1. TYPES OF BUSINESS ENTITIES,THEIR RESIDENCE AND BASIC TAX TREATMENT

1.1 Corporate Structures and Tax Treatment

Businesses in Cyprus generally adopt a corporate form. The most common type of corporate form is that of a private (or public) limited liability company with shares. A Cyprus company is fiscally opaque for tax purposes; therefore, it is taxed as a separate legal entity.

Pursuant to Cyprus law, a company is a legal person with separate legal personality, distinct from its members and its directors. Thus, its shareholders are not personally liable for the obligations of the company and the liability of the shareholders is limited to the share capital contributed. The existence of the company does not depend on the existence or continuation of its members.

Additionally, a Cyprus company may be limited by guarantee. Usually, companies limited by guarantee are incorporated as non-profit organisations, to pursue charitable purposes.

1.2 Transparent Entities

Cyprus law allows for the establishment of general and limited partnerships. A partnership is not treated as a separate taxable person. It is a transparent entity and the tax is imposed on the partners and not on the partnership. Partnerships are widely used in joint venture projects and in smaller (usually family-owned) enterprises.

1.3 Determining Residence of Incorporated Businesses

The test used in Cyprus for determining the residence of incorporated businesses and transparent entities is the so-called management and control test.

The Cyprus income tax legislation does not include a clear provision on how an entity becomes a Cyprus tax resident. General practice looks at the management and control thereof.

The minimum requirements for an entity to be considered as a Cyprus tax resident are quite general and include:

  • the place of residence of the majority of the directors;
  • the place where the meetings of the board of directors are held; and
  • the place where the general policy of the entity is formulated.

1.4 Tax Rates

Tax Rates Paid by Incorporated Businesses

The corporation tax rate is 12.5%.

Business profits of Cyprus tax resident companies, adjusted in relation to allowances and exemptions, are subject to a flat tax rate of 12.5%.

Individual Tax Rates

Income for individuals is subject to progressive tax rates. The first EUR19,500 is tax free, the next EUR8,500 is subject to a tax rate of 20%, the next EUR8,300 is taxed at 25%, the next EUR23,500 at 30% and any amount above EUR60,000 at 35%. A number of deductions and personal allowances are available.

Businesses owned by individuals directly are subject to the individual tax rates; the same applies for businesses owned through transparent entities.

2. KEY GENERAL FEATURES OF THE TAX REGIME APPLICABLE TO INCORPORATED BUSINESSES

2.1 Calculation for Taxable Profits

Business profits of a Cyprus company, adjusted for various disallowances and exemptions, are subject to tax at 12.5%. Cyprus tax residents are taxed on their worldwide income. Profits are taxed on an accrual basis and the International Financial Reporting Standards are followed.

Generally, expenses wholly and exclusively incurred by a company in the production of taxable income are allowable. Private expenses, expenses not matched to taxable income or not validated through proper supporting documentation, provisions (depreciation, amortisation, impairment, obsolete stock), expenses linked to non-taxable assets and exchange differences are considered, amongst others, as non-deductible expenses. However, capital allowances, balancing allowance computed on the disposal of a non-current asset, notional interest deduction and notional loss in related-party transactions are also deductible.

2.2 Special Incentives for Technology Investments

The current Cyprus IP tax regime is applicable as of 1 July 2016. This follows the nexus approach, according to which, a direct link between qualifying income and own qualifying expenses is essential for the IP to qualify. The level of the qualifying profits is positively correlated to the extent that research and development activities are performed by the same entity.

Under the previous IP Box Regime that was applicable in Cyprus, an overall 80% deduction on profits was granted. Under the current IP tax rules, 80% of the overall income derived from the qualifying intangible asset is treated as a deductible expense.

A qualifying intangible asset is defined as an asset that has been acquired, developed or exploited by a person within the course of carrying out their business that is the result of research and development activities.

Such assets specifically include (i) patents, (ii) computer software and (iii) other intellectual property that is legally protected and comprises of utility models, intellectual property assets that provide protection to plants and genetic material, orphan drug destinations and extensions of protection for patents or non-obvious, useful and novel IP assets (which are certified as such by an appropriate authority) where the person utilising such does not generate annual gross revenues in excess of EUR7.5 million from all intangible assets (or EUR50 million for groups).

Qualifying intangible assets specifically exclude trade marks, business names, brand image rights and other IP rights used for the marketing of products and services.

Persons that may benefit from the Cyprus IP tax regime include Cyprus tax resident taxpayers, tax resident permanent establishments (PEs) of non-tax resident persons and foreign PEs that are subject to tax in Cyprus.

2.3 Other Special Incentives

In Cyprus there are a number of special incentives applicable in general as well as to particular industries (in addition to the Cyprus IP tax regime explained in 2.2 Special Incentives for Technology Investments).

The Cyprus Holding Company

Cyprus constitutes an attractive jurisdiction in which to set up a holding company. Namely, dividend income received by a Cyprus holding company is generally exempt from any income tax in Cyprus (subject to the hybrid instrument exception explained below) and Special Defence Contribution (SDC) (subject to the passive dividend rule explained below). Also, no withholding tax applies on any outgoing dividend or other profit distributions or interest, irrespective of the existence of a double tax treaty (DTT). Furthermore, profits from the sale of shares are tax exempt. In general, no restrictions on foreign share ownership exist; as a result, a foreign investor is allowed to be the sole shareholder of a Cyprus company.

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Originally Published by Chambers Global Guide

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.