Cyprus: Domestic Corporate Taxation
Scope of Corporation Tax
Cyprus imposes corporation tax on all 'companies'; this term includes all companies incorporated or registered under any Cypriot law, and any foreign company which conducts business or has an office or place of business (permanent establishment) in Cyprus.
The meaning of 'permanent establishment' is as defined in the OECD Model Tax Convention on Income and on Capital, except that "a building site or construction or installation project" only constitutes a permanent establishment if it lasts for more than three months.
Since 2003, Cyprus has applied a residence-based taxation regime. A company that is deemed 'Resident in the Republic ', is one whose management and control is exercised within Cyprus; 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 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").
In 2013, the Cypriot Parliament approved an increase in the uniform corporation tax rate from 10% to 12.5%. In addition, there is a 2% levy on wage bills (meant to subsidise pensioners), and a 'Special Contribution' related to defence which in effect applies the 12.5% corporate tax rate to inter-company dividend and interest payments. However, the corporation tax rules are complicated and cannot easily be summarised here. Tax rules were improved for collective investment schemes in 2009 (see below and Taxation of Collective Investment Schemes for more details).
This 12.5% corporation tax rate is, with Ireland, the third lowest in the EU. The only other territories with lower rates are the Isle of Man, Jersey and Guernsey, which have all a nil rate for companies not providing financial services. However, these regimes are under attack from the EU and furthermore are not considered part of the Union for most purposes.
Collective Investment Schemes
In 2009, the Cyprus Income Tax Law N.118(I)/2002 was amended, clarifying that interest income earned by a collective investment scheme (CIS) is only subject to income tax (less any allowable expenses); it is exempt from the Special Defence Contribution. This amendment was made in a bid to attract more investment 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 unit holding 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. This abolished the minimum participation requirement of 1% for when dividends are 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 12.5% in all cases, whereas prior to the change, interest income could be taxed at 15%. The amendment was approved by parliament on 22 October 2009 and came into immediate force.
See Law of Offshore for a fuller description of Cypriot investment law.
EU Savings Tax Directive
The EU finally agreed its Tax Directive in June 2003. The European Commission the said it intended to give the ten acceding states (including Cyprus) 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.
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. It is a means of preventing tax evasion by those who do not declare interest income on savings.
Special Levy on Banks
On 14 April 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. Deposits between banks and those held by foreign financial institutions are excluded from the levy. However, subsidiaries and branches of foreign banks are included within the law.
From 2013, all money raised by the levy has been transferred to a special 'stability fund' to help underpin the stability of the island's financial system.
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 €100,000 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 €350, 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.