Cyprus has traditionally been an attractive international financial service centre due to its strategic location, the advantageous tax system, the financial stability and credibility, the first-rate infrastructure and highly skilled workforce, being full member of the European Union as well as a wide network of International treaties for the avoidance of double taxation.
STRATEGIC LOCATION
The island of Cyprus is situated in the eastern Mediterranean at the hub of three continents, linking Europe with Middle East, Africa and Asia.
CYPRUS ADVANTAGEOUS TAX SYSTEM
A) Corporation Tax
All companies tax resident of Cyprus are taxed on their income accrued or derived from all sources in Cyprus and abroad. A non-Cyprus tax resident company is taxed on income accrued or derived from a business activity which is carried out through a permanent establishment in Cyprus and on certain income arising from sources in Cyprus.
A Company is resident of Cyprus if it is managed and controlled in Cyprus.
· Corporate tax rate
Cyprus has a corporate income tax rate of 12.5%. This is the lowest corporate tax rate in the European Union.
· Exemption from tax on dividend income
Dividend income is exempt from tax irrespective of its source provided that the company paying the dividend either engages directly or indirectly in more that 50% of activities that give rise to non-investment income or the tax burden on the dividend paying company’s income is not lower than 6.25%.
· No withholding taxes on dividends
Dividends paid to either non-Cyprus tax resident or non Cyprus domiciled shareholders are exempt from withholding tax in Cyprus.
· Capital gain and income tax exemption for securities
Securities, as defined in the law, include shares, bonds, debentures, founder’s shares and other securities of companies or other legal persons and options over such securities. Cyprus does not impose income or capital gains tax on the profits and gains devired from the disposal of securities, irrespective of whether the profits and gains are considered to be of a revenue or capital nature.
· Capital gain and income tax exemption for real estate
There is no capital gain tax implication on disposal of a real estate / other asset which is situated outside Cyprus.
· Deemed dividend distribution
If a Cyprus resident company does not distribute a dividend within two years from the end of the tax year then:
► 70% of the accounting profits (after some adjustments) are deemed to have been distributed as dividends.
► Special defence contribution at 17% is imposed on the deemed dividend distribution applicable to ulitmate shareholders who are both Cyprus tax residents and Cyprus domiciled (3% on deemed dividend distribution of Collective Investment Schemes).
► Deemed distribution is reduced with payments of actual dividends which have already been paid during the two years from the profits of the relevant year.
When an actual dividend is paid after the deemed dividend distribution, then special contribution for defence is imposed only on the additional dividend paid not previously subject to deemed dividend contribution.
The provision of deemed dividend distribution does not apply in the case where the shareholder of the Cyprus company is directly or indirectly a non-Cyprus tax resident or non Cyprus domiciled.
· Losses carried forward / group relief
Tax losses incurred during a tax year which and cannot be set off against other income, is carried forward and set off against profits of the next five years. This provision is applicable for all losses incurred from tax year 1997 onwards.
A partnership or a sole trader transferring business into a company can carry forward tax losses into the company for future utilisation.
Losses from a permanent establishment abroad can be set off with profits of the company in Cyprus. Subsequent profits of the permanent establishment abroad are taxable up to the amount of losses allowed.
The current year loss of one company can be set off against the profit of another company provided the companies are Cyprus tax resident companies of a group. Group is defined as:
► One Cyprus tax resident company holding directly or indirectly at least 75% of the voting shares of another Cyprus tax resident company.
► Both of the companies are at least 75% of the voting shares held, directly or indirectly by a third company.
► As from 1 January 2015, interposition of a non-Cyprus tax resident company will not affect the eligibility for group relief, as long as such company is tax resident of either an EU country or in a country with which Cyprus has a double tax treaty or an exchange of information agreement.
· Reorganizations
Cyprus has fully adopted the EU Merger Directive and therefore where a transaction is a “reorganization”, it is exempt from corporate income tax, capital gain tax, stamp duties and property transfer fees. A reorganisation generally includes a merger, division, part division, transfer of assets and exchange of shares involving companies which are resident in Cyprus and/or companies which are not resident in Cyprus.
· Permanent establishment abroad
Profits from a permanent establishment maintained abroad are generally exempt from tax in Cyprus (subject to certain conditions).
· Intellectual Property Rights
New IP regime
The provisions of the new IP regime have come into effect on 1 July 2016.
According to the new regime, qualifying intangible asset means an asset which was acquired, developed or exploited by a person in the course of carrying on a business and which constitutes intellectual property, other than marketing related intellectual property associated with promotion (marketing) and which is the result of research and development activities, including an intangible asset for which there is only economic ownership. A detailed definition is provided in the relevant regulations.
In calculating the taxable profit, an 80% deemed deduction applies to the qualifying profit from the exploitation of such qualifying intangible assets.
Qualifying profits are calculated based on the following formula:
Overall Income x [(Qualifying Expenditure + Uplift Expenditure) / Overall Expenditure]
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 capital cost of any qualifying intangible asset is tax deductible as a capital allowance.
· A wide network of tax treaties
Cyprus has an extensive network of tax treaties, currently with more than 45 countries, including countries in North America, Western and Eastern Europe as well as emerging markets such as China, India and Russia. For more details refer to Double Tax Treaties.
· Tax relief on foreign tax paid
The Cyprus Company gets a tax credit for the amount of foreign tax paid on its income which is subject to tax in Cyprus. The relief is given unilaterally irrespective of the existence of a double tax treaty.
B) Personal Tax
Where an individual is a resident in Cyprus, tax is imposed on income accruing or arising from sources both within and outside Cyprus.
Where an individual is not a resident in Cyprus, tax is imposed on income accruing or arising only from sources within in Cyprus.
Resident in Cyprus is an individual who is present in Cyprus for a period exceeding 183 days in a tax year.
Tax rates
Taxable Income
€
|
|
Tax Rate
% |
|
Tax
€ |
|
Cumulative Tax
€ |
| 0 – 19.500 |
|
0 |
|
0 |
|
0 |
| 19.501 – 28.000 |
|
20 |
|
1.700 |
|
1.700 |
| 28.001 – 36.300 |
|
25 |
|
2.075 |
|
3.775 |
| 36.301 – 60.000 |
|
30 |
|
7.110 |
|
10.885 |
| 60.001 and over |
|
35 |
|
|
|
|
· Relief for overseas employment
A Cypriot resident working outside Cyprus for a non-Cypriot employer or to permanent establishment outside Cyprus of a resident employer, is exempt from taxation on remuneration that is attributable to their overseas duties if these duties result in spending more than 90 days outside Cyprus in a calendar year.
· Relief for non-residents taking up employment in Cyprus
A non-resident taking up employment and becoming resident in Cyprus will be given a 20% tax-free allowance (capped at €8.550) on employment income. For employment commencing during or after 2012, the allowance applies for a period of 5 years starting from the tax year following the year of employment with the last eligible tax year being 2020.
A 50% exemption applies to the employment income of a non resident individual taking up residence in Cyprus to work for an employer in Cyprus. This exemption applies for a period of 10 years starting from the first year of employment provided that the annual employment income of the employee exceeds €100,000 per annum. This exemption may not be claimed in addition to the above mentioned 20% exemption for employment income.
C) International trust
Cyprus International Trusts are governed by the International Trusts Law, 1992 which regulates the establishment and administration of International Trusts. Under this law, Cyprus International Trusts are defined as those where:
► The settlor is not a permanent resident in the Republic of Cyprus;
► At least one of the trustees during the whole duration of the trust is a permanent resident in the Republic of Cyprus;
► No beneficiary other than a charitable institution is a permanent resident of the Republic of Cyprus; and
► The trust property does not include any immovable property situated in the Republic of Cyprus.
- Tax aspects of international trusts
Cyprus International Trusts enjoy very important tax advantages, providing significant tax planning possibilities to interested parties. The following advantages are indicative of the possible tax minimisation options:
► Income
All income whether trading or otherwise of an International Trust, is not taxable in Cyprus.
► Dividends
Dividends, interest or other income received by an International Trust from a Cyprus Company are neither taxable nor subject to withholding tax.
► Capital gains
Gains on the disposal of the assets of an International Trust are not subject to capital gains tax in Cyprus.
► Estate duty
An International Trust created for estate duty planning purposes would not be subject to estate duty in Cyprus.
- Other aspects of international trusts
Through the use of a Cyprus International Trust, an individual can ensure that minors, mentally handicapped persons or persons that cannot be trusted with the management of the individual’s estate are well provided for, even after the individual’s death.
A Cyprus International Trust can be used to arrange for a person to inherit, where due to the legislation of the individual’s country, would otherwise be excluded from inheritance.
An individual, who wishes to keep the ownership of a company anonymous and confidential, can do this by setting up a Discretionary Cyprus International Trust to own the shares in the company.
- Maintaining funds overseas
An individual who has or may have income arising overseas which he does not wish to remit to his country of residence, can arrange for such income to be directed to the Trustees of a Cyprus Settlement to be held on Discretionary Trusts in accordance with his wishes.
Trusts may be used by individuals for the purpose of protecting their assets, for inheritance purposes or by employers to set up employment benefit scheme trusts for their employees.
D) Shipping companies – New tonnage tax system (“TTS”)
The new tonnage tax system was introduced with the Merchant Shipping (Fees & Taxing provisions) Law 44(I) of 2010 as from 1 January 2010.
The new tax regime extends the favourable benefits previously applicable to owners of Cyprus flag vessels and ship managers, to owners of EU/or foreign flag vessels and charterers. It also extends the tax benefits that previously only covered profits derived from shipping operation to cover profits from the sale of a ship or the share of a shipowing company, interest earned on funds used as working capital or for the financing of the operation or maintenance of the ship and dividends paid directly or indirectly from profits derived from shipping related activities.
The new regime provides Cyprus with a competitive advantage within and outside EU, secures the tax future of Cyprus based shipping companies and encourages new shipping companies (such as charterers) to set up business in Cyprus.
The new ‘TTS’ covers the three main ‘Maritime Transport’ activities offered in international shipping today, namely shipowing, shipmanagement which is split into crew management and/or technical management and chartering. The ‘TTS’ is available to any qualifying ship owner, qualifying charterer and qualifying ship manager who owns, charters or manages a qualifying ship in qualifying shipping activity.
For more information see our publication dated 1 February 2011. (New Tonnage Tax System (“TTS”)).
FINANCIAL STABILITY AND CREDIBILITY
Cyprus has attracted foreign investment and capital flows during the last decades due to the stable financial and business environment. The country’s financial and regulatory environment is harmonised with that of European Union and the Cyprus Tax System is in line with European principles. The banking system conforms to EC Directives under the regulation of the constitutionally independent Central Bank of Cyprus, as integrated with the Eurosystem.
INFRASTRUCTURE AND HIGHLY SKILLED WORKFORCE
Cyprus maintains a highly professional workforce to provide support to international business. The legal system is based on English common law and English is fluently spoken throughout the country. The accounting, legal and banking sectors are highly developed and the country enjoys a high standard of living with excellent telecommunication facilities in a stable and low-crime environment.
EUROPEAN MEMBER STATE
Cyprus has been a full member of the European Union since May 2004 and fully adopted the Euro as its currency since January 2008. As such, Cyprus-based businesses have full access to EU markets with all privileges that this entails.
DOUBLE TAX TREATIES
Cyprus has a large network of double income tax treaties which reduce significantly withholding taxes for payments outside of treaty countries. The following tables give a summary of the withholding taxes provided by the double tax treaties entered into by Cyprus.
| |
| |
Paid from Cyprus |
| Paid to |
Dividends |
Interest |
Royalties |
| |
% |
% |
% |
| Non-treaty countries |
0 |
0 |
0 |
| Armenia |
0 (32) |
5 (33) |
5 |
| Austria |
10 |
0 |
0 |
| Bahrain |
0 |
0 |
0 |
| Belarus |
5 (4) |
5 |
5 |
| Belgium |
10 (1) |
10 |
0 |
| Bulgaria |
5 (19) |
7 (25) |
10 |
| Canada |
15 |
15 (8) |
10 (11) |
| China |
10 |
10 |
10 |
| Czech Republic |
0 (30) |
0 |
10 |
| Denmark |
0 (34) |
0 |
0 |
| Egypt |
15 |
15 |
10 |
| Ethiopia (31) |
5 |
5 |
5 |
| Estonia |
0 |
0 |
0 |
| Finland |
5 (37) |
0 |
0 |
| France |
10 (7) |
10 (9) |
0 (26) |
| Georgia |
0 |
0 |
0 |
| Germany |
5 (2) |
0 |
0 |
| Greece |
25 |
10 |
0 (12) |
| Guernsey |
0 |
0 |
0 |
| Hungary |
0 |
10 (8) |
0 |
| Iceland |
5 (39) |
0 |
5 |
| India |
10 |
10 (8) |
10 |
| Iran (31) |
5 (19) |
5 |
6 |
| Ireland |
0 |
0 |
0 (12) |
| Italy |
0 |
10 |
0 |
| Jersey (31) |
0 |
0 |
0 |
| Kuwait |
10 |
10 (8) |
5 (14) |
| Kyrgyzstan (27) |
0 |
0 |
0 |
| Latvia |
0 (42) |
0 (42) |
0 (43) |
| Lebanon |
5 |
5 (16) |
0 |
| Lithuania |
0 (40) |
0 |
5 |
| Malta |
15 |
10 (8) |
10 |
| Mauritius |
0 |
0 |
0 |
| Moldova |
5 (19) |
5 |
5 |
| Montenegro (28) |
10 |
10 |
10 |
| Norway |
0 |
0 |
0 |
| Poland |
0 (36) |
5 (8) |
5 |
| Portugal |
10 |
10 |
10 |
| Qatar |
0 |
0 |
5 |
| Romania |
10 |
10 (8) |
5 (14) |
| Russia |
5 (6) |
0 |
0 |
| San Marino |
0 |
0 |
0 |
| Serbia (28) |
10 |
10 |
10 |
| Seychelles |
0 |
0 |
5 |
| Singapore |
0 |
10 (23) |
10 |
| Slovakia |
10 |
10 (8) |
5 (14) |
| Slovenia |
5 |
5 (33) |
5 |
| South Africa |
10 (41) |
0 |
0 |
| Spain |
0 |
0 |
0 |
| Sweden |
5 (1) |
10 (8) |
0 |
| Switzerland |
0 (38) |
0 |
0 |
| Syria |
0 (1) |
10 (8) |
15 (13) |
| Tajikistan (27) |
0 |
0 |
0 |
| Thailand |
10 |
15 (17) |
5 (18) |
| Ukraine |
5 (21) |
2 |
5 (44) |
| United Arab Emirates |
0 |
0 |
0 |
| United Kingdom |
0 |
10 |
0 (26) |
| USA |
0 |
10 (10) |
0 |
| Uzbekistan (27) |
0 |
0 |
0 |
| |
| |
Received in Cyprus |
| Paid from |
Dividends |
Interest |
Royalties |
| |
% |
% |
% |
| Armenia |
0 (32) |
5 (33) |
5 |
| Austria |
10 |
0 |
0 |
| Bahrain |
0 |
0 |
0 |
| Belarus |
5 (4) |
5 |
5 |
| Belgium |
10 (1) |
10 (16) |
0 |
| Bulgaria |
5 (19) |
7 (25) |
10 (20) |
| Canada |
15 |
15 (8) |
10 (11) |
| China |
10 |
10 |
10 |
| Czech Republic |
0 (30) |
0 |
10 |
| Denmark |
0 (34) |
0 |
0 |
| Egypt |
15 |
15 |
10 |
| Ethiopia (31) |
5 |
5 |
5 |
| Estonia |
0 |
0 |
0 |
| Finland |
5 (37) |
0 |
0 |
| France |
10 (7) |
10 (9) |
0 (26) |
| Georgia |
0 |
0 |
0 |
| Germany |
5 (2) |
0 |
0 |
| Greece |
25 |
10 |
0 (12) |
| Guernsey |
0 |
0 |
0 |
| Hungary |
5 (1) |
10 (8) |
0 |
| Ireland |
5 (39) |
0 |
5 |
| India |
10 |
10 (8) |
10 |
| Iran (31) |
5 (19) |
5 |
6 |
| Ireland |
0 |
0 |
0 (12) |
| Italy |
15 |
10 |
0 |
| Jersey (31) |
0 |
0 |
0 |
| Kuwait |
10 |
10 (8) |
5 (14) |
| Kyrgyzstan (27) |
0 |
0 |
0 |
| Latvia |
0 (42) |
0 (42) |
0 (43) |
| Lebanon |
5 |
5 (16) |
0 |
| Lithuania |
0 (40) |
0 |
5 |
| Malta |
0 (22) |
10 (8) |
10 |
| Mauritius |
0 |
0 |
0 |
| Moldova |
5 (19) |
5 |
5 |
| Montenegro (28) |
10 |
10 |
10 |
| Norway |
0 (3) |
0 |
0 |
| Poland |
0 (36) |
5 (8) |
5 |
| Portugal |
10 |
10 |
10 |
| Qatar |
0 |
0 |
5 |
| Romania |
10 |
10 (8) |
5 (14) |
| Russia |
5 (6) |
0 |
0 |
| San Marino |
0 |
0 |
0 |
| Serbia (28) |
10 |
10 |
10 |
| Seychelles |
0 |
0 |
5 |
| Singapore |
0 |
10 (23) |
10 |
| Slovakia (29) |
10 |
10 (8) |
5 (14) |
| Slovenia |
5 |
5 (33) |
5 |
| South Africa |
10 (41) |
0 |
0 |
| Spain |
0 (35) |
0 |
0 |
| Sweden |
5 (1) |
10 (8) |
0 |
| Switzerland |
0 (38) |
0 |
0 |
| Syria |
0 (1) |
10 (8) |
15 (13) |
| Tajikistan (27) |
0 |
0 |
0 |
| Thailand |
10 |
15 (17) |
5 (18) |
| Ukraine |
5 (21) |
2 |
5 (44) |
| United Arab Emirates |
0 |
0 |
0 |
| United Kingdom |
0 (24) |
10 |
0 (26) |
| USA |
5 (5) |
10 (10) |
0 |
| Uzbekistan (27) |
0 |
0 |
0 |
Double Tax Treaties – Notes
10% in the case of royalties granted for use within the Republic.
5% on film and TV rights.
(1) 15% if received by a company controlling less than 25% of the voting power.
(2) 5% if received by a company controlling more than or equal to 10% of the capital. 15% in all other cases.
(3) NIL if the beneficial owner is a company (other than a partnership) which holds directly at least 10% of the capital of the company paying the dividend. 15% in all other cases.
(4) 5% if the amount invested by the beneficial owner is over €200.000 irrespective of the % of voting power acquired. 10% is imposed if received by a holder of at least 25% of the share capital of the paying company. Otherwise the rate is 15%.
(5) 5% if received by a company controlling at least 10% of the voting power. 15% in all other cases.
(6) 10% if received by company, which has invested less than €100.000.
(7) 10% if received by a company controlling more than or equal to 10% of the capital. 15% in all other cases.
(8) NIL if paid to the Government of the other State.
(9) NIL if paid to the Government of the other State or in connection with the sale on credit of any industrial, commercial or scientific equipment or any merchandise by one enterprise to another or in relation to any form of loan granted by a bank or is guaranteed from government or other governmental organisation.
(10) NIL if paid to the Government of the other State, to a bank or a financial institution or in respect to debt obligations arising in connection with sale of property or the provision of services.
(11) NIL on literary, dramatic, musical or artistic work with the exception of films used for television programs.
(12) 5% on film royalties (except films shown on TV).
(13) 10% on literary, musical, artistic work, films and TV royalties.
(14) NIL on literary, artistic or scientific work including films.
(15) Treaty rate restricted to Cyprus legislation rate of 10%. 10% also applies to payment of technical fees, management fees and consultancy fees.
(16) NIL if paid to the Government of the other State, a political subdivision or a local authority, the National Bank or any institution the capital of which is wholly owned by the State or a political subdivision or a local authority or in the form of interest income from bank deposits.
(17) 10% on interest received by financial institutions, on interest paid in connection with industrial, commercial, scientific equipment or the sale or merchandise between two companies.
(18) 10% on right to use industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience and 15% for patents, trademarks, designs, models,
plans, secret formulas or processes.
(19) 5% if the dividend is received by a company owning directly at least 25% of the capital of the company paying dividend. 10% in all other cases.
(20) This rate does not apply, where 25% or more of the capital of the Cypriot resident is owned directly or indirectly by the Bulgarian resident paying the royalties and the Cyprus company pays less than the normal rate of tax.
(21) 5% is applicable if the dividend is received by a company owning at least 20% of the capital of the dividend paying company or has invested in the acquisition of shares or other rights of the dividend paying company of at least €100.000. 15% in all other cases.
(22) The treaty provides that the tax on the gross amount of the dividends shall not exceed that chargeable on the profits out of which the dividends are paid.
(23) 7% if paid to a bank or similar financial institution. NIL if paid to the government.
(24) The treaty provides for 15% withholding tax but the local taxation provides for 0% withholding tax.
(25) NIL if paid to or is guaranteed by the Government, statutory body, the Central Bank.
(26) 5% on film royalties, including films used for television programs.
(27) The treaty between the Republic of Cyprus and the United Soviet Socialist Republic still applies.
(28) The treaty between the Republic of Cyprus and the Socialist Federal Republic of Yugoslavia still applies.
(29) The treaty between the Republic of Cyprus and the Czechoslovak Socialist Republic still applies.
(30) NIL if the beneficial owner is a company (other than a partnership) which holds directly at least 10% of the capital of the company paying the dividends where such holding is being possessed for an uninterrupted period of not less than one year. 5% in all other cases.
(31) The treaty has been published in the Gazette but has not come into effect until the time of publication of this report.
(32) 5% if the beneficial owner has invested in the capital of the company less than the equivalent of €150.000 at the time of the investment.
(33) NIL if paid to the Government or to a local authority, or to the Central Bank.
(34) NIL if the beneficial owner is a company (other than a partnership) which holds directly at least 10% of the capital of the company paying the dividends, where such holding is being possessed for an uninterrupted period of no less than 12 months. NIL if the beneficial owner is the other Contracting State or the Central Bank of that other State, or any national agency or any other agency (including a financial institution) owned or controlled by the Government of that other State. NIL if the beneficial owner is a pension fund or other similar institution providing pension schemes in which individuals may participate in order to secure retirement benefits, where such pension fund or other similar institution is established, recognized for tax purposes and controlled in accordance with the laws of that other State. 15% in all other cases.
(35) NIL if the dividend is received by a company (other than a partnership) holding at least 10% of the capital of the dividend paying company. 5% in all other cases.
(36) NIL if the beneficial owner is a company (other than a partnership) which holds directly at least 10% of the capital of the company paying the dividends, where such holding is being possessed for an uninterrupted period of no less than 24 months. 5% in all other cases.
(37) 5% if the dividend is received by a company (other than a partnership) which controls directly at least 10% of the voting power in the company paying the dividends. 15% in all other cases.
(38) NIL if the beneficial owner is:
(i) a company (other than a partnership) the capital of which is wholly or partly divided into shares and which holds directly at least 10% of the capital of the company paying the dividend for an uninterrupted period of at least one year.
(ii) a pension fund or other similar institution recognised as such for tax purposes, or
(iii) the Government, a political subdivision, local authority or central bank of one of the two contracting states. 15% in all other cases.
(39) 5% if the beneficial owner is a company (other than a partnership) which holds directly at least 10% of the capital of the company paying the dividends. 10% in all other cases.
(40) NIL if the beneficial owner is a company (other than a partnership) which holds directly at least 10% on the capital of the company paying the dividends. 5% in all other cases.
(41) 5% if the dividend is received by a company which holds at least 10% of the capital of the company paying the dividend.10% in all other cases.
(42) NIL if the beneficial owner is a company (other than a partnership).10% in all other cases.
(43) NIL if the beneficial owner is a company (other than a partnership).5% in all other cases.
(44) 5% on royalty payments in respect of any copyright of scientific work any patent, trade mark, secret formula, process or information concerning industrial, commercial or scientific experience. 10% in all other cases.