Cyprus company tax benefits and other relevant incentives
Contributed by Oxford Tax Solutions
10 June, 2020
The Republic of Cyprus has established itself as one of the most attractive jurisdiction within the EU and globally for holding companies. A combination of factors, such as favourable tax legislation, the straightforward corporate legislation and the country's stable tax policy has led Cyprus into becoming an ideal location for incorporation of company, making the country a significant international financial centre. As Cyprus is a European Union member, a company registered in Cyprus enjoys all the advantages of operating in an E.U. country.
Tax Advantages of a Cyprus Company:
- Low corporate tax rate of 12,5% on profit, one of the lowest within the EU with possibility to enjoy a much lower effective tax rate
- Simple, transparent and EU harmonised tax system following recommended OECD practices
- Cyprus has successfully harmonized its legislation fully with the EU standards and introduced a thorough anti money laundering legislative framework which is in full compliance with EU and American standards
- Enjoys the tax benefits of EU Directives (Parent - Subsidiary Directive, Interest and Royalties Directive)
- No withholding tax on dividends paid to non-residents shareholders
- No withholding tax on interest paid from Cyprus
- No tax on dividend income received from another Cyprus tax resident company
- No tax on dividend income received from abroad, unless the foreign country allows the dividend paid as a tax deduction/expense
- No withholding tax on royalties paid from Cyprus in respect of intellectual property exploited outside Cyprus
- Exemption on disposal of securities (e.g. shares, bonds, debentures)
- Availability of a Notional Interest Deduction for companies receiving new equity funding. The tax deduction can reach up to 80% if the taxable income produced is employed by the new equity funding (see below for more information)
- Attractive IP regime which allows 80% deemed deduction on qualifying profits from the use of IP (see below for more information)
- Tonnage tax (TT) for shipping companies (see below for more information)
- No capital gains tax (except for disposal of real estate in Cyprus or shares of company holding real estate in Cyprus to the extent gains is attributable to the real estate holding)
- Land and land with buildings acquired at market value (excluding exchanges, donations, and foreclosures) from unrelated parties during the period 16 July 2015 to 31 December 2016 will be exempt from CGT upon their future disposal
- Profits of a Permanent Establishment exempt from tax under certain criteria
- No inheritance tax
- No taxes on entry, reorganisations and exit
- Unilateral credit relief for foreign taxes
- Extensive Tax Treaty network with more than 60 countries (see below for more information)
Intellectual Property income:
The new Cyprus IP box allows for a deductible notional expense calculated as 80% on qualifying profits from qualifying IP. Cyprus IP companies can achieve an effective tax rate up to 2,5% on qualifying profits earned from exploiting qualifying IP
For the purposes of the 80% deduction, qualifying IP may be legally or economically owned and comprise:
a) Patents as defined in the Patents Law b) Computer Software c) Other IP assets which are legally protected and fall under one of the following: 1. utility models, intellectual property assets which provide protection to plants and genetic material, orphan drug designations and extensions of protections for patents 2. Non obvious, useful, and novel, where the person which utilizes them in furtherance of a business does not generate annual gross revenues exceeding Euro 7.500.000 (in case of a group of companies not exceeding Euro 50.000.000), which are certified as such by an Appropriate Authority in Cyprus or abroad
Qualifying profits are calculated based on the "nexus approach".
For more information, please refer to: https://oxfordglobalservices.com/wp-content/uploads/2019/09/Fact-Sheet-38.pdf
Notional Interest Deduction:
Based on the tax law effective as from 01/01/2015, a Cyprus tax resident company and Cyprus permanent establishments are entitled to a Notional interest Deduction - NID, on the introduction of new capital in the company used for the production of taxable income.
In general terms, the NID is equal to new equity (paid up share capital or share premium) multiplied by the applicable reference rate (10-year government bond) of the country where the funds are employed plus a 3% subject to a minimum rate, equal to the yield of the 10-year Cyprus government bond plus a 3% premium. For more information, please refer to: https://oxfordglobalservices.com/wp-content/uploads/2019/09/Fact-Sheet-34.pdf
Cyprus tax resident companies that are owners of Cyprus ships (a qualifying ship with a Cyprus flag engaging in qualifying activities) are mandatorily subject to the Tonnage Tax System (TTS). The TTS refers to flat given rates of tax based on the net tonnage ship.
Cyprus tax resident companies that are owners of a non-Cyprus flagged qualifying ship and Cyprus tax resident companies that provide ship management services to qualifying ships have a choice to either be taxed normally under corporation tax (12.5%) or to elect for the TTS.
The legislation includes an "all or nothing" rule, meaning that if a ship-owners/ charterer/ ship manager of a group elects to be taxed under the tonnage tax regime (TTS), all ship owners/ charterers/ ship managers of the group should elect the same. Exemption is also given in relation to the salaries of officers and crew aboard a Cyprus ship.
Companies registered in Cyprus benefit from the double taxation avoidance treaties that have been established between Cyprus and around 60 other countries. There are double tax treaties in effect with multiple European countries (in and outside the EU) and a number of Middle Eastern countries and the treaties follow the OECD model. As a result, foreign investors do not have to pay additional tax in their home country.
For more information and advice on how a Cyprus company could help to structure your business please contact us.
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