A number of international companies are using Cyprus as a hub for software development, testing and marketing services, research and development activities and system integration. Government officials have expressed their plans to brand Cyprus into a technology hub and are introducing more and more schemes and programs to attract such companies.
One of the main questions is why Cyprus?
- Cyprus is located in a strategic position in Europe which serves as a convenient point for trade and transportation;
- Cyprus is a member of EU and Eurozone which allows access to 500 million EU citizens and 40+ EU trade agreements;
- A regulatory framework that is aligned with EU and a legal system comparable with UK common law;
- Large amount of highly experienced, educated and multilingual workforce;
- Low costs for office operation – Cost for technical and professional support in Cyprus is much lower compared to other EU countries;
- Quality healthcare with a number of private hospitals;
- A number of private English speaking schools are available providing high levels of education leaving families feeling more at ease when re-locating to Cyprus;
- A sense of security amongst its community since Cyprus holds one of the lower crime rates in EU;
- Good climate, around 50 beaches with blue flag and a relaxed Mediterranean lifestyle;
- Majority of people in Cyprus are fluent in English. Road signs, government documents etc. can all be found in English so there is no language barrier;
- Government has amended the Blue Visa legislation that will give access to local labour market to spouses of these workers.
Incentives and benefits of relating to Cyprus can be found in a personal and business level. Below we have analysed both:
Personal tax incentives
There are a number of personal tax incentives for an individual that decides to relocate in Cyprus and become a tax resident. A few key benefits are discussed below:
- Cyprus income tax grants the below exemptions
- Cyprus tax residents that are not domiciled in Cyprus are exempt from defence tax on dividend and interest income;
- Lump sums received by way of retiring gratuity, commutation of pension or compensation for death or injuries;
- Capital sums paid to individuals out life insurance policies, provident fund and pension funds;
- Profit from the sale of securities is exempt from tax in Cyprus. Securities are defined as: Ordinary shares, founder shares, preference shares, options on shares, debentures, bonds, short position on titles to include futures, forwards, swaps and participation in companies. Such income will however be subject to GHCS at a rate of 2.65%;
- 50% employment exception from income tax of individuals commencing first employment in Cyprus for a period of 17 years if remuneration from employment exceed the amount of €55,000 per tax year; A grace period of 2 years will be given to such new employees in cases where their initial annual salary is below the minimum annual wage of €55,000;
- 20% employment exemption (up to a maximum of €8,550) on income tax for remuneration from employment in Cyprus as long as remuneration does not exceed €55,000 for a period of 7 years – (Note that individuals can only claim one of the two exemption at a time) ;
- Tax credit relief can be offered if a particular income was already taxed abroad. This relief can be obtained only when the original tax payment receipt is presented as confirmation;
- Option for overseas pension to be taxed under a special mode of taxation in which pensions are exempt from tax up to €3,420 and any amount above that threshold is taxed at a flat rate of 5%;
- Gains arising from the disposal of non – Cypriot real estate are exempt from Capital Gains Tax;
- No estate duty, wealth tax, gift tax or inheritance tax in Cyprus;
Corporate Tax Incentives:
Cyprus holds one of the most favourable corporate tax rates In the EU at 12.5%. Below we have listed the key corporate tax benefits:
All the below listed sources of income are exempt from Cyprus corporation tax:
- Dividend income (subject to conditions);
- Profits from sale of securities (shares, bonds, debentures);
- Any interest income that did not arise from the ordinary business activities of the company;
- Profits of a permanent establishment held outside Cyprus (subject to conditions);
- Foreign exchange gain (assuming gains are not from trading);
Other corporate tax benefits a Cyprus tax resident company can enjoy are below:
- Notional interest deduction for investments into Cyprus companies;
- A wide network of double tax treaties covering approximately 60 countries providing a competitive advantage for businesses conducting international operations;
- Tax losses can be carried forward and utilised against future profits for the next five years. Tax losses can also be surrendered for group relief the year they occur;
- No capital gains tax (except for disposal of real estate in Cyprus or shares of company holding real estate in Cyprus;
- No taxes on entry, reorganisations and exit;
One of the most important advantages that the Cyprus tax system has to offer to its tax residents, especially companies that hold IP assets is the IP regime. Full details are explained below:
How IP regime works:
Under the IP regime, 80% of qualifying profits generated from qualifying assets are deemed to be tax deductible. Cyprus IP companies can achieve an effective tax rate up to 2.5% on qualifying profits earned from exploiting qualifying IP.
"Qualifying intangible asset" is defined as an asset which was acquired, developed or exploited by a person in furtherance of his business, (excluding intellectual property associated with marketing) and which is the result of research and development activities and includes intangible assets for which only economic ownership exists. Examples of such assets can be seen below:
- Patents as defined in the Patents Law
- Computer Software
Qualifying intangible assets specifically exclude:
- Business Name
- Image Rights
- Other intellectual property rights used for the marketing of products and/or services.
"Qualifying profits" are calculated based on the "nexus approach". More specifically, the level of profits eligible for the 80% tax exemption will depend on the level of R&D expenditure carried out by the taxpayer to develop the qualifying asset. The qualifying profits are calculated based on the following formula:
QP = OI multiplied by ((QE + UE) / OE)
QP: Qualifying Profit
OI: Overall Income
QE: Qualifying Expenditure
UE: Uplift Expenditure
OE: Overall Expenditure
"Overall Income (OI)": is defined as the gross income derived from qualifying intangible assets during the tax year less any direct costs incurred for generating the income.
A few examples of such types of income are:
- Amount for grant of a licence for exploitation of asset
- Any amount relating to insurance or compensation of the assets
- Income from disposal of asset
A few examples of direct costs are listed below:
- Any allowable costs that have been incurred wholly and exclusively for the generation of gross income
- Amortisation of the cost of the assets (over the life of IP, with a max of 20 years)
- Notional interest deduction associated with qualifying asset.
"Qualifying expenditure (QE)": is defined as, but not limited to:
- Wages and salaries;
- Direct costs and general expenses;
- Commission expenses associated with R&D activities;
Qualifying expenditure do not include the below:
- Acquisition cost of the intangible asset;
- Interest paid or payable;
- Cost for acquisition or construction of immovable property;
- Any costs not directly linked to the qualifying asset;
"Uplift Expenditure (UE)": is added to the qualifying expenditure, which will be equal to the lower of:
- 30% of QE or
- The total costs of acquiring the qualifying asset plus the cost of outsourcing to related parties of any research and development
The purposes of the uplift expenditure is to ensure that the nexus approach does not penalise taxpayers excessively for acquiring IP or outsourcing R&D activities to related parties.
Overall Expenditure (OE): relating to qualified intangible assets is defined as the sum of:
- The qualifying expenditure and
- The total cost of acquiring the qualifying asset plus the cost of outsourcing to related parties of any research and development costs outsourced to related parties incurred in any tax year.
Calculation of taxable profit
80% of the overall profit derived from the qualifying intangible asset is treated as a deductible expense. Every year the taxpayer may elect not to claim the whole or part of this allowance.
In the case of a resulting loss, only 20% of the loss can be surrendered to other group companies or be carried forward to subsequent years.
Qualifying taxpayers that are eligible for the IP regime include Cyprus tax resident persons, permanent establishments (PEs) of non- resident person and foreign PEs that are subject to tax in Cyprus.
An intangible asset (qualifying or not) is eligible for tax amortisation over the useful economic life of the asset with maximum of 20 years.
Disposal of an IP
If the IP disposal is considered as a capital nature transaction, then any accounting profit or loss that may arise from the disposal is exempt from Cyprus tax. If disposal is under trading nature then accounting gain or loss may be taxable.
When an IP is developed in Cyprus rather than outsourcing then the benefits from the provisions of the IP regime are maximised. This is one of the key reasons why more and more software developer companies are relocating their key personal and engineers to Cyprus.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.