The Cyprus Tax System Explained in a Simple Way
Contributed by AGP Law Firm - AGP Management Ltd
18 December, 2018
In this article we will consider a brief overview of the taxes regarding businesses in Cyprus and some changes made to national tax legislation. The information provided below will allow you to conduct tax planning effectively and minimize the tax burden of your business.
Cyprus is a popular jurisdiction for foreign investors and businessmen. The country is a member of the European Union and taxes in Cyprus are lower than any other European country. The Cypriot government implements favorable tax conditions for current and future investors. Small, medium-sized and large enterprises can use all the benefits of tax planning and legal methods for reducing the amount that they pay in taxes.
What are the key benefits of the Cypriot tax system?
- The rate of corporate tax in Cyprus is one of the lowest in the European Union (the rate is 12.5%);
- All European regulations are applicable in Cyprus and are part of Cypriot tax law;
- Thin-capitalization rules do not apply;
- Cyprus has double taxation treaties with over 50 countries;
- Payments of dividends, interest and royalties to non-residents of Cyprus are not subject to any withholding tax;
- There are a number of other operations which are exempt from taxation;
- Company re-domiciliation is not subject to taxation.
Below you can find a general overview of information with respect to Cyprus corporation tax.
The company shall be regarded as a tax resident of Cyprus if its management and control is exercised from the territory of Cyprus. All companies which are considered to be Cypriot tax residents will pay tax from income generated from sources in Cyprus and abroad.
The rate of corporate tax for all companies is 12.5%.
The following categories of income are not taxable in Cyprus:
- Dividends, except:
- as from 1st of January 2016, when they are tax deductible for the paying company.
- when more than 50% of the paying company's activities result directly or indirectly from investment income and
- when the foreign tax is significantly lower than the tax burden in Cyprus. The tax authorities have clarified through a circular that "significantly lower" means an effective tax rate of less than 6.25% on the profit distributed.
- Interest income (excluding interest income arising in the ordinary course of the business or closely connected with the ordinary carrying on of the business);
- Profit arising from the disposal of securities;
- Transfers of assets and liabilities between companies within the framework of a qualified reorganization;
- Profits from a foreign permanent establishment (under certain conditions);
- Capital gains (except on disposal on immovable property situated in Cyprus);
- Foreign exchange gains (except when they arise from trading in foreign currencies and related derivatives) etc.
The following are some expenses which may be deducted in calculating taxable income:
- Donations to approved charitable organizations (with receipts);
- Contributions to the provident or pension funds (restricted to 10% of the employee's salary) and to health insurance funds (restricted to 1% of the employee's salary);
- Notional Interest deduction on new equity;
- Interest expenses incurred in connection with direct and indirect transactions for the acquisition of 100% share capital in the subsidiary (under certain conditions);
- The profit from exploitation and disposal of intellectual property rights that falls under the "old" and "new" IP-Box Regime (see below in detail);
- Representational expenses for the purpose of running business activities;
Which new rules were implemented with respect to the intellectual property taxation?
Cyprus is a very popular destination for companies and individuals who want to benefit the most of its favorable tax structure. One major sector that is of special interest to intellectual property owners is the IP-Box-Regime. On 14 October 2016 the House of Representatives enacted into Law significant amendments to Cyprus' "IP regime". These amendments apply retroactively from 1 July 2016 and provide a transitional period for intellectual property assets qualified under the existing "IP regime" adopted in 2012. The amendments implemented in 2016 by the Cypriot authorities made the existing IP-Box rules stricter.
It should be mentioned that the old IP-Box regime is not fully cancelled as the companies which enjoyed its benefits prior to the amendments may continue to do so until the end of the transitional period, 30 June 2021.
In order to determine whether the particular IP asset is eligible for the IP box regime it is important to ascertain if it falls under the definition of "qualifying intangible asset": an asset which was acquired, developed, or exploited by a person within its business activities, which is the result of research and development (R&D) activities and which includes intangible assets for which only economic ownership exists.
These assets include:
- patents (as defined in the Patent Law);
- computer software;
- other IP assets which are legally protected, and they fall under one of the following:
- utility models and intellectual property assets which provide protection to plants and genetic material, orphan drugs designations and extensions of protections for patents
- 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.
Business names, trademarks, image rights and other intellectual property rights used for the marketing of products and services are not considered as qualified intangible assets.
So, what is the benefit under the above-mentioned regime? 80% of qualifying profits (this amount is calculated based on the special formula) shall be regarded as a deductible expense. This means that the effective tax rate of the "qualifying income" will be the same 2,5% which was applicable under an old IP-Box regime.
The Tax Department is the main tax authority of Cyprus. According to the information provided on its web-site, the Vision of the Tax Department is "to become a modern tax administration, providing quality service to the taxpayer and achieving the maximum possible voluntary compliance". The Mission of Tax Department is "the consistent application of the laws, ensuring fair taxation in a way that enhances the confidence of the taxpayer, the minimization of tax evasion and the effective collection of tax revenues of the state with the least possible cost". In the official website of the Tax Department you may easily find the necessary information such as information with respect to double tax treaties, automatic exchange of tax information, returns, forms, applicable legislation, circulars, tax rates, organizational structure of the Tax Department of Cyprus, etc. However, you should remember that the best way to obtain and properly interpret all the array of the information is to consult professionals such as AGP & Co. tax experts, accountants and advisors.
What you should know about double tax treaties
Cyprus has double tax treaties with more than 50 countries and is currently negotiating with other countries to increase the number of its treaties. Each treaty aims at avoiding double taxation of income earned in any of these countries. In addition, most of the conventions provide reduced rates of withholding taxes on dividends, interest and royalties paid out of the contracting state.
The full list of the Double Tax Treaties concluded between the Republic of Cyprus and other countries, as well as the text of each published treaty can be found on the official website of the Ministry of Finance of Cyprus.
How can AGP & Co. help you with respect to tax optimization and planning?
Our company is proud to engage highly-qualified professionals in order to provide our clients with the best tax and corporate advice with respect to your business. Our tax lawyers, tax advisers, and accountants are always at your disposal to assist you with the following issues:
- Which taxes and duties are applicable to your business entity and what the tax rates are;
- How to reduce your overall tax burden;
- How to fully comply with the tax legislation of Cyprus;
- How to prepare and submit the tax returns;
- How to enjoy all the benefits of the Cypriot taxation system;
- Which latest changes to the Cypriot tax legislation were implemented and how to apply them etc.
The Cyprus tax system, although very attractive and simple, requires very good knowledge of its regulations and laws, qualified professionals and very experienced accountants to deal with. Cyprus can boast on the high level of education and experience of its accountants, lawyers and other professionals who are eager to assist their international clients to benefit the most.
« Go Back to Articles