Cyprus
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.
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.
An
additional tax of 5% was imposed on company
profits exceeding CYP1,000,000 for the years
2003 and 2004.
As
from 2003, Cyprus applies 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,
new provisions have been introduced under the
Special Contribution for the Defence of the
Republic Law, 2002 ("Special Contribution").
"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 (3) months.
The 10%
corporate tax gives Cyprus the lowest rate in
the EU, after Ireland (12.5%), with the exception
of the Isle of Man, Jersery and Guernsey, which
have all announced a nil rate - but these islands
are not in the EU anyway for most purposes.
After
the EU finally agreed its Tax Directive in June,
2003, the Commission said it intended to give
the ten acceding states, of which Cyprus is
one, until 2007 to implement the Directive,
which includes 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.
Cyprus Branch or Subsidiary?
Corporation
tax rates are the same, but the calculation
of the taxable base is different:
- Head-office
expenses are allowable in both cases
- Transfer-pricing
rules may be applied differently in the two
cases
- Branch
profits may be remitted to head office free
of withholding tax; corporate dividends are
also now exempt from withholding tax
- Interest
on intercompany loans is generally deductible
for a company, but not for a branch.
Cyprus Calculation of Taxable Base
Allowable
expenditure needs to be incurred 'wholly and
exclusively' for the business; however, mixed
private/company expenses can often be apportioned.
Among others, the following expenses are allowable:
- Repairs,
but not improvements, alterations or additions
- Contributions
to an approved fund
- Bad
debts and provisions for them
- Non-capital
scientific research expenditure
- Expenditure
on patents or patent rights
- Various
types of charitable expenditure
- Interest
on loans, other than for those used to acquire
shares
- Rental
payments
- Salaries
and other compensation costs for employees
and directors
- Inventories
are valued using FIFO
- Wear
and tear allowances on prescribed scales which
replace depreciation in the tax calculation
- Investment
allowances which are available for certain
activities
There
are some restrictions on the use of losses from
one trade to offset profits from another. Unrelieved
losses can normally be carried forward to offset
future profits, but from 1996 they have only
a 5-year life. Group relief is available but
with limitations.
50%
of income from interest derived by a company
is exempt from corporate tax but the whole interest
received or credited will be subject to the
new provisions of the Special Contribution.
Interest derived from ordinary trading activities
will only be subject to the Income Tax Law provisions
without any exceptions.
The
Group Relief rules, now enacted, provide for
group relief of tax losses among companies of
the same group. A company will be considered
as member of a group if:
- A
company is at least 75% subsidiary of the
other, or
- Both
companies are at least 75% subsidiaries of
a third company.
A
company will be considered to be 75% subsidiary
of another company if and so long as not less
than 75% of its ordinary share capital with
voting rights are owned directly or indirectly
by that other company and that other company
is entitled to not less than 75 per cent of:
- Any
profits available for distribution to the
equity shareholders, and
- Any
assets of the subsidiary company which would
be available for distribution to its equity
holders on a winding up.
Group
tax losses may be set off as long as both companies
are Cypriot tax residents and are members of
the same group during the whole year of assessment.
Only
the loss of any year of assessment of a company
can be set off against the other company's profits
of the corresponding year of assessment. Losses
brought forward will not be available for Group
Relief.
Any
payment for acquiring the tax losses will not
be taken into account in the tax computation
nor it will be considered to be a dividend or
an allowable expense.
Profits
from the sale of shares, bonds, debentures and
other titles of companies established anywhere
in the world are exempt from tax.
Cyprus Filing Requirements
and Payment of Tax
Company
tax returns must be filed in respect of each
fiscal (calendar) year by 31st December in the
year following the fiscal year, together with
balance sheet and profit and loss account, auditor's
report, income tax and Defence Tax computation
and additional information report.
Self-assessment
operates, and corporation tax payments have
to be made on 1st August, 30th September and
31st December of the year of assessment. Fines
apply to late or materially faulty self-assessments.
Cyprus Withholding Tax
Dividends,
royalties arising from the use of an asset outside
Cyprus and interest payments to non-residents
are now exempt from withholding tax. Other types
of payment to non-residents are subject to withholding
tax at 10%, although if the payment is in respect
of a right outside Cyprus, there is no withholding.
The rate of withholding for film rentals earned
by a non-resident is 5%.
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