Cyprus: Domestic Corporate Taxation
Scope of Corporation Tax
Cyprus imposes corporation tax on 'companies': this term includes all companies incorporated or registered under any Cyprus law, and any foreign company which carries on business or has an office or place of business (permanent establishment) in Cyprus.
"Permanent establishment" has the same meaning as defined in the OECD Model Tax Convention on Income and on Capital with the exemption of "a building site or construction or installation project", which constitutes a permanent establishment only if it lasts more than three months.
In July, 2002, as part of the Income Tax Act No. 118(I) of 2002, Parliament approved a uniform 10% corporate tax rate, to apply to both onshore and offshore companies, plus a 2% levy on wage bills (meant to subsidise pensioners), and a 'Special Contribution' related to defence which in effect applies the 10% corporate tax rate to inter-company dividend and interest payments. However, the rules are complex. The tax rules were improved for collective investment schemes in 2009 (see below).
The 10% corporate tax gives Cyprus one of the the lowest rates in the EU, alongside Ireland (12.5%), with the exception of the Isle of Man, Jersey and Guernsey, which have all introduced a nil rate for non-financial services firms (and 10% for financial services firms) - but these islands are not in the EU anyway for most purposes.
An additional tax of 5% was imposed on company profits exceeding CY£1m for the years 2003 and 2004.
In June 2010, a proposal was considered by the Cypriot parliament for a temporary 1% increase in the rate of corporate tax for the tax years 2010 and 2011, but was rejected in the following month.
As from 2003, Cyprus applied a residence-based taxation regime: "Resident in the Republic", when applied to a company, means a company whose management and control is exercised in the Republic; and "non-resident or resident outside the Republic" will be construed accordingly.
However, profits from activities of a permanent establishment situated outside Cyprus are completely exempt. This exemption will not apply to a Cyprus company if: (i) its foreign permanent establishment directly or indirectly engages in more than fifty per cent (50%) of its activities in producing investment income, and (ii) the foreign tax burden is substantially lower than that in Cyprus.
Dividends are exempted from tax; however, provisions have been introduced under the Special Contribution for the Defence of the Republic Law, 2002 ("Special Contribution").
Collective Investment Schemes
In 2009, the The Cyprus Income Tax Law N.118(I)/2002 was amended to clarify that interest income earned by a collective investment scheme (CIS) is subject only to income tax (less any allowable expenses) and exempt from the Special Defence Contribution. This amendment was made in a bid to attract more investments schemes to set up and operate from Cyprus and to improve taxation for companies holding interests in Cypriot and non-Cypriot CISs.
In addition, the changes mean that the redemption of a unitholding in a collective investment scheme will not be considered as a reduction in capital under the Special Defence Law, therefore there will be no tax obligations on the distribution arising from the redemption.
Furthermore, the Special Contribution for Defence Law was amended in order to abolish the minimum participation requirement of 1% when it relates to dividends received from abroad by a Cyprus tax resident company. This makes it easier for portfolio investors to benefit from the dividend participation exemption.
The result of the amendment is that interest earned by a Cypriot company is now reduced to a maximum rate of 10% in all cases, whereas prior to the change, interest income could be taxed at 15%. The amendment was approved by parliament on October 22, 2009 and came into immediate force. It is enforceable from January 1, 2009.
See Law of Offshore for a fuller description of Cypriot investment law.
EU Savings Tax Directive
After the EU finally agreed its Tax Directive in June, 2003, the Commission said it intended to give the ten states acceding at that time, of which Cyprus was one, until 2007 to implement the Directive, which included a 'Code of Conduct' on 'harmful tax practices' and rules to avoid the double taxation of royalty and interest payments.
However, a statement released by the Cypriot Ministry of Finance said that Cyprus would adopt the new code in full from 2005. The royalties and company interest directive was in place from January 2004, according to the ministry, which pointed out that it was already compliant with the Code of Conduct rules as a result of its recent tax reforms.
Along with other member states of the EU, Cyprus introduced an exchange of information regime applying to the returns on savings under the Savings Tax Directive as from 1st July 2005.
Special Levy on Banks
On April 14, 2011, legislation was enacted to introduce a special bank levy in Cyprus under which financial institutions operating in Cyprus will be required to pay 0.095% on the total amount of deposits held at the end of each calendar year, up to a maximum of 20% of banks' total taxable profits. Interbank deposits and deposits held by foreign financial institutions are excluded from the levy. However, subsidiaries and branches of foreign banks are included within the law.
About half of the revenues raised by the levy for the years 2011 and 2012 will be transferred to a special 'stability fund' to help underpin the future stability of the island's financial system. The rest will be treated as general government revenue, but from 2013 all money raised by the levy will be transferred to the stability fund.
Financial institutions will be required to declare their taxable deposits by March 31 each year and pay the levy on a quarterly basis on the last day of March, June, September and December. Banks which are found to have passed the cost of the levy on to their customers face paying a EUR100,000 fine.
The levy is not deductible for income tax purposes, but reduces the amount of profits subject to deemed distribution.
The levy is effective from the date that the law is published in the Cypriot government's official gazette and regulations regarding the operation of the stability fund must be published within six months, beyond which banks will be entitled to claim compensation from the government.
A series of austerity packages were approved by the Cypriot parliament in the latter half of 2011, as a result of which companies are required to pay a new annual fee of EUR350, subject to a maximum payment of EUR20,000 for group companies. The first payment was due by December 31, 2011 with subsequent payments required by June 30 each year.
The standard rate of value-added tax will rise from 15% to 17% from March 1, 2012.
In November 2011, the government announced that it was considering plans for a temporary 0.5% levy on company turnover for the 2012 and 2013 tax years.