬e approval of the Commissioner of Taxation is required. ¬The Commissioner of Taxation also has the right to request from a taxable person to file his VAT returns for a different period.
Payment or refund of VAT
Where the input VAT incurred on expenses exceeds the output VAT on sales, the taxable person is in a VAT refundable position for the VAT period. This is either refunded or transferred against the VAT due amount for the next VAT period. In the cases where a refund is requested (via submission of the 4B form together with the VAT return), the VAT Authorities need to repay the amount within 4 months (extended to 8 months in case of investigation). If they fail to repay within the above time limits, interest will be due on the principal amount for every complete month the Authorities do not repay the VAT refundable amount. Payments are made electronically which requires informing the Authorities of the taxable person’s bank account details through the TF1900 form.
The Commissioner of Taxation reserves the right to suspend the payment of a VAT credit balance in case where the taxpayer has failed to comply with the obligation to submit Income Tax Returns. The refund is suspended until the taxpayer complies with the relevant obligations. No interest will be paid to the taxpayer where the delay in refunding the VAT is due to late submission of Income Tax Returns.
VAT Information Exchange System (VIES)
VIES (recapitulative return) is a system of exchange of information between the VAT Authorities of the EU Member States used to monitor intra-community supplies of goods and services and the VAT due.
The VIES return is a monthly electronic return that needs to be submitted within 15 days from the end of the relevant month (i.e. VIES for December 2018 needs to be submitted by 15/01/2019).
Maintenance of books and records
Every person deriving income from the following sources:
is obliged to:
Books and records should be kept for at least six years and be ready to be presented to the Tax Department if requested.
Deadline for submitting an objection to the Commissioner of Taxation
The deadline for submitting an objection to the Commissioner of Taxation is set at 60 days from the date of the notification of the decision of the Commissioner to the taxpayer and not from the date of the issuance of relevant assessment.
Maintenance of books and records - Individuals
On February 9, 2018 the Cyprus Tax Department (CTD) issued Interpretative Circular 18, Income Tax, interpreting the obligations arising for individuals under the provisions of the Assessment and Collection of Taxes Law to maintain books and records and prepare audited financial statements.
As per s.30 of the Assessment and Collection of Taxes Law, “any person who derives income from the sources prescribed in paragraphs (a) (c) (e) and (f) of subsection (1) of section 5 or in paragraphs (a) (d) and (e) of subsection (2) of section 5 of the Income Tax Law, shall for every year of assessment:
Furthermore, only physical persons (individuals) whose annual turnover does not exceed the amount of EUR70.000 shall be exempted from the provisions of the aforementioned paragraph (b).
The Circular clarifies that for the purposes of the exemption, “annual turnover” includes, only the income that accrues from the carrying out of a business activity, irrespective of the nature of the income. If the taxpayer in question derives interest, dividends or rents in excess of the income derived by the carrying out of a business activity, these will be taken into account in his/her total income for the purposes of preparing financial statements for the submission of his/her tax return.
The carrying out of a business activity for the taxpayer in question is an absolute condition for the preparation of financial statements; if the taxpayer in question is an employee or a pensioner, and in above of his/her emoluments deriving from salaried services receives interest, dividends or rents, then the taxpayer is under NO obligation to prepare financial statements under s.30(1)(b) irrespective of his/her total income amount.
It should be stressed that all prescribed books and records would need to be maintained and provided to the CTD upon request in the context of a tax audit.
Stamp Duty
Documents relating to property situated in the Republic or to any matters or issues executed or performed in the Republic are subject to stamp duty. The place where the document is drafted is not relevant. The maximum amount of stamp duty payable is €20.000 per contract.
Cyprus Tax Law Amended to Allow for Exchange of Information under Tax Treaties
Cyprus amended its domestic tax legislation to incorporate the exchange of information provisions in Article 26 of the OECD Model Tax Treaty and as found in Cyprus tax treaties. These changes should allow Cyprus to bolster its reputation and respectability particularly with respect to being a jurisdiction that fulfils its information sharing obligations and cooperates with other jurisdictions in tackling tax evasion.
The amended legislation allows for the waiver of other legislative secrecy provisions, including that of bank and professional secrecy laws which include provisions for the maintenance of client confidentiality and data protection. However, the right to legal professional privilege is maintained and any information that provided during communications between a professional legal advisor and his/her client may not be disclosed to third parties.
The disclosure of information in the capacity of trustee or nominee of a non-resident person is not covered by this exception. Subject to legal privilege, lawyers as well as accountants will have a duty to disclose when required to do so for the purposes of exchange of information. Please note that the exchange of this information will be in very rare circumstances and it may involve only very substantial investments. The time and effort required makes it worthless to go through the whole process for anything less than very substantial investments. The time and effort required is too much as evidenced by the key provisions below before information can be exchanged.
The key provisions of the new rules include the following:
December 2015 Amendments
The second set of amendments in the provisions of the Cyprus tax legislation aim towards further improving the competitiveness of the tax system of Cyprus.
The second set of draft Bills submitted to the Cyprus Parliament were voted into law on 16 December 2015 and is in addition to the amendments already voted into law in July 2015.
These changes relate to the income tax legislation and the capital gains tax legislation and are summarised below.
A. Corporate Income Tax Law
These restrictions do not apply in the case of publicly listed companies andtransfers of shares on death.
The new provisions will apply as of 1st January2016.
B. Capital GainsTax Law
o The identity of the person underexamination;
o A description of the informationrequested and the nature and manner in which the requesting state wishes toreceive the information from the Cyprus tax authorities;
o The tax purpose for requesting theinformation;
o The reason for the belief that therequested information is held by the Cyprus tax authorities or found in thepossession or under the control of a person within the jurisdiction of Cyprus;
o The name and address of any person whomay hold the requested information to the extent the information is madeavailable;
o A declaration that the provision ofthe information is in accordance with the legislation and administrativepractices of the requesting state and, where the requested information is foundwithin the jurisdiction of the state in question, the relevant authorities mayobtain the information according to its laws and according to the terms of itsordinary administrative practices; and
o A declaration that the requestingstate has exhausted all means at its disposal within its jurisdiction to obtainthe requested information, except where resorting to such means would have imposed an excessive burden.
Immovable Property Tax
Under the Cyprus ImmovableProperty Tax Law, all property owners, regardless of whether they are residentin Cyprus or not, they are liable to pay an annual tax based on the total valueof all the immovable property registered in their name.
Tax Diary - By the end of each month
31 January
31 March
30 April
31 May
30 June
31 July
1 August
31 August
31 December
Electronic submission of tax returns
Every person (individual or company) who has an obligation to submit a tax return in accordance with the provisions of the Assessment and Collection of Taxes law must do so electronically.
Administrative penalties
An administrative penalty of €100 or €200 (depending on the specific case), is imposed for the late submission of a tax return or late submission of supporting documentation requested by the Commissioner.
In the case of late payment of the tax due, a penalty of 5% is imposed on the unpaid tax. An additional penalty of 5% is imposed if the tax remains unpaid 2 months after the payment deadline.
Public interest rate
The interest rate applicable on late payment of taxes is set by the Minister of Finance through a Decree and it is applicable for the whole year. The rate for 2019 is 2%.
The applicable interest rates for the previous years are as follows:
Cyprus imposes corporation tax on 'companies': this term includes all companies incorporated or registered under any Cyprus law, and any foreign company which carries on business or has an office or place of business (permanent establishment) in Cyprus.
As from 2003, Cyprus applies a residence-based taxation regime. "Resident in the Republic", when applied to a company, means a company whose management and control is exercised in the Republic; and "non-resident or resident outside the Republic" will be construed accordingly.
A Company is considered to be tax resident in Cyprus if its management and control is exercised in Cyprus. In order to achieve tax residency, several factors are taken into consideration by the Tax Authorities such as the make-up of the Board of Directors, the place where major decisions are taken and major contracts are signed. Tax residency is required in order for a company to be taxed under the Cyprus tax laws and also for taking advantage of all European directives as well as the Double Tax Treaty (DTT) network that Cyprus has secured for tax resident persons.
As from 1st January 2015 onwards, if an adjustment in the income of one party has been made in accordance with the arm’s length provisions of Section 33 of the Cyprus income tax legislation, then a corresponding deduction/expense should be given to the other party of the transaction. Thus, if for example a deemed interest income is imposed on an interest free loan provided by one Cyprus company to another, then a corresponding deemed interest expense should be given to the Cyprus company receiving the respective loan.
Due to the global initiatives in the international tax sector, particularly the OECD/G20 initiative and the base erosion and profit shifting (BEPS) action plan, the profit margins (0,35% or lower) that used to be applicable for tax purposes on back to back financing arrangements, have ceased to be acceptable as from 1st of July 2017 (increased to 2,29% if simplification rules are applied).
The term “intra-group financing transaction”, refers to any activity consisting in the granting of loans or cash advances to related entities, remunerated (or that should be remunerated) by interest to related companies, financed by financial means and instruments, such as debentures, private loans, cash advances and bank loans.
In view of the above, for companies involved in such intra-group financing transactions, two separate tax computations should be submitted for the accounting period of 2017. One for the period 01/01/2017-30/06/2017 and one for the period 01/07/2017-31/12/2017.
However, from the 1st of July 2017 onwards, the tax computation will be based on the arm’s length principle, being the international standard adopted by OECD member states.
This means that for each intra-group financing transaction conducted (for example a loan agreement) the Company has to determine through a transfer pricing (TP) study, that the agreed remuneration (for example interest) complies with the arm’s length principle i.e. corresponds to the price which would have been accepted by independent entities in comparable circumstances. If according to the transfer pricing study, a higher interest rate should be imposed on the loan agreement, the tax computation will be adjusted accordingly.
For the sake of simplification, a back to back intra-group financing arrangement will be deemed to comply with the arm’s length principle, if the company receives a minimum after tax return of 2% (or 2,29% before tax) on the assets generating the interest income (simplification measures). Even in such a case, the Tax Authorities may still request the submission of a transfer pricing study.
Corporate tax for resident companies is imposed at the rate of 12,5% for each year of assessment upon the taxable income derived from sources both within and outside Cyprus. However, in arriving at the taxable income, deductions on such income and exemptions must be taken into account; all relevant expenses for the production of that income are deductible expenses whereas dividends, capital gains or profits from the sale of shares and other securities are also tax exempt.
There is no minimum holding requirement for the exemption of foreign dividends from taxation in Cyprus when received by a Cyprus tax resident company. This makes it easier for portfolio investors to benefit from the dividend participation exemption.
Therefore, the requirement is that the dividend from abroad tax exemption (i.e. no tax) will not apply only when:
The above exemptions do not apply (as from 1st January 2016), for dividends which are tax deductible for the paying company.
“Permanent establishment” is a fixed place of business, through which the business of an enterprise is wholly or partly carried on. "Permanent establishment" has the same meaning as defined in the OECD Model Tax Convention
For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
The term "permanent establishment" includes especially:
A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.
Not with standing the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include:
Losses of a permanent establishment outside the Republic Tax losses arising from a permanent establishment maintained outside the Republic can be offset against taxable profits of the company arising in the Republic in the same year. However, any subsequent taxable profits from such a permanent establishment are taxable up to the amount of tax losses previously offset.
Allowable Deductible expenditure needs to be incurred 'wholly and exclusively' for the business; however, mixed private/company expenses can often be apportioned. Among others, the following expenses are allowable:
Non-deductible expenses
The following expenses cannot be deducted from the income in the computation of taxable income:
Effective from the 2015 tax year, any exchange differences, both gains and losses, and irrespective of whether they are realised or unrealised, will no longer be taxable or tax deductible, irrespective of the purpose for which the funds in a foreign currency have been used for. This provision will not apply in the case of companies trading in foreign currencies and related derivatives. However, such companies will be able to may make an irrevocable election not to be taxed on unrealised gains or losses, and to be taxed only when such gains or losses are realised.
Taxable Losses carried forward
Previously, any trading losses that have arisen in the Cyprus Company could be set off against its profits and any excess could be carried forward, indefinitely.
However, according to the relevant Amendment with the Law 188(I)/2012, article 13(1), the taxable loss of a specific year can be carried forward only to the next five years.
The restriction of five years means that for the taxation of year 2012 (year the law becomes effective), the taxable losses which can be claimed from the taxable income of year 2012 should be the losses relating to years 2007 to 2011 (five years).
Circular – ‘Titles’
Circular 2009/06 (amending Circular 2008/13) was issued by the Income Tax Authorities listing the financial instruments that fall within the definition of ‘titles’. The full list is as follows:
The circular applies for tax years 2003 and onwards.
Therefore, profits from the sale of the above titles are not taxed in Cyprus.
One crucial point to mention is that promissory notes, bills of exchange and cryptocurrencies are NOT titles according to the Income Tax Law. Therefore, any profit from the sale of promissory notes is taxed at 12,50%.
Group relief provisions
The Group Relief rules provide for group relief of tax losses among companies of the same group. A company will be considered as member of a group if:
Group tax losses may be set off as long as both companies are Cypriot tax residents and are members of the same group during the whole year of assessment. Only the loss of any year of assessment of a company can be set off against the other company's profits of the corresponding year of assessment. Losses brought forward will not be available for Group Relief. In addition, where a company has been incorporated by its parent company during the tax year, this company will be deemed to be a member
of this group for group relief purposes for that tax year.
As from 1st January 2015, interposition of a non – Cyprus tax resident company(ies) will not affect the eligibility for group relief as long as such company(ies) is/are tax resident of either an EU country or in a country with which Cyprus has a tax treaty or an exchange of information agreement (bilateral or multilateral). A partnership or a sole trader transferring a business into a company can carry forward tax losses into the company for future utilisation.
The group loss relief is extended to include qualifying group subsidiary companies that are also tax residents in any EU member state. However, this will only apply provided the group subsidiary company has exhausted all the means available for using the available tax loss in its respective country of residence or in the country where its immediate holding company resides.
Cyprus Withholding Tax
Payment of dividends, interest and capital distributions made by a Cypriot company to non-resident shareholders are free from any withholding taxes
Provisional tax
For every year, the Company should submit Provisional Tax Assessment on 31 July of the specific year, and pay the tax relating to the year by two instalments.
Provisional tax instalments made by companies and self-employed individuals are two (from three that previously applied) and these instalments are due on 31 July and 31 December each year.
Then, when the Tax Form for the specific year is prepared, in case the profit per the Assessment is more than 75% of the actual profit per the Tax Form, then the penalty of 10% on the tax payable is not levied.
However, the Company can submit a Revised Provisional Tax Assessment until the 31st of December of the specific year, in order to change the profit estimate and pay the total tax and thus, avoid the 10% penalty.
Reorganisations
Transfers of assets and liabilities between companies in the context of reorganisations can be effected without any tax consequences.
Reorganisations include mergers, demergers, partial divisions, transfer of assets, exchange of shares and transfer of registered office of a European Company (SE) or a European Cooperative Company (SCE).
Tax losses can be carried forward by the receiving entity.
Annual wear and tear allowances on assets
These are calculated as a percentage on the cost of each asset used in the business and the relevant amount is deductible from the taxable income.
Special contribution for defence
As per Article 3 of the Special Contribution for the Defence of the Republic Law No. 117(I)/2002, Cyprus tax resident individuals and companies and also individuals domiciled in Cyprus, are liable to Special Defence Contribution (“SDC”) as follows:
Deemed dividend distribution
Under the deemed distribution provisions, a Cyprus company should distribute as dividends at least 70% of its accounting profits (after tax) within two years from the end of the year in which the relevant profits were generated. If the above dividend distribution provisions are not satisfied, then the Cyprus Company will be considered to have declared such dividends, and SDC is applicable.
Deemed dividend distribution is reduced with payments of actual dividends which have already been paid out from the profits of the relevant year.
SDC is charged to the extent that the ultimate direct and/or indirect shareholders of the company are individuals who are both Cyprus tax resident and Cyprus domiciled.
As of 16 July 2015, the deemed distribution provisions should not apply to the extent that the ultimate direct/ indirect shareholders of the company are individuals who are Cyprus tax residents, but non- Cyprus domiciled.
For the purpose of calculating the amount of the deemed distribution, the term profits means the accounting profits arrived at using generally acceptable accounting principles, after the deduction of any transfers to reserves as specified by any law. Any losses brought forward, group losses as well as any amounts, including any additional depreciation, which emanate from the revaluation of movable and immovable property are ignored.
The term tax includes:
Capital Reduction
In the case of a capital reduction of a company, any amounts paid or due to the shareholders over and above the previously paid-in equity, will be considered as dividends distributed subject to special defence contribution at 17% after deducting any amounts which have been deemed as distributable profits.
The redemption of units or shares in a Collective Investment Scheme is not subject to the above provisions.
Before 16 July 2015, the above three provisions applied only if the ultimate shareholders (direct or indirect) are individuals who are tax residents in Cyprus. As from 16 July 2015, the above provisions apply only if the ultimate shareholders (direct or indirect) are individuals who are both tax residents in Cyprus and domiciled in Cyprus.
Disposal of assets to shareholder at less than market value
When a company disposes of an asset to a shareholder who is individual or a relative of his up to second degree or his spouse for a consideration less than the market value of the asset, 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 for assets originally gifted to the company by a shareholder who is individual or a relative of his up to second degree or his spouse.
Company dissolution
In the case that a company is dissolved, the accumulated profits of the last 5 years prior to the 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). The above provision is not applicable if there is a dissolution under a reorganisation.
Non – domiciliation rules
The Special Contribution for the Defence of the Republic Law (SDC) imposes tax on certain categories of income (interest, rents, dividends) received by persons who are considered to be residents for tax purposes of Cyprus, subject to any available exemptions. The SDC Law also includes provisions for the deemed distribution of profits of Cypriot tax resident companies to the extent that the shareholders of such companies are Cypriot tax residents.
With the introduction of the concept “domicile in the Republic” in the SDC Law, non-domiciled individuals will be exempt from Special Defence Contribution on their dividend, interest and rental income, even if they spend more than 183 days in Cyprus (Cyprus tax residents). Therefore, non-domiciled (or “non-dom”) Cyprus tax resident individuals will be exempt from both income tax and SDC on dividend income and interest income. This amendment aims to attract high net worth individuals to reside in Cyprus.
The new provisions define domicile in accordance with the rules of the Wills and Succession Law:
A person who has a domicile of origin in Cyprus will be treated as “domiciled in Cyprus” for SCD purposes with the exception of:
Irrespective of his/her domicile of origin, an individual who remains a tax resident of Cyprus for a period of at least 17 years out of the last 20 years prior to the tax year in question, shall be deemed as domiciled in Cyprus for SDC purposes.
The law includes anti-abuse provisions as per which the tax authorities have the right to disregard the transfer of property made by a person who is domiciled in Cyprus to a relative up to a third degree of kindred who is not domiciled in Cyprus in case such transfer was made with the aim to avoid the imposition of SDC as a result of the introduction of “non-domicile” rules. The non-domicile rules are expected to further encourage the relocation of corporate executives and encourage high-net-worth individuals to take up residency in Cyprus.
The non-domicile rules are effective as of the date of publication in the Official Gazette of the Republic (17th of July 2015).
Capital Gains Tax
Capital Gains Tax (“CGT”) applies to the gains of an individual or company arising from the disposal or disposition of chargeable property situated in Cyprus and shares in companies which directly or indirectly own immovable property situated in Cyprus.
Such gains are not subject to income tax. The Law in question is the Capital Gains Tax Law 52/80 as amended.
Chargeable property means:
The gain made from a chargeable disposal or disposition of property is subject to CGT at the rate of20%.
Certain disposals are exempt from CGT. These are the following:
Determination of capital gain
Liability is restricted to gains accruing since 1 January 1980. The costs that are deducted from the gross proceeds on the disposal of immovable property are the market value of the property at 1 January 1980, or the costs of acquisition and improvements of the property, if made after 1 January 1980, as adjusted for inflation up to the date of disposal based on the consumer price index (CPI) in Cyprus. Expenses that directly relate to the acquisition and disposal of immovable property (e.g. transfer and legal fees etc.) are also deducted, subject to certain conditions.
Lifetime Exemptions
The Transfer of Immovable property is made at the District Lands Office.
Transfer fees are charged by the Department of Land and Surveys to the acquirer on transfers of immovable property.
The transfer fees are calculated on the market value of the property or lease/sublease as estimated by the Department of Land and Surveys at the following rates:
The following transfers are exempt from transfer fees:
Transfer fees are reduced by 50% in cases where the purchase of immovable property is not subject to VAT.
On the transfer of immovable property by donation between spouses, spouses and children or relatives up to third degree of kindred, transfer fees are calculated on the value of the property as at 1 January 2013 at the following rates:
Cyprus imposes corporation tax on 'companies': this term includes all companies incorporated or registered under any Cyprus law, and any foreign company which carries on business or has an office or place of business (permanent establishment) in Cyprus.
As from 2003, Cyprus applies a residence-based taxation regime. "Resident in the Republic", when applied to a company, means a company whose management and control is exercised in the Republic; and "non-resident or resident outside the Republic" will be construed accordingly.
A Company is considered to be tax resident in Cyprus if its management and control is exercised in Cyprus. In order to achieve tax residency, several factors are taken into consideration by the Tax Authorities such as the make-up of the Board of Directors, the place where major decisions are taken and major contracts are signed. Tax residency is required in order for a company to be taxed under the Cyprus tax laws and also for taking advantage of all European directives as well as the Double Tax Treaty (DTT) network that Cyprus has secured for tax resident persons.
As from 1st January 2015 onwards, if an adjustment in the income of one party has been made in accordance with the arm’s length provisions of Section 33 of the Cyprus income tax legislation, then a corresponding deduction/expense should be given to the other party of the transaction. Thus, if for example a deemed interest income is imposed on an interest free loan provided by one Cyprus company to another, then a corresponding deemed interest expense should be given to the Cyprus company receiving the respective loan.
Due to the global initiatives in the international tax sector, particularly the OECD/G20 initiative and the base erosion and profit shifting (BEPS) action plan, the profit margins (0,35% or lower) that used to be applicable for tax purposes on back to back financing arrangements, have ceased to be acceptable as from 1st of July 2017 (increased to 2,29% if simplification rules are applied).
The term “intra-group financing transaction”, refers to any activity consisting in the granting of loans or cash advances to related entities, remunerated (or that should be remunerated) by interest to related companies, financed by financial means and instruments, such as debentures, private loans, cash advances and bank loans.
In view of the above, for companies involved in such intra-group financing transactions, two separate tax computations should be submitted for the accounting period of 2017. One for the period 01/01/2017-30/06/2017 and one for the period 01/07/2017-31/12/2017.
However, from the 1st of July 2017 onwards, the tax computation will be based on the arm’s length principle, being the international standard adopted by OECD member states.
This means that for each intra-group financing transaction conducted (for example a loan agreement) the Company has to determine through a transfer pricing (TP) study, that the agreed remuneration (for example interest) complies with the arm’s length principle i.e. corresponds to the price which would have been accepted by independent entities in comparable circumstances. If according to the transfer pricing study, a higher interest rate should be imposed on the loan agreement, the tax computation will be adjusted accordingly.
For the sake of simplification, a back to back intra-group financing arrangement will be deemed to comply with the arm’s length principle, if the company receives a minimum after tax return of 2% (or 2,29% before tax) on the assets generating the interest income (simplification measures). Even in such a case, the Tax Authorities may still request the submission of a transfer pricing study.
Corporate tax for resident companies is imposed at the rate of 12,5% for each year of assessment upon the taxable income derived from sources both within and outside Cyprus. However, in arriving at the taxable income, deductions on such income and exemptions must be taken into account; all relevant expenses for the production of that income are deductible expenses whereas dividends, capital gains or profits from the sale of shares and other securities are also tax exempt.
There is no minimum holding requirement for the exemption of foreign dividends from taxation in Cyprus when received by a Cyprus tax resident company. This makes it easier for portfolio investors to benefit from the dividend participation exemption.
Therefore, the requirement is that the dividend from abroad tax exemption (i.e. no tax) will not apply only when:
The above exemptions do not apply (as from 1st January 2016), for dividends which are tax deductible for the paying company.
“Permanent establishment” is a fixed place of business, through which the business of an enterprise is wholly or partly carried on. "Permanent establishment" has the same meaning as defined in the OECD Model Tax Convention
For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
The term "permanent establishment" includes especially:
A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.
Not with standing the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include:
Losses of a permanent establishment outside the Republic Tax losses arising from a permanent establishment maintained outside the Republic can be offset against taxable profits of the company arising in the Republic in the same year. However, any subsequent taxable profits from such a permanent establishment are taxable up to the amount of tax losses previously offset.
Allowable Deductible expenditure needs to be incurred 'wholly and exclusively' for the business; however, mixed private/company expenses can often be apportioned. Among others, the following expenses are allowable:
Non-deductible expenses
The following expenses cannot be deducted from the income in the computation of taxable income:
Effective from the 2015 tax year, any exchange differences, both gains and losses, and irrespective of whether they are realised or unrealised, will no longer be taxable or tax deductible, irrespective of the purpose for which the funds in a foreign currency have been used for. This provision will not apply in the case of companies trading in foreign currencies and related derivatives. However, such companies will be able to may make an irrevocable election not to be taxed on unrealised gains or losses, and to be taxed only when such gains or losses are realised.
Taxable Losses carried forward
Previously, any trading losses that have arisen in the Cyprus Company could be set off against its profits and any excess could be carried forward, indefinitely.
However, according to the relevant Amendment with the Law 188(I)/2012, article 13(1), the taxable loss of a specific year can be carried forward only to the next five years.
The restriction of five years means that for the taxation of year 2012 (year the law becomes effective), the taxable losses which can be claimed from the taxable income of year 2012 should be the losses relating to years 2007 to 2011 (five years).
Circular – ‘Titles’
Circular 2009/06 (amending Circular 2008/13) was issued by the Income Tax Authorities listing the financial instruments that fall within the definition of ‘titles’. The full list is as follows:
The circular applies for tax years 2003 and onwards.
Therefore, profits from the sale of the above titles are not taxed in Cyprus.
One crucial point to mention is that promissory notes, bills of exchange and cryptocurrencies are NOT titles according to the Income Tax Law. Therefore, any profit from the sale of promissory notes is taxed at 12,50%.
Group relief provisions
The Group Relief rules provide for group relief of tax losses among companies of the same group. A company will be considered as member of a group if:
Group tax losses may be set off as long as both companies are Cypriot tax residents and are members of the same group during the whole year of assessment. Only the loss of any year of assessment of a company can be set off against the other company's profits of the corresponding year of assessment. Losses brought forward will not be available for Group Relief. In addition, where a company has been incorporated by its parent company during the tax year, this company will be deemed to be a member
of this group for group relief purposes for that tax year.
As from 1st January 2015, interposition of a non – Cyprus tax resident company(ies) will not affect the eligibility for group relief as long as such company(ies) is/are tax resident of either an EU country or in a country with which Cyprus has a tax treaty or an exchange of information agreement (bilateral or multilateral). A partnership or a sole trader transferring a business into a company can carry forward tax losses into the company for future utilisation.
The group loss relief is extended to include qualifying group subsidiary companies that are also tax residents in any EU member state. However, this will only apply provided the group subsidiary company has exhausted all the means available for using the available tax loss in its respective country of residence or in the country where its immediate holding company resides.
Cyprus Withholding Tax
Payment of dividends, interest and capital distributions made by a Cypriot company to non-resident shareholders are free from any withholding taxes
Provisional tax
For every year, the Company should submit Provisional Tax Assessment on 31 July of the specific year, and pay the tax relating to the year by two instalments.
Provisional tax instalments made by companies and self-employed individuals are two (from three that previously applied) and these instalments are due on 31 July and 31 December each year.
Then, when the Tax Form for the specific year is prepared, in case the profit per the Assessment is more than 75% of the actual profit per the Tax Form, then the penalty of 10% on the tax payable is not levied.
However, the Company can submit a Revised Provisional Tax Assessment until the 31st of December of the specific year, in order to change the profit estimate and pay the total tax and thus, avoid the 10% penalty.
Reorganisations
Transfers of assets and liabilities between companies in the context of reorganisations can be effected without any tax consequences.
Reorganisations include mergers, demergers, partial divisions, transfer of assets, exchange of shares and transfer of registered office of a European Company (SE) or a European Cooperative Company (SCE).
Tax losses can be carried forward by the receiving entity.
Annual wear and tear allowances on assets
These are calculated as a percentage on the cost of each asset used in the business and the relevant amount is deductible from the taxable income.
Special contribution for defence
As per Article 3 of the Special Contribution for the Defence of the Republic Law No. 117(I)/2002, Cyprus tax resident individuals and companies and also individuals domiciled in Cyprus, are liable to Special Defence Contribution (“SDC”) as follows:
Deemed dividend distribution
Under the deemed distribution provisions, a Cyprus company should distribute as dividends at least 70% of its accounting profits (after tax) within two years from the end of the year in which the relevant profits were generated. If the above dividend distribution provisions are not satisfied, then the Cyprus Company will be considered to have declared such dividends, and SDC is applicable.
Deemed dividend distribution is reduced with payments of actual dividends which have already been paid out from the profits of the relevant year.
SDC is charged to the extent that the ultimate direct and/or indirect shareholders of the company are individuals who are both Cyprus tax resident and Cyprus domiciled.
As of 16 July 2015, the deemed distribution provisions should not apply to the extent that the ultimate direct/ indirect shareholders of the company are individuals who are Cyprus tax residents, but non- Cyprus domiciled.
For the purpose of calculating the amount of the deemed distribution, the term profits means the accounting profits arrived at using generally acceptable accounting principles, after the deduction of any transfers to reserves as specified by any law. Any losses brought forward, group losses as well as any amounts, including any additional depreciation, which emanate from the revaluation of movable and immovable property are ignored.
The term tax includes:
Capital Reduction
In the case of a capital reduction of a company, any amounts paid or due to the shareholders over and above the previously paid-in equity, will be considered as dividends distributed subject to special defence contribution at 17% after deducting any amounts which have been deemed as distributable profits.
The redemption of units or shares in a Collective Investment Scheme is not subject to the above provisions.
Before 16 July 2015, the above three provisions applied only if the ultimate shareholders (direct or indirect) are individuals who are tax residents in Cyprus. As from 16 July 2015, the above provisions apply only if the ultimate shareholders (direct or indirect) are individuals who are both tax residents in Cyprus and domiciled in Cyprus.
Disposal of assets to shareholder at less than market value
When a company disposes of an asset to a shareholder who is individual or a relative of his up to second degree or his spouse for a consideration less than the market value of the asset, 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 for assets originally gifted to the company by a shareholder who is individual or a relative of his up to second degree or his spouse.
Company dissolution
In the case that a company is dissolved, the accumulated profits of the last 5 years prior to the 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). The above provision is not applicable if there is a dissolution under a reorganisation.
Non – domiciliation rules
The Special Contribution for the Defence of the Republic Law (SDC) imposes tax on certain categories of income (interest, rents, dividends) received by persons who are considered to be residents for tax purposes of Cyprus, subject to any available exemptions. The SDC Law also includes provisions for the deemed distribution of profits of Cypriot tax resident companies to the extent that the shareholders of such companies are Cypriot tax residents.
With the introduction of the concept “domicile in the Republic” in the SDC Law, non-domiciled individuals will be exempt from Special Defence Contribution on their dividend, interest and rental income, even if they spend more than 183 days in Cyprus (Cyprus tax residents). Therefore, non-domiciled (or “non-dom”) Cyprus tax resident individuals will be exempt from both income tax and SDC on dividend income and interest income. This amendment aims to attract high net worth individuals to reside in Cyprus.
The new provisions define domicile in accordance with the rules of the Wills and Succession Law:
A person who has a domicile of origin in Cyprus will be treated as “domiciled in Cyprus” for SCD purposes with the exception of:
Irrespective of his/her domicile of origin, an individual who remains a tax resident of Cyprus for a period of at least 17 years out of the last 20 years prior to the tax year in question, shall be deemed as domiciled in Cyprus for SDC purposes.
The law includes anti-abuse provisions as per which the tax authorities have the right to disregard the transfer of property made by a person who is domiciled in Cyprus to a relative up to a third degree of kindred who is not domiciled in Cyprus in case such transfer was made with the aim to avoid the imposition of SDC as a result of the introduction of “non-domicile” rules. The non-domicile rules are expected to further encourage the relocation of corporate executives and encourage high-net-worth individuals to take up residency in Cyprus.
The non-domicile rules are effective as of the date of publication in the Official Gazette of the Republic (17th of July 2015).
Capital Gains Tax
Capital Gains Tax (“CGT”) applies to the gains of an individual or company arising from the disposal or disposition of chargeable property situated in Cyprus and shares in companies which directly or indirectly own immovable property situated in Cyprus.
Such gains are not subject to income tax. The Law in question is the Capital Gains Tax Law 52/80 as amended.
Chargeable property means:
The gain made from a chargeable disposal or disposition of property is subject to CGT at the rate of20%.
Certain disposals are exempt from CGT. These are the following:
Determination of capital gain
Liability is restricted to gains accruing since 1 January 1980. The costs that are deducted from the gross proceeds on the disposal of immovable property are the market value of the property at 1 January 1980, or the costs of acquisition and improvements of the property, if made after 1 January 1980, as adjusted for inflation up to the date of disposal based on the consumer price index (CPI) in Cyprus. Expenses that directly relate to the acquisition and disposal of immovable property (e.g. transfer and legal fees etc.) are also deducted, subject to certain conditions.
Lifetime Exemptions
The Transfer of Immovable property is made at the District Lands Office.
Transfer fees are charged by the Department of Land and Surveys to the acquirer on transfers of immovable property.
The transfer fees are calculated on the market value of the property or lease/sublease as estimated by the Department of Land and Surveys at the following rates:
The following transfers are exempt from transfer fees:
Transfer fees are reduced by 50% in cases where the purchase of immovable property is not subject to VAT.
On the transfer of immovable property by donation between spouses, spouses and children or relatives up to third degree of kindred, transfer fees are calculated on the value of the property as at 1 January 2013 at the following rates:
Cyprus imposes corporation tax on 'companies': this term includes all companies incorporated or registered under any Cyprus law, and any foreign company which carries on business or has an office or place of business (permanent establishment) in Cyprus.
As from 2003, Cyprus applies a residence-based taxation regime. "Resident in the Republic", when applied to a company, means a company whose management and control is exercised in the Republic; and "non-resident or resident outside the Republic" will be construed accordingly.
A Company is considered to be tax resident in Cyprus if its management and control is exercised in Cyprus. In order to achieve tax residency, several factors are taken into consideration by the Tax Authorities such as the make-up of the Board of Directors, the place where major decisions are taken and major contracts are signed. Tax residency is required in order for a company to be taxed under the Cyprus tax laws and also for taking advantage of all European directives as well as the Double Tax Treaty (DTT) network that Cyprus has secured for tax resident persons.
As from 1st January 2015 onwards, if an adjustment in the income of one party has been made in accordance with the arm’s length provisions of Section 33 of the Cyprus income tax legislation, then a corresponding deduction/expense should be given to the other party of the transaction. Thus, if for example a deemed interest income is imposed on an interest free loan provided by one Cyprus company to another, then a corresponding deemed interest expense should be given to the Cyprus company receiving the respective loan.
Due to the global initiatives in the international tax sector, particularly the OECD/G20 initiative and the base erosion and profit shifting (BEPS) action plan, the profit margins (0,35% or lower) that used to be applicable for tax purposes on back to back financing arrangements, have ceased to be acceptable as from 1st of July 2017 (increased to 2,29% if simplification rules are applied).
The term “intra-group financing transaction”, refers to any activity consisting in the granting of loans or cash advances to related entities, remunerated (or that should be remunerated) by interest to related companies, financed by financial means and instruments, such as debentures, private loans, cash advances and bank loans.
In view of the above, for companies involved in such intra-group financing transactions, two separate tax computations should be submitted for the accounting period of 2017. One for the period 01/01/2017-30/06/2017 and one for the period 01/07/2017-31/12/2017.
However, from the 1st of July 2017 onwards, the tax computation will be based on the arm’s length principle, being the international standard adopted by OECD member states.
This means that for each intra-group financing transaction conducted (for example a loan agreement) the Company has to determine through a transfer pricing (TP) study, that the agreed remuneration (for example interest) complies with the arm’s length principle i.e. corresponds to the price which would have been accepted by independent entities in comparable circumstances. If according to the transfer pricing study, a higher interest rate should be imposed on the loan agreement, the tax computation will be adjusted accordingly.
For the sake of simplification, a back to back intra-group financing arrangement will be deemed to comply with the arm’s length principle, if the company receives a minimum after tax return of 2% (or 2,29% before tax) on the assets generating the interest income (simplification measures). Even in such a case, the Tax Authorities may still request the submission of a transfer pricing study.
Corporate tax for resident companies is imposed at the rate of 12,5% for each year of assessment upon the taxable income derived from sources both within and outside Cyprus. However, in arriving at the taxable income, deductions on such income and exemptions must be taken into account; all relevant expenses for the production of that income are deductible expenses whereas dividends, capital gains or profits from the sale of shares and other securities are also tax exempt.
There is no minimum holding requirement for the exemption of foreign dividends from taxation in Cyprus when received by a Cyprus tax resident company. This makes it easier for portfolio investors to benefit from the dividend participation exemption.
Therefore, the requirement is that the dividend from abroad tax exemption (i.e. no tax) will not apply only when:
The above exemptions do not apply (as from 1st January 2016), for dividends which are tax deductible for the paying company.
“Permanent establishment” is a fixed place of business, through which the business of an enterprise is wholly or partly carried on. "Permanent establishment" has the same meaning as defined in the OECD Model Tax Convention
For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
The term "permanent establishment" includes especially:
A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.
Not with standing the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include:
Losses of a permanent establishment outside the Republic Tax losses arising from a permanent establishment maintained outside the Republic can be offset against taxable profits of the company arising in the Republic in the same year. However, any subsequent taxable profits from such a permanent establishment are taxable up to the amount of tax losses previously offset.
Allowable Deductible expenditure needs to be incurred 'wholly and exclusively' for the business; however, mixed private/company expenses can often be apportioned. Among others, the following expenses are allowable:
Non-deductible expenses
The following expenses cannot be deducted from the income in the computation of taxable income:
Effective from the 2015 tax year, any exchange differences, both gains and losses, and irrespective of whether they are realised or unrealised, will no longer be taxable or tax deductible, irrespective of the purpose for which the funds in a foreign currency have been used for. This provision will not apply in the case of companies trading in foreign currencies and related derivatives. However, such companies will be able to may make an irrevocable election not to be taxed on unrealised gains or losses, and to be taxed only when such gains or losses are realised.
Taxable Losses carried forward
Previously, any trading losses that have arisen in the Cyprus Company could be set off against its profits and any excess could be carried forward, indefinitely.
However, according to the relevant Amendment with the Law 188(I)/2012, article 13(1), the taxable loss of a specific year can be carried forward only to the next five years.
The restriction of five years means that for the taxation of year 2012 (year the law becomes effective), the taxable losses which can be claimed from the taxable income of year 2012 should be the losses relating to years 2007 to 2011 (five years).
Circular – ‘Titles’
Circular 2009/06 (amending Circular 2008/13) was issued by the Income Tax Authorities listing the financial instruments that fall within the definition of ‘titles’. The full list is as follows:
The circular applies for tax years 2003 and onwards.
Therefore, profits from the sale of the above titles are not taxed in Cyprus.
One crucial point to mention is that promissory notes, bills of exchange and cryptocurrencies are NOT titles according to the Income Tax Law. Therefore, any profit from the sale of promissory notes is taxed at 12,50%.
Group relief provisions
The Group Relief rules provide for group relief of tax losses among companies of the same group. A company will be considered as member of a group if:
Group tax losses may be set off as long as both companies are Cypriot tax residents and are members of the same group during the whole year of assessment. Only the loss of any year of assessment of a company can be set off against the other company's profits of the corresponding year of assessment. Losses brought forward will not be available for Group Relief. In addition, where a company has been incorporated by its parent company during the tax year, this company will be deemed to be a member
of this group for group relief purposes for that tax year.
As from 1st January 2015, interposition of a non – Cyprus tax resident company(ies) will not affect the eligibility for group relief as long as such company(ies) is/are tax resident of either an EU country or in a country with which Cyprus has a tax treaty or an exchange of information agreement (bilateral or multilateral). A partnership or a sole trader transferring a business into a company can carry forward tax losses into the company for future utilisation.
The group loss relief is extended to include qualifying group subsidiary companies that are also tax residents in any EU member state. However, this will only apply provided the group subsidiary company has exhausted all the means available for using the available tax loss in its respective country of residence or in the country where its immediate holding company resides.
Cyprus Withholding Tax
Payment of dividends, interest and capital distributions made by a Cypriot company to non-resident shareholders are free from any withholding taxes
Provisional tax
For every year, the Company should submit Provisional Tax Assessment on 31 July of the specific year, and pay the tax relating to the year by two instalments.
Provisional tax instalments made by companies and self-employed individuals are two (from three that previously applied) and these instalments are due on 31 July and 31 December each year.
Then, when the Tax Form for the specific year is prepared, in case the profit per the Assessment is more than 75% of the actual profit per the Tax Form, then the penalty of 10% on the tax payable is not levied.
However, the Company can submit a Revised Provisional Tax Assessment until the 31st of December of the specific year, in order to change the profit estimate and pay the total tax and thus, avoid the 10% penalty.
Reorganisations
Transfers of assets and liabilities between companies in the context of reorganisations can be effected without any tax consequences.
Reorganisations include mergers, demergers, partial divisions, transfer of assets, exchange of shares and transfer of registered office of a European Company (SE) or a European Cooperative Company (SCE).
Tax losses can be carried forward by the receiving entity.
Annual wear and tear allowances on assets
These are calculated as a percentage on the cost of each asset used in the business and the relevant amount is deductible from the taxable income.
Special contribution for defence
As per Article 3 of the Special Contribution for the Defence of the Republic Law No. 117(I)/2002, Cyprus tax resident individuals and companies and also individuals domiciled in Cyprus, are liable to Special Defence Contribution (“SDC”) as follows:
Deemed dividend distribution
Under the deemed distribution provisions, a Cyprus company should distribute as dividends at least 70% of its accounting profits (after tax) within two years from the end of the year in which the relevant profits were generated. If the above dividend distribution provisions are not satisfied, then the Cyprus Company will be considered to have declared such dividends, and SDC is applicable.
Deemed dividend distribution is reduced with payments of actual dividends which have already been paid out from the profits of the relevant year.
SDC is charged to the extent that the ultimate direct and/or indirect shareholders of the company are individuals who are both Cyprus tax resident and Cyprus domiciled.
As of 16 July 2015, the deemed distribution provisions should not apply to the extent that the ultimate direct/ indirect shareholders of the company are individuals who are Cyprus tax residents, but non- Cyprus domiciled.
For the purpose of calculating the amount of the deemed distribution, the term profits means the accounting profits arrived at using generally acceptable accounting principles, after the deduction of any transfers to reserves as specified by any law. Any losses brought forward, group losses as well as any amounts, including any additional depreciation, which emanate from the revaluation of movable and immovable property are ignored.
The term tax includes:
Capital Reduction
In the case of a capital reduction of a company, any amounts paid or due to the shareholders over and above the previously paid-in equity, will be considered as dividends distributed subject to special defence contribution at 17% after deducting any amounts which have been deemed as distributable profits.
The redemption of units or shares in a Collective Investment Scheme is not subject to the above provisions.
Before 16 July 2015, the above three provisions applied only if the ultimate shareholders (direct or indirect) are individuals who are tax residents in Cyprus. As from 16 July 2015, the above provisions apply only if the ultimate shareholders (direct or indirect) are individuals who are both tax residents in Cyprus and domiciled in Cyprus.
Disposal of assets to shareholder at less than market value
When a company disposes of an asset to a shareholder who is individual or a relative of his up to second degree or his spouse for a consideration less than the market value of the asset, 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 for assets originally gifted to the company by a shareholder who is individual or a relative of his up to second degree or his spouse.
Company dissolution
In the case that a company is dissolved, the accumulated profits of the last 5 years prior to the 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). The above provision is not applicable if there is a dissolution under a reorganisation.
Non – domiciliation rules
The Special Contribution for the Defence of the Republic Law (SDC) imposes tax on certain categories of income (interest, rents, dividends) received by persons who are considered to be residents for tax purposes of Cyprus, subject to any available exemptions. The SDC Law also includes provisions for the deemed distribution of profits of Cypriot tax resident companies to the extent that the shareholders of such companies are Cypriot tax residents.
With the introduction of the concept “domicile in the Republic” in the SDC Law, non-domiciled individuals will be exempt from Special Defence Contribution on their dividend, interest and rental income, even if they spend more than 183 days in Cyprus (Cyprus tax residents). Therefore, non-domiciled (or “non-dom”) Cyprus tax resident individuals will be exempt from both income tax and SDC on dividend income and interest income. This amendment aims to attract high net worth individuals to reside in Cyprus.
The new provisions define domicile in accordance with the rules of the Wills and Succession Law:
A person who has a domicile of origin in Cyprus will be treated as “domiciled in Cyprus” for SCD purposes with the exception of:
Irrespective of his/her domicile of origin, an individual who remains a tax resident of Cyprus for a period of at least 17 years out of the last 20 years prior to the tax year in question, shall be deemed as domiciled in Cyprus for SDC purposes.
The law includes anti-abuse provisions as per which the tax authorities have the right to disregard the transfer of property made by a person who is domiciled in Cyprus to a relative up to a third degree of kindred who is not domiciled in Cyprus in case such transfer was made with the aim to avoid the imposition of SDC as a result of the introduction of “non-domicile” rules. The non-domicile rules are expected to further encourage the relocation of corporate executives and encourage high-net-worth individuals to take up residency in Cyprus.
The non-domicile rules are effective as of the date of publication in the Official Gazette of the Republic (17th of July 2015).
Capital Gains Tax
Capital Gains Tax (“CGT”) applies to the gains of an individual or company arising from the disposal or disposition of chargeable property situated in Cyprus and shares in companies which directly or indirectly own immovable property situated in Cyprus.
Such gains are not subject to income tax. The Law in question is the Capital Gains Tax Law 52/80 as amended.
Chargeable property means:
The gain made from a chargeable disposal or disposition of property is subject to CGT at the rate of20%.
Certain disposals are exempt from CGT. These are the following:
Determination of capital gain
Liability is restricted to gains accruing since 1 January 1980. The costs that are deducted from the gross proceeds on the disposal of immovable property are the market value of the property at 1 January 1980, or the costs of acquisition and improvements of the property, if made after 1 January 1980, as adjusted for inflation up to the date of disposal based on the consumer price index (CPI) in Cyprus. Expenses that directly relate to the acquisition and disposal of immovable property (e.g. transfer and legal fees etc.) are also deducted, subject to certain conditions.
Lifetime Exemptions
The Transfer of Immovable property is made at the District Lands Office.
Transfer fees are charged by the Department of Land and Surveys to the acquirer on transfers of immovable property.
The transfer fees are calculated on the market value of the property or lease/sublease as estimated by the Department of Land and Surveys at the following rates:
The following transfers are exempt from transfer fees:
Transfer fees are reduced by 50% in cases where the purchase of immovable property is not subject to VAT.
On the transfer of immovable property by donation between spouses, spouses and children or relatives up to third degree of kindred, transfer fees are calculated on the value of the property as at 1 January 2013 at the following rates:
Cyprus imposes corporation tax on 'companies': this term includes all companies incorporated or registered under any Cyprus law, and any foreign company which carries on business or has an office or place of business (permanent establishment) in Cyprus.
As from 2003, Cyprus applies a residence-based taxation regime. "Resident in the Republic", when applied to a company, means a company whose management and control is exercised in the Republic; and "non-resident or resident outside the Republic" will be construed accordingly.
A Company is considered to be tax resident in Cyprus if its management and control is exercised in Cyprus. In order to achieve tax residency, several factors are taken into consideration by the Tax Authorities such as the make-up of the Board of Directors, the place where major decisions are taken and major contracts are signed. Tax residency is required in order for a company to be taxed under the Cyprus tax laws and also for taking advantage of all European directives as well as the Double Tax Treaty (DTT) network that Cyprus has secured for tax resident persons.
As from 1st January 2015 onwards, if an adjustment in the income of one party has been made in accordance with the arm’s length provisions of Section 33 of the Cyprus income tax legislation, then a corresponding deduction/expense should be given to the other party of the transaction. Thus, if for example a deemed interest income is imposed on an interest free loan provided by one Cyprus company to another, then a corresponding deemed interest expense should be given to the Cyprus company receiving the respective loan.
Due to the global initiatives in the international tax sector, particularly the OECD/G20 initiative and the base erosion and profit shifting (BEPS) action plan, the profit margins (0,35% or lower) that used to be applicable for tax purposes on back to back financing arrangements, have ceased to be acceptable as from 1st of July 2017 (increased to 2,29% if simplification rules are applied).
The term “intra-group financing transaction”, refers to any activity consisting in the granting of loans or cash advances to related entities, remunerated (or that should be remunerated) by interest to related companies, financed by financial means and instruments, such as debentures, private loans, cash advances and bank loans.
In view of the above, for companies involved in such intra-group financing transactions, two separate tax computations should be submitted for the accounting period of 2017. One for the period 01/01/2017-30/06/2017 and one for the period 01/07/2017-31/12/2017.
However, from the 1st of July 2017 onwards, the tax computation will be based on the arm’s length principle, being the international standard adopted by OECD member states.
This means that for each intra-group financing transaction conducted (for example a loan agreement) the Company has to determine through a transfer pricing (TP) study, that the agreed remuneration (for example interest) complies with the arm’s length principle i.e. corresponds to the price which would have been accepted by independent entities in comparable circumstances. If according to the transfer pricing study, a higher interest rate should be imposed on the loan agreement, the tax computation will be adjusted accordingly.
For the sake of simplification, a back to back intra-group financing arrangement will be deemed to comply with the arm’s length principle, if the company receives a minimum after tax return of 2% (or 2,29% before tax) on the assets generating the interest income (simplification measures). Even in such a case, the Tax Authorities may still request the submission of a transfer pricing study.
Corporate tax for resident companies is imposed at the rate of 12,5% for each year of assessment upon the taxable income derived from sources both within and outside Cyprus. However, in arriving at the taxable income, deductions on such income and exemptions must be taken into account; all relevant expenses for the production of that income are deductible expenses whereas dividends, capital gains or profits from the sale of shares and other securities are also tax exempt.
There is no minimum holding requirement for the exemption of foreign dividends from taxation in Cyprus when received by a Cyprus tax resident company. This makes it easier for portfolio investors to benefit from the dividend participation exemption.
Therefore, the requirement is that the dividend from abroad tax exemption (i.e. no tax) will not apply only when:
The above exemptions do not apply (as from 1st January 2016), for dividends which are tax deductible for the paying company.
“Permanent establishment” is a fixed place of business, through which the business of an enterprise is wholly or partly carried on. "Permanent establishment" has the same meaning as defined in the OECD Model Tax Convention
For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
The term "permanent establishment" includes especially:
A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.
Not with standing the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include:
Losses of a permanent establishment outside the Republic Tax losses arising from a permanent establishment maintained outside the Republic can be offset against taxable profits of the company arising in the Republic in the same year. However, any subsequent taxable profits from such a permanent establishment are taxable up to the amount of tax losses previously offset.
Allowable Deductible expenditure needs to be incurred 'wholly and exclusively' for the business; however, mixed private/company expenses can often be apportioned. Among others, the following expenses are allowable:
Non-deductible expenses
The following expenses cannot be deducted from the income in the computation of taxable income:
Effective from the 2015 tax year, any exchange differences, both gains and losses, and irrespective of whether they are realised or unrealised, will no longer be taxable or tax deductible, irrespective of the purpose for which the funds in a foreign currency have been used for. This provision will not apply in the case of companies trading in foreign currencies and related derivatives. However, such companies will be able to may make an irrevocable election not to be taxed on unrealised gains or losses, and to be taxed only when such gains or losses are realised.
Taxable Losses carried forward
Previously, any trading losses that have arisen in the Cyprus Company could be set off against its profits and any excess could be carried forward, indefinitely.
However, according to the relevant Amendment with the Law 188(I)/2012, article 13(1), the taxable loss of a specific year can be carried forward only to the next five years.
The restriction of five years means that for the taxation of year 2012 (year the law becomes effective), the taxable losses which can be claimed from the taxable income of year 2012 should be the losses relating to years 2007 to 2011 (five years).
Circular – ‘Titles’
Circular 2009/06 (amending Circular 2008/13) was issued by the Income Tax Authorities listing the financial instruments that fall within the definition of ‘titles’. The full list is as follows:
The circular applies for tax years 2003 and onwards.
Therefore, profits from the sale of the above titles are not taxed in Cyprus.
One crucial point to mention is that promissory notes, bills of exchange and cryptocurrencies are NOT titles according to the Income Tax Law. Therefore, any profit from the sale of promissory notes is taxed at 12,50%.
Group relief provisions
The Group Relief rules provide for group relief of tax losses among companies of the same group. A company will be considered as member of a group if:
Group tax losses may be set off as long as both companies are Cypriot tax residents and are members of the same group during the whole year of assessment. Only the loss of any year of assessment of a company can be set off against the other company's profits of the corresponding year of assessment. Losses brought forward will not be available for Group Relief. In addition, where a company has been incorporated by its parent company during the tax year, this company will be deemed to be a member
of this group for group relief purposes for that tax year.
As from 1st January 2015, interposition of a non – Cyprus tax resident company(ies) will not affect the eligibility for group relief as long as such company(ies) is/are tax resident of either an EU country or in a country with which Cyprus has a tax treaty or an exchange of information agreement (bilateral or multilateral). A partnership or a sole trader transferring a business into a company can carry forward tax losses into the company for future utilisation.
The group loss relief is extended to include qualifying group subsidiary companies that are also tax residents in any EU member state. However, this will only apply provided the group subsidiary company has exhausted all the means available for using the available tax loss in its respective country of residence or in the country where its immediate holding company resides.
Cyprus Withholding Tax
Payment of dividends, interest and capital distributions made by a Cypriot company to non-resident shareholders are free from any withholding taxes
Provisional tax
For every year, the Company should submit Provisional Tax Assessment on 31 July of the specific year, and pay the tax relating to the year by two instalments.
Provisional tax instalments made by companies and self-employed individuals are two (from three that previously applied) and these instalments are due on 31 July and 31 December each year.
Then, when the Tax Form for the specific year is prepared, in case the profit per the Assessment is more than 75% of the actual profit per the Tax Form, then the penalty of 10% on the tax payable is not levied.
However, the Company can submit a Revised Provisional Tax Assessment until the 31st of December of the specific year, in order to change the profit estimate and pay the total tax and thus, avoid the 10% penalty.
Reorganisations
Transfers of assets and liabilities between companies in the context of reorganisations can be effected without any tax consequences.
Reorganisations include mergers, demergers, partial divisions, transfer of assets, exchange of shares and transfer of registered office of a European Company (SE) or a European Cooperative Company (SCE).
Tax losses can be carried forward by the receiving entity.
Annual wear and tear allowances on assets
These are calculated as a percentage on the cost of each asset used in the business and the relevant amount is deductible from the taxable income.
Special contribution for defence
As per Article 3 of the Special Contribution for the Defence of the Republic Law No. 117(I)/2002, Cyprus tax resident individuals and companies and also individuals domiciled in Cyprus, are liable to Special Defence Contribution (“SDC”) as follows:
Deemed dividend distribution
Under the deemed distribution provisions, a Cyprus company should distribute as dividends at least 70% of its accounting profits (after tax) within two years from the end of the year in which the relevant profits were generated. If the above dividend distribution provisions are not satisfied, then the Cyprus Company will be considered to have declared such dividends, and SDC is applicable.
Deemed dividend distribution is reduced with payments of actual dividends which have already been paid out from the profits of the relevant year.
SDC is charged to the extent that the ultimate direct and/or indirect shareholders of the company are individuals who are both Cyprus tax resident and Cyprus domiciled.
As of 16 July 2015, the deemed distribution provisions should not apply to the extent that the ultimate direct/ indirect shareholders of the company are individuals who are Cyprus tax residents, but non- Cyprus domiciled.
For the purpose of calculating the amount of the deemed distribution, the term profits means the accounting profits arrived at using generally acceptable accounting principles, after the deduction of any transfers to reserves as specified by any law. Any losses brought forward, group losses as well as any amounts, including any additional depreciation, which emanate from the revaluation of movable and immovable property are ignored.
The term tax includes:
Capital Reduction
In the case of a capital reduction of a company, any amounts paid or due to the shareholders over and above the previously paid-in equity, will be considered as dividends distributed subject to special defence contribution at 17% after deducting any amounts which have been deemed as distributable profits.
The redemption of units or shares in a Collective Investment Scheme is not subject to the above provisions.
Before 16 July 2015, the above three provisions applied only if the ultimate shareholders (direct or indirect) are individuals who are tax residents in Cyprus. As from 16 July 2015, the above provisions apply only if the ultimate shareholders (direct or indirect) are individuals who are both tax residents in Cyprus and domiciled in Cyprus.
Disposal of assets to shareholder at less than market value
When a company disposes of an asset to a shareholder who is individual or a relative of his up to second degree or his spouse for a consideration less than the market value of the asset, 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 for assets originally gifted to the company by a shareholder who is individual or a relative of his up to second degree or his spouse.
Company dissolution
In the case that a company is dissolved, the accumulated profits of the last 5 years prior to the 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). The above provision is not applicable if there is a dissolution under a reorganisation.
Non – domiciliation rules
The Special Contribution for the Defence of the Republic Law (SDC) imposes tax on certain categories of income (interest, rents, dividends) received by persons who are considered to be residents for tax purposes of Cyprus, subject to any available exemptions. The SDC Law also includes provisions for the deemed distribution of profits of Cypriot tax resident companies to the extent that the shareholders of such companies are Cypriot tax residents.
With the introduction of the concept “domicile in the Republic” in the SDC Law, non-domiciled individuals will be exempt from Special Defence Contribution on their dividend, interest and rental income, even if they spend more than 183 days in Cyprus (Cyprus tax residents). Therefore, non-domiciled (or “non-dom”) Cyprus tax resident individuals will be exempt from both income tax and SDC on dividend income and interest income. This amendment aims to attract high net worth individuals to reside in Cyprus.
The new provisions define domicile in accordance with the rules of the Wills and Succession Law:
A person who has a domicile of origin in Cyprus will be treated as “domiciled in Cyprus” for SCD purposes with the exception of:
Irrespective of his/her domicile of origin, an individual who remains a tax resident of Cyprus for a period of at least 17 years out of the last 20 years prior to the tax year in question, shall be deemed as domiciled in Cyprus for SDC purposes.
The law includes anti-abuse provisions as per which the tax authorities have the right to disregard the transfer of property made by a person who is domiciled in Cyprus to a relative up to a third degree of kindred who is not domiciled in Cyprus in case such transfer was made with the aim to avoid the imposition of SDC as a result of the introduction of “non-domicile” rules. The non-domicile rules are expected to further encourage the relocation of corporate executives and encourage high-net-worth individuals to take up residency in Cyprus.
The non-domicile rules are effective as of the date of publication in the Official Gazette of the Republic (17th of July 2015).
Capital Gains Tax
Capital Gains Tax (“CGT”) applies to the gains of an individual or company arising from the disposal or disposition of chargeable property situated in Cyprus and shares in companies which directly or indirectly own immovable property situated in Cyprus.
Such gains are not subject to income tax. The Law in question is the Capital Gains Tax Law 52/80 as amended.
Chargeable property means:
The gain made from a chargeable disposal or disposition of property is subject to CGT at the rate of20%.
Certain disposals are exempt from CGT. These are the following:
Determination of capital gain
Liability is restricted to gains accruing since 1 January 1980. The costs that are deducted from the gross proceeds on the disposal of immovable property are the market value of the property at 1 January 1980, or the costs of acquisition and improvements of the property, if made after 1 January 1980, as adjusted for inflation up to the date of disposal based on the consumer price index (CPI) in Cyprus. Expenses that directly relate to the acquisition and disposal of immovable property (e.g. transfer and legal fees etc.) are also deducted, subject to certain conditions.
Lifetime Exemptions
The Transfer of Immovable property is made at the District Lands Office.
Transfer fees are charged by the Department of Land and Surveys to the acquirer on transfers of immovable property.
The transfer fees are calculated on the market value of the property or lease/sublease as estimated by the Department of Land and Surveys at the following rates:
The following transfers are exempt from transfer fees:
Transfer fees are reduced by 50% in cases where the purchase of immovable property is not subject to VAT.
On the transfer of immovable property by donation between spouses, spouses and children or relatives up to third degree of kindred, transfer fees are calculated on the value of the property as at 1 January 2013 at the following rates:
