| In this section:
-
Cyprus Scope of Corporation Tax
- Cyprus Branch or Subsidiary?
- Cyprus Calculation of Taxable Base
- Cyprus Filing Requirements and Payment of Tax
- Cyprus Withholding Tax
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.
"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.
Tax Rates
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 CYP1m 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.
Recent Developments
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.
Back to Top
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.
Back to Top
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 will it 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.
Back to Top
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.
As from April 1, 2011, all tax
returns submitted by companies and self-employed
individuals with an annual turnover of more
than EUR70,000 must be accompanied by a Tax
Confirmation that is prepared and signed by
an independent tax advisor or auditor. This
requirement follows the issue by the Commissioner
of Income Taxes of Circular 2011/1 on February
15, 2011. In addition, all tax returns submitted
by companies and self-employed individuals
with a turnover exceeding EUR70,000 for the
2010 and subsequent tax years must submit
their tax returns electronically.
Back to Top
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 royalties
earned by a non-resident is 5%.
Back to Top
Back to
Cyprus Information: Business, Taxation and
Offshore
|
Lowtax Network Portal
Front Page
Tax Jurisdictions
Featured Content
