Basis of taxation
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 and on certain income arising from sources in Cyprus.
A company is considered a resident of Cyprus if it is managed and controlled from Cyprus.
Corporation tax rates
|COMPANIES||TAX RATE %
The following sources of income are exempt from corporate taxation:
- Profit from the sale of securities.
- Dividends *
- Interest not arising from the ordinary activities or closely related to the ordinary activities of the company, mainly bank deposit interest, however, such interest income is subject to Special Defence Contribution.
- Profits of a permanent establishment abroad, under certain conditions.
- Gains relating to foreign exchange differences with the exception of forex arising from trading in foreign currencies and related products.
- Gains arising from a loan restructuring
All expenses incurred wholly and exclusively in earning the income of the company including:
- Interest expense incurred for the acquisition of 100% of the share capital of a subsidiary company (direct or indirect) is treated as deductible for income tax purposes provided that the subsidiary company does not own any assets that are not used in the business.
- 80% of any income or profit (net of all direct expenses) generated from the sale or exploitation of intellectual property owned by a Cypriot resident company (old IP regime).**
- 80% of net profit as calculated using the modified nexus approach (new IP regime rules applicable as from 1/7/16 onwards) on income (i.e. royalties, embedded income) from qualifying intellectual property. In case of a loss, only 20% of the loss is allowed to be offset against other sources of income, or to be carried forward.***
- New equity introduced to a company as from 1 January 2015 in the form of paid up share capital or share premium is eligible for an annual notional interest deduction (NID). NID is calculated as a percentage of interest on the new equity. The relevant interest rate used for its calculation is the yield on the 10 year government bond (as at December 31 of the prior tax year) of the country where the funds are invested plus 5%. Certain anti avoidance provisions apply.
The NID deduction is restricted to 80* of the taxable profit before allowing the NID and only to the extent that the new capital is invested in assets and activities that generate taxable income. The NID is lost in respect of any year in which it is not utilized.
- Donations to approved Cypriot charitable organizations (with receipts).
- Employer's contributions to social insurance and approved funds on employees' salaries.
- Employers contributions to:
- Medical fund for employees
(restricted to 1% on employee remuneration)
- Provident or pension funds
(restricted to 10% on employee remuneration)
- Medical fund for employees
- Entertainment expenses subject to a maximum amount of 1 % of the gross business income or €17.086, whichever is lower.
- Expenditure incurred for the acquisition of shares in innovative businesses.
- Expenses of private motor vehicles (saloon cars)
- Interest attributed to the cost of acquiring a private motor vehicle, irrespective of its use, and to the cost of acquiring any other asset not used in the business for a period of 7 years since its acquisition.
Losses carried forward
Companies are able to carry forward tax losses incurred in a year over the next five years from the end of the tax year in which they were incurred and such losses can be offset against any taxable income.
The current year loss of a company can be set off against the current year profit of another company provided that either:
- The companies are both Cyprus tax resident companies and members of a group for the whole of a tax year. In the case where a subsidiary company is incorporated by its parent company during a specific tax year, the subsidiary company will be considered as being a member of the group for the whole tax year and therefore will be able to claim group relief for that tax year; or
- The surrendering company is registered in and is a tax resident of another EU Member State country provided that the EU company had exhausted all possibilities available for using the losses in its respective country of tax residency or in the country where its intermediary holding company has its legal seat.
Group is defined as:
- One company holding at least 75 percent of the shares of the other company.
- At least 75 percent of the voting shares of the companies are held by another company that is a tax resident of either an EU country or a country with which Cyprus has a double tax treaty or exchange of information agreement.
A partnership or a sole trader transferring business into a company can carry forward tax losses into the company for future utilization.
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 previously allowed.
Transfers of assets and liabilities between companies can be effected without tax consequences within the framework of a reorganization.
- Mergers and demergers
- Partial divisions
- Transfer of registered office
- Transfer of assets
- Exchange of shares
Anti Tax Avoidance Provisions
Cyprus has introduced certain anti tax avoidance provisions as a result of the adoption of the EU ATAD Directive (2016/1164). In brief those provisions are the following:
- Controlled Foreign Company Rule
The non-distributed income of a foreign CFC which arises from non-genuine arrangements which are controlled by the Cyprus parent entity shall be added to the taxable income of the Cyprus entity and taxed in Cyprus (subject to certain conditions and exceptions).
- Interest Limitation Deduction
Under this provision the excess of the borrowing cost which exceeds 30% of the taxable earnings before interest, tax and deductions would not be tax deductible for the purpose of calculating the taxable income of a company. However, any excess borrowing cost is deducted up to the amount of €3.000.000 per year.
- General Anti Abuse Rule (GAAR)
This rule provides that an arrangement or series of arrangements which are considered as being non genuine and which are not put in place based on valid commercial/economic reasons shall be ignored for the purposes of calculating the tax liability of a tax payer.
- Hybrid Mismatches
These rules shall deny any deduction or tax a specific source of income in Cyprus to the extent that a hybrid mismatch exists and results to a double deduction/deduction without inclusion orno taxation without inclusion
- Exit Taxation
Exit taxation may apply in Cyprus to an amount equal to the market value of an asset less its value for tax purposes where such asset is transferred/moved outside Cyprus (i.e in cases of transfers between head office to a permanent establishment or where a company moves its tax residency outside Cyprus).
Annual wear and tear allowances on fixed assets
The following allowances are given as a percentage on the cost of acquisition and are deducted from the chargeable income:
|PLANT & MACHINERY|
|plant and machinery||10 (1)|
|furniture and fittings||10|
|fork lifts, excavators, loading vehicles, tractors, bulldozers and oil barrels||25|
|machinery and tools used in agricultural business||15|
|computer hardware and operating systems||20|
up to € 1.709
above € 1.709
|commercial motor vehicles (vans, trucks)||20|
|armoured motor vehicles (e.g. used for security services)||20|
|Wind Power Generators||10|
|television and videos||10|
|industrial, agricultural and hotel buildings||4 (2)|
|metallic greenhouse structures||10|
|wooden greenhouse structures||33 1/3|
|steamers, tugs and fishing boats||6|
|ship motor launches||12.5|
|new cargo vessels||8|
|new passenger vessels||6|
|used cargo/passenger vessels||over their useful life|
|tools in general||33 1/3|
|video tapes, property of video clubs||50|
(1) increased to 20% up to 31/12/18 for such assets acquired during 2012 to 2018
(2) increased to 7% up to 31/12/18 for such assets acquired during 2012 to 2018
* The dividend income exemption will not be available:
- To the extent that it constitutes a tax deduction in the paying company (i.e. dividend income from hybrid instruments such as preference shares) or
- If it constitutes an arrangement or part of an arrangement or series of arrangements put in place for the main purpose or one of the main purposes of obtaining the relevant exemption and which are considered not to have been put in place for valid commercial reasons which reflect economic reality).
Where such dividends are taxable under CT they will be exempt from taxation under SDC.
** The term 'intangible assets' includes patents, trademarks and copyrights. The old IP regime has ceased as at 30 June 2016 but under the grandfathering rules, taxpayers with intangible assets that were already falling under the old IP regime as at 30 June 2016, will continue to apply this old regime until 30 June 2021.
*** The term 'intangible assets' comprise of copyrighted software, patents, utility models and other intangible assets which are non obvious, useful and novel and which are certified as such by a designated authority.
For the calculation of the relevant deduction, a fraction is applied to the net profit based on research and development activity of the taxpayer; the higher the amount of research and development undertaken by the taxpayer itself (or via a taxable foreign PE or via an unrelated third party) the higher the amount of the research and development fraction.
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.