The Cyprus Tax Regime
The fiscal regime is predominantly based on two key tax laws:
- The Income Tax Law of 2002
- The Special Contribution for Defense Law of 2002 ( the SCDT Law)
However, any international tax planner utilizing Cyprus must also be familiar with the legislation on legal entities, namely the Companies Law CAP113, and the legislation governing the formation and management of Cyprus International Trusts: The International Trust Law 1992 and The Trustees Law CAP193 of 1955.
A number of other tax laws have secondary importance in corporate tax planning, as they address the assessment and collection of taxes, capital gains on the sale of immovable property in Cyprus, the Social Cohesion Fund and Stamp Duty.
The Income Tax Law
Scope of Income Tax
Income Tax is imposed on the worldwide income of all resident Cyprus persons (individuals and corporations). Non-resident persons are liable for tax on their Cyprus-sourced income only.
A corporation is tax resident when its management and control is exercised in Cyprus. Although there is no concrete definition, it is suggested that “management and control” is present in the case where the majority of the directors are Cyprus residents or in the case where the Board of Directors holds its meetings in Cyprus.
An individual is tax resident if present in the Republic of Cyprus for periods exceeding a total of 183 days per calendar year.
A permanent establishment follows the definition of the OECD Model Tax Convention, with the exception of a building site or construction or installation project, which constitutes a permanent establishment only if it lasts more than three (3) months.
The Uniform Corporate Tax Rate
The Income Tax Law provides for a uniform corporate tax rate of 10% on the taxable profits of Cyprus tax-resident companies. An additional tax of 5% is imposed on the taxable profits of tax-resident companies which exceed C£1,000,000 (approximately € 1.75m) for the tax years 2003 and 2004.
The sources of income used in calculating the taxable income of tax-resident companies under the Income Tax Law include:
- Business profits
- Rent from property
- Any consideration for the trading of goodwill
Ship management companies are taxable at 4.25% but can elect to be taxed in accordance with their tonnage tax rates.
The Special Contribution for Defence Tax Law
The Special Contribution for Defence Tax Law (The SCDT Law) incorporates the EU Parent-Subsidiary Directive into the Cyprus Law. The main provision of this law is the imposition, in certain cases, of taxation at 15% on dividend income and 10% on Interest income received by Cyprus residents. The specific circumstances under which the SCDT law is applicable are further discussed below.
Taxation on Dividends
Dividend income is not taxable under the Cyprus Income Tax Law.
Under the SCDT Law, dividend income received, or deemed to be received by one Cyprus tax-resident company from another tax-resident company is not taxable.
Under the SCDT Law, dividend income received by a Cyprus tax-resident company from a non-resident company is exempt from tax, provided the tax-resident company holds at least 1% of the share capital of the non-resident company.
Similarly, the business profits of a resident Cyprus company derived directly or indirectly from a permanent establishment outside Cyprus are exempt both from income tax and SCD tax.
The exemption does not apply if:
- Directly or indirectly more than 50% of the activities of the paying company result in investment income, AND
- The paying company is subject to tax at a rate which is significantly
- lower than the Cyprus corporate rate.
- Significantly lower means 50% of the Cyprus tax rate i.e. 5%
It is important to note that both conditions above must be present for the exemption to be withheld.
The tax treatment of dividend income is summarized in the table below:
||Impact on a tax-resident company
||Impact on a non-resident company
|From a resident company to a resident company||0% Income tax 0% SCDT||N/A|
|From a resident company to a non-resident company or individual||N/A||Exempt|
|From a non-resident company to a resident company||0% Income tax 0% SCDT*||N/A|
|From a non-resident company to a resident individual||0% Income tax 15% SCDT||N/A|
|From a non-resident company to a non-resident company or individual||N/A||Exempt
* 0% if the exemption applies. If the exemption does not apply there is a 15% special defense tax contribution on the amount of the dividend.
There are no withholding taxes on dividends paid to non-residents individuals or companies.
Taxation on Interest
The Income Tax Law and the SCDT Law distinguish between interest income on deposits and interest received in the ordinary course of business.
Interest income on deposits
Under the Income Tax Law, 50% of the interest income on deposits is exempt from income tax. However, interest income on deposits credited or received by a Cyprus tax-resident company or individual is subject to a 10% tax under the SCDT Law. Therefore the effective tax rate on interest income on deposits for a Cyprus tax-resident is 15%.
Interest income received in the ordinary course of business
The interest income received in the ordinary course of business, including interest closely connected to the normal trading activity of business, is fully included in the calculation of the taxable profits of a Cyprus tax-resident company. However, this type of interest is exempt from taxation under the SCDT Law. This suggests that the effective tax rate on interest received in the ordinary course of business is 10%.
The term “ordinary course of business” is not defined in the law. Nevertheless the Cyprus tax authorities have clarified in a recent circular that the ordinary operation of a business is deemed to include banking activities, companies with a primary objective the provision of loans, business financing, and finance leasing. It further clarifies that “ closely connected to the normal trading activity of business” is deemed to include interest from trade debtors, interest income of insurance companies, interest income on current accounts, and interest income of companies acting as intro-group financing companies.
The tax treatment on the interest income is summarized in the table below:
||Impact on a tax-resident Company||Impact on a non-resident Company
|From a resident company to a Cyprus company as part of the normal course of business||10% Cyprus Income Tax 0% SCDT||Exempt|
|From a resident company to a Cyprus company on deposits||5% Cyprus Income Tax 10% SCDT||Exempt|
|From a non-resident company to a Cyprus company as part of the normal course of business||10% Cyprus Income Tax 0% SCDT||Exempt|
|From a non-resident company to a Cyprus company as part of the normal course of business||5% Cyprus Income Tax 10% SCDT||Exempt|
Taxation on Royalties
Income from royalties is included in the computation of the taxable profits of a Cyprus tax-resident company.
Royalty payments are deductible expenses in the computation of the taxable profits of a tax-resident company.
The gross amount of any royalty premiums payable for the use of the intellectual property within Cyprus are subject to a withholding tax of 10%. Royalty premiums for use of the intellectual property outside Cyprus are not subject to any withholding tax.
The gross income derived from the rental of cinema films by a non-resident person within Cyprus is subject to a 5% withholding tax.
Profits arising from the disposal or trading of securities
Profits arising from the disposal or trading of securities are not subject to income tax.
There is no capital gains tax liability on the disposal of securities unless the gain arises from the sale of shares of a company that owns immovable property in Cyprus.
The gain on the sale of shares in a company that owns immovable property in Cyprus is subject to a flat rate capital gains tax of 20%.
Securities include shares, debentures, government bonds, founder shares or other shares of legal entities in Cyprus or abroad, as well as options thereon.
Carry forward of losses
Losses from business operations can be carried forward indefinitely to be offset against the profits of future years.
Group relief is available to offset the losses of one company against the profits of another. Group relief applies only for Cyprus tax-resident companies that are part of the same group, and is available only where both the surrendering and claimant company are part of the same group for the entire tax year.
Definition of a Group
Two companies are deemed to be a group for group relief purposes if:
- One is 75% subsidiary of the other, or
- Both are 75% subsidiaries of a third company
A company is deemed to be 75% controlled by another company if at least 75% of the ordinary share capital with voting rights is held either directly or indirectly, and the holding company is entitled to no less than 75% of the subsidiary’s:
- Distributable profits, and
- Assets of the subsidiary which would have been available for distribution to the shareholders upon liquidation.
Loss of a Permanent Establishment
Losses arising from the operation of a permanent establishment abroad can be offset against the profits arising in Cyprus. However, in subsequent periods, when the overseas permanent establishment is in a profit position, an amount equal to the losses which have been previously offset will be included in the taxable income of the Cyprus tax resident entity.
Transitional Rules for existing IBC’s to 2005
International Business Companies (IBC’s), or permanent establishments of overseas companies, which during the tax year 2001 derived and continue to derive income from sources exclusively outside Cyprus, or expect to have income which did not accumulate before 31 December 2001 due to the nature of their operations, may elect to be taxed at 4.25% for the years 2003, 2004 and 2005, provided they submit to the following criteria:
- They continue to have income from sources exclusively outside Cyprus
- They forfeit entitlement to the following benefits:
- Exemption of 50% of their interest income Exemption of dividend income
- Exemption of profit from disposal of securities
- Group relief for losses
- The tax benefits of reorganization of companies
- Credit for foreign tax
- Exemption for the profits of permanent establishments abroad
- Losses up to 2000 will be offset only against profits up to 2005, whereas losses for the years 2001 onward shall be carried forward indefinitely
- Dividend income received from companies which make the transitional election is exempt from tax
- The election, once made, is irrevocable for the three year period
Group Reorganisation Rules
The Cyprus Income Tax Law incorporates the provisions of the EU Merger Directive and extends the benefits of tax-neutral reorganizations to both EU and Non-EU members. Further, the provision of the tax is extended not only to trans-border transactions but also to domestic transactions and cover not only capital gains tax but also stamp duty and VAT.
Reorganization structures include:
- Asset Transfers
- Shares Exchange
Under the reorganization rules:
- Assets and liabilities, including provisions and reserves which are transferred under a reorganisation, do not give rise to a tax-liability on gains or profits of the transferring company.
- Any accumulated losses of a company undergoing reorganisation may be transferred to the new company.
- Where the receiving company has a holding in the transferring company, there is no tax liability on any gains accrued by the receiving company as a result of the cancellation of the holding because of the reorganization.
- Share exchange is not subject to tax: The newly allotted shares have the same value as the shares which were exchanged prior to the reorganization.
Relief from Double Taxation
Cyprus has a network of 33 Double Tax Treaties which apply to over 40 countries. These are summarized in the double tax treaties table.
In the case of a treaty partner of Cyprus, tax paid in the treaty partner’s country is allowed as a credit against tax payable in Cyprus for the same income. The tax credit can by utilized against any tax liability arising from the provisions of the Income Tax and the SCDT Law.
The following Double Tax Treaty countries allow for relief of underlying tax:
- South Africa
In cases where there is no tax treaty in force, or the subsidiary of the Cyprus company does not qualify for relief under the EU Parent-Subsidiary Directive, Cyprus grants unilateral relief on taxes arising from both the Income Tax Law and the SCDT Law. This unilateral relief, however, cannot exceed the actual tax paid in the foreign country.
by Aspen Trust Group