Tax Environment in Cyprus
As part of the accession process to the EU and in compliance with the OECD requirements against harmful tax practices, the Cyprus Tax Legislation has undergone major reforms, greatly enhancing Cyprus' competitiveness and making it an even more attractive jurisdiction through which to conduct international business. Cyprus offers enhanced business opportunities in an enlarged European Common Market and its Taxation System renders Cyprus one of the most attractive International business centres.
The new Cyprus tax laws provide significant benefits for all types of international business activities. Cyprus resident Companies have one of the lowest effective tax rate of any EU member and the treatment of dividends, interest, income and capital gains are amongst the most beneficial in the world.
Cyprus is a signatory to the Treaty for the Prevention of Double Taxation with many countries all over the world. A Double Taxation Prevention Treaty, in principle, enables offsetting tax paid in one country against the tax payable in the other, in this way preventing double taxation for businesses and individuals.
Tax costs play a significant role in investment decisions, investors aim in maximising after tax return on investment. Therefore, investment structures, which have the least tax leakage are preferred by investors and are recommended by professional advisers. As such, a Cyprus investment vehicle can collect income, which is a charge against high tax income. Withholding tax is eliminated or reduced under double tax treaties or under EU directives. The rate of tax in Cyprus is low compared to other EU countries. The income can then be repatriated in any form the investor wishes without withholding tax.
A Cyprus entity is suitable both for EU inbound and outbound investments. There are no investment activities which are inappropriate for the Cyprus tax environment. However, there are investment activities that are indeed ideally suited to the Cyprus tax environment such as:
- Holding Companies
- Investment Funds and Companies
- Finance Companies
- Royalty Companies
- South Europe, Middle East, Russia, Central and Eastern Europe headquarter business activities.
DOUBLE TAX TREATY
Cyprus is considered to be holding quite a significant position in the international tax planning as a number of fiscal benefits can be accumulated to foreign entities by using the advantages offered from the use of a Cyprus company for a successful application of the theory of International Tax Planning. The actual theory of International Tax Planning refers to the arrangement of financial and business affairs in such a way so as to be able to magnetise the minimum tax either locally or internationally, without being in any event in conflict with any tax laws or without deceiving the Inland Revenue authorities by not declaring profits or by other ways of fraudulent actions. The position held by Cyprus in the field of International Tax Planning derives both from the favourable tax regime established as well as for the wide network of double tax treaties.
The central purpose for the conclusion of these treaties is the avoidance of double taxation of income earned in any of the two contracting states. According to these agreements:
- either a credit is allowed on any tax paid in another country against the Cyprus tax
- or the income is totally exempted from tax.
BASIS OF TAXATION / THE CYPRUS HOLDING COMPANY
A Cyprus Holding Company can be effectively utilised for International Tax Planning purposes, and at the same time enjoy the status of being located at a reputable business centre.
All Companies tax resident of Cyprus are taxed on all 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. A Company is resident of Cyprus when it is managed and controlled in Cyprus.
Corporate tax for resident Companies is imposed at the rate of 12.5% (twelve and a half percent) for each year of assessment upon the taxable income derived from sources both within and outside Cyprus.
A Company is considered to be tax resident in Cyprus when 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 composition of the Board of Directors and the place where major decisions are taken and major contracts are signed. Cyprus Tax residency is required in order for a Company to be taxed under the Cyprus tax laws and to take advantage of all European directives as well as the Double Tax Treaty (DTT) network that Cyprus has secured for tax resident persons.
Dividends paid from one Cyprus Company to another are free from withholding or any other tax in Cyprus.
Dividends received from abroad
There is no withholding tax on dividends received from other Cyprus resident Companies. Dividends received from abroad are also tax exempt, provided the following two conditions are satisfied:
- The Company that receives the dividend must hold directly at least one percent (1%) of the share capital of the Company abroad that pays the dividend, and
- The Company that pays the dividend must not engage more than fifty percent (50%) in activities which lead to passive income (non-trading income) OR the foreign tax burden on the income of the Company that pays the dividend is not substantially lower than the tax burden in Cyprus.
(A tax rate of five percent (5%) or more in a country paying the dividend satisfies this condition)
When interest income arises from the company’s ordinary activities or is closely connected to those ordinary activities, it is subject to corporate tax at 12.5% in the same manner as any “active” trading income. Where interest income is not arising from the ordinary activities or it is not closely connected to those ordinary activities, it is considered to be “passive” and is subject to both corporation and special defence tax. “Passive” Interest income will be subject to 12.5% corporation tax on 50% of the interest received and to special defence contribution tax at 30% on the whole amount of the interest received, to give an effective total tax burden of 36.25%.
Group finance interest income is considered as trading income.
FOREIGN PERMANENT ESTABLISHMENT (PE)
The Profits from a foreign PE held by the Cyprus Holding company are exempt from corporate tax, if one of the following two conditions is satisfied:
- Passive income is less than 50%
- The foreign tax burden is not substantially lower than that in Cyprus.
Generally all expenses incurred wholly and exclusively for the production of income are deducted before arriving at the taxable income.
LOSSES CARRIED FORWARD
The tax losses incurred during a tax year that cannot be set off against other income, is carried forward and set off against future profits with no time restriction.
The Group relief rules are now enacted, providing for group relief of tax losses between Cyprus tax-resident Companies of a Group.
A group is defined as:
- One company holding at least 75% of the shares of the other company.
- At least 75 % of the voting shares of the companies are held by another company. Losses brought forward will not be available for Group Relief.
A partnership or a sole trader transferring business into a company can carry forward tax losses into the company for future utilisation.
In view of the incorporation of the EC Merger Directive 90/434/EEC into the new tax law, the transfers of assets and liabilities between Companies can be affected without tax consequences within the framework of a reorganisation. Reorganisations include mergers, demergers, transfer of activities and exchange of shares. Tax losses can be carried forward by the receiving company.
CYPRUS BRANCHES OF COMPANIES
With the accession of Cyprus in the EU, double taxation relief will be available to all Cyprus branches, of companies resident in other European Union member states.
INHERITANCE OR ESTATE TAXES
Although Cyprus is a full member of the EU, there are no taxes on capital. Estate or Inheritance tax was abolished as of January 1st, 2000. It is an extremely useful tool in the hands of a tax advisor as it can save large amounts of money to the individuals involved.
CAPITAL GAINS TAX
Capital Gains are not included in the ordinary trading profit of a business, instead they are taxed separately under Capital Gains Tax Law.
Capital Gains Tax from the sale of immovable property situated in Cyprus and/or sale of shares in Companies (other than quoted shares) that own immovable property situated in Cyprus, are taxed at a flat rate of 20%, after allowing for indexation.
Exemption from Capital Gains Tax on Immovable Property acquired from the 9th of July 2015 until 31st of December 2016. There is a 100% exemption from Capital Gains Tax in Cyprus, for the disposal of real estate located in Cyprus provided that the real estate has been purchased between 16/7/2015 until 31/12/2016 and it is acquired through purchase or purchase agreement and not through exchange or donation at market value from a non-relative party. The prior applicable regime imposed a 20% capital gains tax on the seller.
Capital Gains that arise from the disposal of immovable property held outside Cyprus or shares in Companies that include immovable property held outside Cyprus are completely exempt from Capital Gains Tax.
Therefore, if a non-resident shareholder decides in the future to dispose of its shares in a Cyprus Company, he/she will not be subject to any tax in Cyprus.
Cyprus imposes no tax on wealth and it is not anticipated to do so in the years to come.
IP PROTECTION IN CYPRUS
The protection of IP rights is dealt extensively in Cyprus. The comprehensive system in place guarantees that the results of innovation and creativity are protected at a European and an International level.
As far as patents are concerned, a new invention is protected in the following ways in Cyprus:
- A national patent certificate is granted by the Department of Registrar of Companies and Official Receiver.
- A European Patent issued by the European Patent Office.
- An International Patent under the provisions of the Patent Cooperation Treaty, administered by the World Intellectual Property Organization (WIPO).
b. Trademarks/Service Marks/ Designs
As far as Trademarks, Service Marks and Designs are concerned, protection is granted in the following ways:
- Registration under the provisions Capital 268 offering protection at a National level.
- EU Regulation 207/2009 of 26 February 2009 on the Community Trademark and EU Regulation 6/2002 of 12 December 2001 on the Community Design offer via Cyprus uniform protection throughout the territory of the European Union.
- Cyprus being a signatory to the Paris Treaty on the Protection of Industrial Property, as administered by the World Intellectual Property Organization (WIPO) and a party to the Madrid Protocol, offers global protection of trademarks, service marks and designs.
- Copyrights are protected under Law N.59/76 on the Protection of Intellectual Property which offers protection at a National level.
- Cyprus being a signatory to the Bern Convention for the Protection of Literary and Artistic Works which covers broad range of rights, including software copyrights. This guarantees protection to all the Convention member states with no further process being required.
- Also complemented with the beneficial tax provisions, that render the Cyprus tax system as one of the most favorable in the EU, featuring a 12.5% corporate tax rate, no withholding tax on outgoing payments (interest, dividends, royalties) and no exit taxes.
- Cyprus, offers an extensive double tax treaty network that ensures withholding tax optimization on royalty payments that may arise from the contemplated IP arrangements and access to all EU Tax Directives.
The new IP Regime in the spotlight
- An 80% exemption on royalty income and capital gains upon disposal of IP;
- No recapture system for previously generated losses - losses can be carried forward indefinitely;
- Gross IP income reduced by expenses incurred for the production of IP income;
- Competitive amortization provisions over a 5 year period;
- Wide range of qualifying IP rights;
- Effective Tax rate of 2% or Less!
Qualifying IP Rights include amongst others
Patents , trademarks/service marks, designs/models, internet domain names, software copyrights, secret formulae, know-how, work in process R&D, lists, rights related to scientific, literary or artistic work, rights related to industrial or commercial work.
Acquired or Developed post 1st January 2012
Qualifying IP income
- Royalty payments
- Capital gains
- 80 % exemption on qualifying net income
- effective tax rate: 2% or less!
SPECIAL TYPE OF COMPANIES
The company is registered as a private company with limited liability under the provisions of the Cyprus Companies Law. The present legislation contains provisions, which facilitate the acceleration of the various procedures. Tax and other benefits to Shipping Activities
- Special taxation for shipping companies: Ship owners, charterers and ship managers participating in the Cyprus tonnage tax system, are exempted from the income tax and any other tax or levy on dividends paid to shareholders, on interest earned on working capital and on any profit made from the sale of a qualifying ship.
- No income tax on the emoluments of officers and crew on board a Cyprus ship.
- No estate duty on the inheritance of shares in a ship owning company.
- No stamp duty on ship mortgage deeds or other security documents.
- VAT exemption for international transport services when the effective use and enjoyment of the services takes place outside the EU.
The new Tonnage Tax System (Law 44(I)/2010) is applicable as from the fiscal year 2010. Under this new system, qualifying owners of Cyprus ships are not liable to pay tax under the provisions of the Income Tax Law in force, but are subject to an annual tax referred to as tonnage tax.
Profits of insurance Companies are liable to corporation tax similar to all other Companies except in the case where the corporation tax payable on taxable profit of life insurance business is less than 1,5% on gross premium. In this case, the difference is paid as additional corporation tax.
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