- International Finance Centre
- Reasons to Invest in Cyprus
- Main Features of Cyprus Tax System
- Cyprus Holding Companies
- Cyprus - Double Tax Treaties
- Jurisdictions
Cyprus is a full member of European Union as from 1st of May 2004. The accession to the European Union obliged Cyprus to reform its tax system to remove the "discriminatory" elements and bring it into line with EU Laws and Directives, the Code of Conduct and the Organization for Economic Cooperation and Development's (OECD) recommendation on Harmful Tax Corporation.
The Income Tax Law introduced a single corporation rate of taxation of 12.5% for all companies registered in Cyprus. This regime, coupled with an extensive network of favourable tax treaties, enabled Cyprus to develop into one of the most successful international business, financial and commercial centres in Europe. In particular, it capitalised on the good political and economic relations that it enjoyed with members of the former Soviet block to become the principal conduit for foreign investment in and out of Central and Eastern Europe.
Cyprus is geographically situated in the eastern Mediterranean Sea, 65 km south of Turkey, 96 km west of Syria, 385 km north of Egypt, 980 km southeast of Athens and 328 km west of Israel. Historically, Cyprus has always been a crossing point between Europe, Asia and Africa. It is the third largest island in the Mediterranean (9.251 sq Km) after Sicily and Sardinia. The island's time zone is 2 hours ahead of Greenwich meantime, 7 hours ahead of New York and 7 hours behind Tokyo.
Cyprus enjoys perhaps the best type of Mediterranean climate with over 300 warm and sunny days a year and a brief, mild winter and occasional rain. Cyprus's strategic location and tax-efficient environment are accompanied by a modern commercial infrastructure and, as a former British colony, a common law legal system.
The political and economic stability in combination with a strong banking system, excellent telecommunications infrastructure, highly qualified and multilingual labour force, low crime rate and high standard of living have enabled Cyprus to generate substantial business in structured finance, royalties, trading, shipping and portfolio investments, in addition to being a prime jurisdiction for holding companies.
Tax reasons
- Favourable corporate tax system offering a low tax rate of 12.5%.
- Extensive network of double tax treaties.
- Probably the most favourable holding company jurisdiction in Europe
- Group relief for tax loses.
- No withholding tax on dividends paid to non-residents shareholders.
- No capital gains tax in Cyprus on sale of immovable property held outside Cyprus if company is tax resident in Cyprus.
- Non Cyprus tax resident companies are taxed only on the income derived in Cyprus.
- Sales of shares and securities are tax free.
- No taxation on dividend income received by Cyprus Companies.
- No tax on group reorganizations (mergers, demergers, transfer of assets including shares).
- No 'thin capitalisation' rules.
- VAT Advantages.
- Royalty income advantages including a favourable Intellectual Property (IP) Box Regime.
- Full adoption of E.U. Directives.
- Tax free salaries from services outside Cyprus to a non-Cypriot resident employer or to a permanent establishment of a Cypriot resident employer under certain conditions.
- Advantageous tax system for pensioners and expatriates.
- No inheritance tax.
Commercial & other reasons
- Established international business and shipping centre for the last 30 years.
- Full member state of the European Union as from 1st of May 2004.
- Full member of the European Monetary Union.
- Strategic geographical location in the eastern Mediterranean, a crossing point between Europe, Asia and Africa.
- Political stability with a presidential democracy political system.
- Macro-economic stability with successful economic performance.
- Highly qualified, well educated and multilingual labour force.
- World class banking & professional services.
- One of the most popular overseas property and tourist destinations.
- Advanced telecommunications and transport infrastructure.
- No exchange control restrictions.
- Anonymity of the beneficial owners of a company.
- Full Confidentiality.
- No formalities are present for obtaining work permits for EU citizens.
- Low operating costs.
- High level of standard of living.
- Low crime level.
- Excellent health care system.
- Excellent climate - a blue sky with over 300 days of sunshine per year.
Cyprus' tax system is in full compliance with EU requirements and also within the OECD requirements against harmful tax practices.
The main features of the Cyprus tax are as follows:
Basis of Taxation
Under the new Income Tax Law, all distinctions between local and international business companies have been removed. The taxation of companies is now based on residence. All companies that are tax resident in Cyprus are taxed on their accrued worldwide income. Non-Cyprus tax resident companies are taxed in Cyprus only on income derived from a permanent establishment or immovable property in Cyprus. A company is resident of Cyprus if it is managed and controlled in Cyprus. Registration or incorporation in Cyprus is not sufficient to render a company liable to tax in Cyprus.
Corporate Tax Rates
A uniform 12,5% corporate tax rate is applicable to the worldwide income of all Cypriot tax-resident companies.
Tax Exemptions
Profits from the Sale of Securities and Capital Gains Tax
The whole profit from buying and selling securities is exempted from corporation tax. Moreover, there is no capital gains tax arising; except capital gains tax applicable at the rate of 20% on gains accruing from disposal of immovable property situated in Cyprus and shares in non-listed companies, which own immovable property in Cyprus.
Dividend Income (excluding dividends that were used to reduce the taxable profits of the payer)
Dividend income from overseas sources is fully exempted from Corporation tax. Moreover, dividend income from overseas sources is also exempted from the 17% Special Defence Contribution tax, provided that:
- Not more than 50% of the activities of the paying company result directly or indirectly from investment income; and
- The foreign tax burden is not significantly lower than the tax burden in Cyprus. Per Cyprus tax authorities 'significantly lower' means a tax burden below 6,25%.
Interest Income
When interest income arises from the company's ordinary activities or is closely connected to those ordinary activities, it is subject to corporate tax. Any other interest income is taxed under Special Defence Contribution tax at the rate of 30%. Group finance interest income is considered as trading income.
Rental income
In addition to the normal corporation tax rates, 75% of the gross rental income is taxed under Special Defence Contribution tax at 3%, (i.e. effectively taxed at 2,25%).
Foreign Exchange Differences (excluding dividends that were used to reduce the taxable profits of the payer)
Since 1st of January 2015 all exchange differences (realised and unrealised) are no longer taxable or allowable. The only exemption are exchange differences resulting from trade of currencies and related products. Companies dealing with the trade of currencies may irrevocably elect not to be taxed or granted an allowance in respect of unrealized exchange profits/losses. Realized gains and/or losses resulting from the trade of currencies is taxable/allowable with no right to elect for the company.
Profits from an Overseas Permanent Establishment
Profits from an overseas permanent establishment are exempted from corporate tax. The exemption does not apply if:
- The permanent establishment directly or indirectly engages more than 50% in activities that result in investment income; and
- The foreign tax burden is substantially lower than the tax burden in Cyprus (i.e. lower than 6,25%).
Income from Intellectual Property
There are new rules applicable from the 1st July 2016 onwards which are in line with the BEPS Action Plan 5 and offer 'grandfathering rules' to those that benefited from the 'Old IP Box'. These grandfathering rules, allow taxpayers that benefited from the Old IP Box to continue doing so until the 30th June 2021 provided that:
- The intellectual property in question has either generated taxable income or
- Their development was completed as at 30th June 2016
- Was acquired/developed prior to the 2nd January 2016 or
- Was acquired directly or indirectly from a related party during the period from 2nd January 2016 to 30th June 2016 and which assets at the time of either the acquisition were benefiting under the Cyprus IP Box or under a similar scheme in any other country or
- Were acquired from a non-related party, or were developed by the tax payer themselves during the period from 2nd January to 30th June 2016.
The new provisions follow the 'nexus approach' whereby a direct link between qualifying income and own qualifying expenses is essential for the intellectual property to qualify. Rather than granted an overall 80% deduction as per the previous IP Box Scheme, tax adjusted incomes are granted a 'deemed expense' which is equivalent to 80% of qualifying profits.
Expense Deductibility
Generally all expenses incurred wholly and exclusively for the production of income are deducted before arriving at the taxable income.
Losses Carried Forward
Taxable losses can be carried forward and used to set-off taxable profits of the following five years.
Losses incurred by an overseas permanent establishment can be offset against taxable profits of the Cypriot Company. Subsequent profits of the permanent establishment abroad are taxable up to the amount of losses allowed.
Losses incurred by an overseas permanent establishment can be offset against taxable profits of the Cypriot Company. Subsequent profits of the permanent establishment abroad are taxable up to the amount of losses allowed.
Group Relief
A company's taxable loss for the current year can be used to set-off taxable profits of another group company. A group is defined as:
- A Cyprus tax resident company holding at least 75% (directly or indirectly) of the voting shares of another Cyprus tax resident company.
- 75% of the voting shares of the two companies are held by a third company (directly or indirectly).
As from 1 January 2015 a non-Cyprus tax resident company will be eligible for group relief as long it is tax resident in either an EU country or in a country with which Cyprus has a double tax treaty or an exchange of information agreement (bilateral or multilateral).
Reorganisations
In view of the incorporation of the EC Merger Directive 90/434/EEC into the new tax law, there are tax exemptions available on the transfer of assets (including shares) under a reorganisation (merger / de-merger / transfer of assets). Tax losses can be carried forward by the receiving company. The tax benefits of an approved reorganisation are as follows:
- No balancing statement is required for assets transferred.
- No capital gains (or corporation tax if trade) on the transfer of Cyprus immovable property.
- Any losses carried forward of a transferring company can be transferred to the receiving company.
- No transfer fees nor stamp duty.
- No taxes whatsoever on the transfer on any assets.
Dividends paid to non-Cyprus tax resident shareholders are exempted from any withholding tax in Cyprus. Dividends paid to Cyprus tax resident shareholders that are considered non-domiciled are also exempted from any withholding tax in Cyprus.
Network of Double Tax Treaties
A comprehensive network of double taxation treaties has been integral to Cyprus's success as a financial centre. It has concluded tax treaties with more than 50 countries, and further treaties are under negotiation, or awaiting ratification, with half as many more. Most of the Treaties follow the OECD model and their objective is that of reducing or eliminating the double taxation payments imposed by the Contracting states on cross border transactions. This is beneficial for trading and investment activities with other countries through Cyprus.
The Cyprus holding company regime, one of the most advantageous in the EU, is probably the most attractive feature of the Cypriot tax system. A holding company is generally set up as an ordinary company resident in Cyprus. There is no geographical limitation on the exercise of a company's activities and its income may be derived from any source, including a Cypriot-based source. Moreover, there is no restriction on the ownership of a company's shares.
Profits of a Cypriot holding company arising from the sale of shares in other entities enjoy a full exemption from the local tax in Cyprus, with no minimum participation threshold required. However, any profits arising on sale of shares in entities owning immovable property in Cyprus are taxed under capital gains tax at the rate of 20%.
Dividends paid by a Cypriot holding company to its ultimate parent company are not subject to withholding tax in Cyprus. Furthermore, the incorporation of EU Interest and Royalties Directive into Cypriot domestic law provides an exemption at source of interest for a beneficial owner that is non-resident in Cyprus but resident in an EU member state.
Overseas dividends income received by a Cypriot holding company is fully exempted from Corporation tax. Moreover, overseas dividend income is also exempted from the 17% Special Defence Contribution tax, provided that:
Overseas dividends income received by a Cypriot holding company is fully exempted from Corporation tax. Moreover, overseas dividend income is also exempted from the 17% Special Defence Contribution tax, provided that:
- Not more than 50% of the activities of the paying company result directly or indirectly from investment income; and
- The foreign tax burden is not significantly lower than the tax burden in Cyprus. Per Cyprus tax authorities ‘significantly lower’ means a tax burden below 6,25%.
Interest income received by a Cypriot holding company in the ordinary course of its business will be subject to corporate tax at 12,5%. Any other interest income is taxed under Special Defence Contribution tax at the rate of 30%.
Foreign taxes paid on overseas income can be credited against any respective tax liabilities (from both Corporation tax and Special Defence Contribution tax) arising from the same source of income.
There are no thin capitalisation rules in Cyprus, but there are certain indirect restrictions. Interest paid in the course of a company’s normal trading activities, including any amount in relation to the acquisition of assets used in the business, is an allowable deduction. Back-to-back financing transactions must be undertaken on an “arm’s length” basis, such that the borrowing and on lending should not result in a loss to the Cypriot company.
A comprehensive network of double taxation treaties has been integral to Cyprus’s success as a financial centre. It has concluded tax treaties with more than 50 countries, and further treaties are under negotiation, or awaiting ratification, with half as many more. All such treaties apply the credit method to the taxation of dividends and interest, by allowing tax payable in the other country as a credit against tax payable in Cyprus, including the Special Defence Contribution tax. As a result, the taxpayer only pays the higher of the two rates of tax and is not taxed twice on the same income.
Cypriot companies are therefore advantageous for holding, financing, licensing, trading or other operations. The absence of dividend withholding tax offering a tax-free exit for dividends from the EU, the favourable holding company tax regime in combination with the extensive network of double tax treaties have resulted in Cyprus being an appropriate jurisdiction for European holding activities.
There are no thin capitalisation rules in Cyprus, but there are certain indirect restrictions. Interest paid in the course of a company’s normal trading activities, including any amount in relation to the acquisition of assets used in the business, is an allowable deduction. Back-to-back financing transactions must be undertaken on an “arm’s length” basis, such that the borrowing and on lending should not result in a loss to the Cypriot company.
A comprehensive network of double taxation treaties has been integral to Cyprus’s success as a financial centre. It has concluded tax treaties with more than 50 countries, and further treaties are under negotiation, or awaiting ratification, with half as many more. All such treaties apply the credit method to the taxation of dividends and interest, by allowing tax payable in the other country as a credit against tax payable in Cyprus, including the Special Defence Contribution tax. As a result, the taxpayer only pays the higher of the two rates of tax and is not taxed twice on the same income.
Cypriot companies are therefore advantageous for holding, financing, licensing, trading or other operations. The absence of dividend withholding tax offering a tax-free exit for dividends from the EU, the favourable holding company tax regime in combination with the extensive network of double tax treaties have resulted in Cyprus being an appropriate jurisdiction for European holding activities.
Constructive use of the Cyprus Treaties’ Network has provided considerable advantages to businesses and individuals who have chosen Cyprus for the establishment of legal entities. Tax treaties supersede local tax legislation and therefore they are useful tax-planning tools to protect businesses and individuals against double taxation of income earned in other countries.
More than 60 countries are among those which have double-tax treaties with Cyprus. Several others are under discussions and negotiations. In the absence of a Double Tax Treaty, a Cyprus Company can benefit from EU Directives to reduce or eliminate withholding taxes when receiving income from an EU Country. Unilateral tax credit on foreign taxes withheld at source is also available.
For a complete list of the countries that have Double Tax Treaties with Cyprus, please follow this link.
Although we are a Cyprus based Company, we can provide our services through our network to the following jurisdictions:
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Cyprus Information
International Finance Centre
Cyprus is a full member of European Union as from 1st of May 2004. The accession to the European Union obliged Cyprus to reform its tax system to remove the "discriminatory" elements and bring it into line with EU Laws and Directives, the Code of Conduct and the Organization for Economic Cooperation and Development's (OECD) recommendation on Harmful Tax Corporation.
The Income Tax Law introduced a single corporation rate of taxation of 12.5% for all companies registered in Cyprus. This regime, coupled with an extensive network of favourable tax treaties, enabled Cyprus to develop into one of the most successful international business, financial and commercial centres in Europe. In particular, it capitalised on the good political and economic relations that it enjoyed with members of the former Soviet block to become the principal conduit for foreign investment in and out of Central and Eastern Europe.
Cyprus is geographically situated in the eastern Mediterranean Sea, 65 km south of Turkey, 96 km west of Syria, 385 km north of Egypt, 980 km southeast of Athens and 328 km west of Israel. Historically, Cyprus has always been a crossing point between Europe, Asia and Africa. It is the third largest island in the Mediterranean (9.251 sq Km) after Sicily and Sardinia. The island's time zone is 2 hours ahead of Greenwich meantime, 7 hours ahead of New York and 7 hours behind Tokyo.
Cyprus enjoys perhaps the best type of Mediterranean climate with over 300 warm and sunny days a year and a brief, mild winter and occasional rain. Cyprus's strategic location and tax-efficient environment are accompanied by a modern commercial infrastructure and, as a former British colony, a common law legal system.
The political and economic stability in combination with a strong banking system, excellent telecommunications infrastructure, highly qualified and multilingual labour force, low crime rate and high standard of living have enabled Cyprus to generate substantial business in structured finance, royalties, trading, shipping and portfolio investments, in addition to being a prime jurisdiction for holding companies.
Reasons to Invest in Cyprus
Main Features of Cyprus Tax System
Cyprus Holding Companies
Cyprus - Double Tax Treaties
Jurisdictions
