Cyprus Company Tax Review

Date of last update: 1 January 2015

Introduction

Tax resident companies in Cyprus are taxed on their worldwide income, accrued or derived from all sources in Cyprus and abroad. A non-Cyprus tax resident Company is obligated to Cyprus tax for the income accrued or derived from business activities in Cyprus, from permanent establishment in Cyprus or from other sources.

A company is considered to be tax resident in Cyprus if it is managed and controlled in Cyprus. Although there is no official definition in the tax law, it is generally accepted that companies are managed and controlled in the place where its directors reside and where strategic and not just day-to-day board decisions are taken. Therefore, in order for a company to be Cyprus tax resident and to benefit from Cyprus’ favourable tax system, its directors would be preferable to be Cyprus residents and the company should hold its board meetings in Cyprus. The appointment of Cyprus-resident directors and the holding of board meetings in Cyprus are indicative but not conclusive factors of the Cyprus tax residence of the company.

Corporation Tax

The corporation tax rate is flat 12.5% for all kind of industries and it is the lowest tax rate within European Union (previously 10% up to 31 December 2013).

However, many exceptions are in force which may result in a zero rate of effective tax.

The tax treatment of the major sources of income is as follows:

Trading income

Under Cyprus tax law the trading income of a company (commercial or manufacturing) is taxed at 12.5%. There is not any official definition in the tax laws about trading income, but trading income is considered to be any income from the activities of the company, main or secondary. Under certain conditions, profits of a permanent establishment abroad are not subject to corporation tax.

According to the law, all expenses incurred wholly and exclusively for the production of the taxable income of the company are deducted from income before arriving at the taxable income. However, some expenses are specifically disallowed. Some of the expenses that are specifically disallowable expenses for tax purposes are:

  • Incorporation expenses;
  • All expenses related to saloon cars;
  • Interest on loans to acquire securities since neither any dividends nor any profits received from the sale of securities are subject to tax. However, expenses for purchase of a subsidiary after 1 January 2012 are allowable expenses (under conditions);
  • Mortgage expenses even if the loan is for trading activities;
  • Contributions and donations to non-approved charities (donations to approved charities is a deductible expense only with receipts);
  • Entertainment expenses above a certain level (1% of revenue capped to €17.100);
  • Professional tax;
  • Immovable property tax;
  • Interest payable or deemed to be payable in relation to the purchase of a private motor vehicle, irrespective of whether it is used in the business or not, or other asset not used in the business. This restriction is lifted after seven (7) years from the date of purchase of the relevant asset;
  • Expenditure not supported by invoices and relevant receipts or other supporting documentation as required by the relevant Regulations;
  • Wages and Salaries relating to services offered within the tax year on which contribution due to the Social Insurance Office have not been paid in the year in which they were due.

Dividend income

Dividend income, from Cyprus or foreign companies, is not subject to corporation tax for Cyprus companies. However, as it is mentioned in the section entitled “Special Contribution for defence”, dividend income from foreign companies, under special rules, may be subject to defence fund contribution.

Interest income

There are two kinds of interest in Cyprus that companies may receive namely, active and passive interest.

Active interest

Active interest is the interest arising out of the ordinary business of the company or of business closely connected to the ordinary business of the company. Active interest is considered trading profit and includes interest earned by:

  • Leasing companies;
  • Financial companies and institutions (banks etc.);
  • Companies considered as the financing vehicles of their group;
  • The current accounts of a company.

Active interest is subject only to corporation tax of 12.5%.

Passive interest

Any other interest received by a company is considered to be passive interest. Passive interest includes:

  • Interest on the loans provided by the company to its directors and shareholders if the company is not a financial institution;
  • Interest earned by bank deposit accounts.

Passive interest is not subject to corporation tax. However, as further explained in the section “Special Contribution for defence”, passive itnerest is subject to defence fund contribution.

Profits from disposal of securities

Profits arising from the sale of securities are not subject to any taxes in Cyprus. The definition securities includes shares, debentures, bonds, options and all major financial instruments currently traded in international financial markets.

An exception to the rule is the case of sale of shares of a company that directly holds immovable property in Cyprus, which is subject to Capital Gains Tax for the value of immovable property (except if the shares are for listed company).

Rental income

Rental income from the renting of immovable property, whether in Cyprus or abroad is subject to corporation tax at a rate of 12.5%. The expenses of the rental property are deductible expense for tax purposes.

Tax losses - Group relief

Tax loss incurred during a tax year and cannot be set off against other income are carried forward for a five year period. However, losses cannot be carried forward if there is a change in the ownership of the company and significant change in the nature of business within three (3) years from the year in which the loss arose.

Companies that belong to a tax group and have incurred losses that cannot be set off with other income during the current year, may set off their losses against profits of another company that belongs to the same group. However, this may be done only for the year in which the particular loss arose and on the condition that the companies are members of the same group throughout the whole year as well as that both companies are tax residents of Cyprus. As from 1 January 2012, where a parent company incorporates a subsidiary company during a tax year, the subsidiary will be deemed to be a member of the tax group, for group relief purposes, for the entire year.

For tax purposes, a company is deemed to be member of a tax group if:

  • it is 75% subsidiary of another company, or
  • both the parent and the subsidiary are 75% subsidiaries of a third company.

Reorganizations

Under Cyprus law, any profits arising out from the transfer of assets and liabilities between companies during a reorganization plan are not subject to any taxes. A reorganization plan includes:

  • mergers divisions;
  • demergers;
  • divisions;
  • transfer of activities;
  • transfer of assets;
  • exchange of shares;
  • transfer of registered office.

General Tax Issues

Transfer pricing: There is no transfer pricing rules under Cyprus tax legislation but the law requires transactions to be based on arm’s length principles. Cyprus legislation incorporates the OECD model and the relevant guidelines to determine what an arm’s length transaction is.

Special Contribution for Defence (SCD)

Special contribution to defence (SCD) is imposed on Cyprus tax resident companies. As opposed to corporation tax, the SCD rate is not set at a flat rate but ranges from 3-30%, depending on the activity.

Dividend income

Dividend income from Cyprus or foreign companies is not subject to the SCD exempt if the dividend is received from a foreign entity and the following apply:

  • More than 50% of the paying company’s activities results directly or indirectly in investment income; and
  • The foreign tax is significantly lower than the tax burden in Cyprus. The Cyprus tax authorities have issued a circular that clarifies that “significantly lower” is interpreted to mean a tax burden rate below 5%.

When the above exemption applies, the dividend income is subject to SCD at a rate of 17%.

Interest income

Passive interest (see corporation tax section above) is subject to SCD at the rate of 30% and is always exempted from the corporation tax obligation. The two main forms of passive interest are:

  • Interest on loans provided by the company to its directors and shareholders; and
  • interest earned by bank deposit accounts.

Rental income

All the income arising from rental of immovable property, whether in Cyprus or abroad is subject to SCD at a rate of 3% on 75% of the gross rent.

General

Trading income, royalty income and profits from the disposal of securities are not subject to SCD.

Capital Gains Tax

Capital gains tax (CGT) rate is set at a flat rate of 20% on the taxable gains arising.

Capital gains tax (CGT) is imposed on Cyprus companies when they have profits from the sale of:

  • Shares of a company which (is not listed) and which owns immovable property in Cyprus (calculated on the value of the underlying property);
  • Immovable property in Cyprus.

As an exemption to the rule, companies which have as their main activity the buying and selling of land are not subject to CGT on the sale of immovable property but to corporation tax.

The taxable gain is the difference between the selling price and the total acquisition cost, plus related expenses, as inflated by indexation allowance.

Capital losses are set off against chargeable gains and any unrelieved losses are carried forward and set off against future chargeable gains.

Social Insurance Contribution

The social insurance contribution (SIC) is compulsory in Cyprus and covers any person working in the Republic.

Both employer and employee are required to contribute to the social insurance fund. Each working month the employer deducts from the employee a certain percentage of his or her salary and adds it to the employer’s contribution for that month. The whole amount (employer plus employee contribution) is due and payable by the end of the next month to the Social Insurance Authorities.

The applicable rates are as follows:

 

Employer’s contribution

Employee’s
contribution

Social Insurance

      7.8%

        7.8%

Social Cohesion Fund.

         2%

          -

Redundancy Fund.

      1.2%

          -

Industrial Training Fund.

      0.5%

          -

Maximum level of income to which the SIC applies:

 

€ (per year )

Weekly employees

1.046

54.392

Monthly employees

4.533

54.396

Exemption: The maximum level does not apply for social cohesion. Social cohesion is calculated on the whole amount of salary even if it exceeds the maximum level.

Annual Levy for Cyprus Companies

All companies registered in Cyprus must pay annual levy of €350. In the case of group companies the total amount payable is capped at €20.000.

This levy is payable to the Registrar of Companies by 30 June of each year. New companies also have to pay the prescribed levy during the year of their incorporation.

Late payment of the levy will give rise to the following penalties:

  • In case of up to a 2 month delay the penalty is 10%;
  • In case of a delay between 2 to 5 months the penalty is 30%.

Non-payment of the levy may result in deregistration (striking-off) of a company by the Cyprus Registrar of Companies (who will not allow the company to submit documents or request certificates from the Registrar of Companies).

Summary of taxes applicable to Cyprus companies

Type of income

Corporation tax

    Special Contribution        for Defence (SCD)

Capital Gains Tax   (CGT)

Trading income

12.5%

-

-

Dividend

-

-

-

Dividend (exemption to the rule)

-

20%

-

Active interest

12.5%

-

-

Passive interest

-

30%

-

Gains on sale of securities (general rule)

-

-

-

Gains on sale of shares of a company which owes directly immovable property in Cyprus

-

-

20%
After allowable deductions

Gains on sale of immovable property

-

-

20%

 

Company Tax Calendar

Due Date

Tax

31 March

Electronic submission of income tax returns (IR4) for companies that prepare audited financial statements for the year before the previous year (on 31 March 2015 is the deadline for the tax return for the year 2013)

30 April

Submission of employers return for the previous year

30 June

Payment of SCD on rental income for the first six months of the current year

31 July

Submission of provisional tax assessment and payment of first instalment

1 August

Payment of final corporation tax with respect to the previous year

30 September

Immovable property tax

31 December

Payment of SCD on rental income for the last six months of the current year

Payment of the second and final instalment of provisional tax

End of the following month

Payment of tax deducted from employees salary (PAYE)

Social Insurance for employer and SI deducted from employees salary

Tax withheld from interest and dividends as defence contribution

 

Legal Disclaimer
The information in this report is for information purposes only. It is not intended to constitute tax, legal or other professional advice, and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances. We accept no responsibility for any errors, omissions or misleading statements in this report, or for any loss which may arise from reliance on materials contained in this report. 

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