The combination of low tax with the existence of an impressive and ever expanding network of Double Taxation Treaties (DTT) with tens of countries has proven to be a tremendous tool for international tax planning for any tax professional. With regard to any form of investment towards Eastern European countries especially, Cyprus has unquestionably positioned itself as the world’s primary “business hub”.
Cyprus has wisely managed to differentiate from “tax havens” and establish itself internationally as one of the most important “low tax jurisdictions”. It has therefore managed to escape the suspicions and control of the tax authorities of other countries. The only tax for an International business entity ranges between 0 – 12,50% only
Cyprus may be used by organizations with international operations to mitigate taxation in various ways. Firstly, it can eliminate or minimize withholding taxes thanks to the zero or low withholding rates contained in the treaties. Secondly, it can be used to eliminate or substantially reduce taxation in the country of origin of the organization by combining the beneficial provisions of its treaties with domestic law. Thirdly, even in the absence of a DTT with a specific country, it can still be utilized in conjunction with other jurisdictions to lead to tax minimization.
Cyprus treaties are analyzed in our leaflet “Double Tax Treaties between Cyprus and …”.
The treaties with most of Eastern Europe are extremely beneficial. They all provide for zero or substantially low tax-withholding rates for dividends, interest and royalties. Royalties are very broadly defined this allowing for important tax planning. Permanent establishment in these countries can be avoided by careful planning. Capital gains from the sale of immovable property situated in Eastern Europe can be extracted and repatriated to the investors’ country of origin free of any foreign tax. Similar structures can also be designed from DTT Cyprus has signed with other countries.
Some of the DTT eliminate double taxation using the tax exemption method while others use the tax credits method. Some of the latter also contain tax sparing credits provisions.
For specific tax structures and more details please ask for our leaflet.
Aspects of Cyprus Tax and non-taxable entities
A company is considered to be a tax resident of Cyprus if it is “managed and controlled” in Cyprus. Although no definition of management and control is provided in the tax law itself, this is generally accepted as being the place where board decisions are taken and where the directors reside. Consequently, for a company to be managed and controlled in Cyprus we would expect to see resident directors and regular board meetings being held in Cyprus.
A company that is incorporated in a foreign country is considered to be tax resident in Cyprus if managed and controlled in Cyprus. Similarly, it is possible to incorporate companies in Cyprus that are non-resident for Cyprus tax purposes. Non-resident companies i.e. entities not managed and controlled in Cyprus are not subject to taxation in Cyprus unless they have a permanent establishment in the island. Where they have such an establishment, they are taxed only on that income that arises from the activities of that establishment. Such companies cannot take advantage of the Cyprus network of double tax treaties and are therefore used mainly for trading activities where treaty benefits are not required. The reputation of Cyprus as a top quality financial centre with highly developed banking, legal and accountancy professions gives a non-resident Cyprus company a clear advantage over known offshore jurisdictions which are often viewed with suspicion or mistrust.
Taxation of resident companies
Resident companies are subject to Cyprus corporation tax at the rate of 12,50%. This is among the lowest corporate tax rates in the EU. Dividends, interest, royalties and profits realised for sale of securities are subject to special tax treatment as detailed below
Taxation of transactions in shares and other securities
Profits realised from the sale of securities are exempt from tax. “Securities” are defined as meaning shares, bonds, debentures, founders’ shares and securities of companies or other legal persons and options thereon.
The definition of security does not embrace all financial instruments. The Cyprus Tax Authorities have not issued a definitive list of all the financial instruments that they consider to fall under this definition but it is generally considered that promissory notes and currency contracts are not considered as securities. Profits realised on dealing in these instruments are not exempt and are subject to corporation tax.
Taxation of dividends
Dividends received by a Cyprus resident company are generally exempt from taxation in Cyprus if they are received from a foreign entity.
There is no withholding tax dividends received from other Cyprus resident Companies. Dividends received from abroad are also tax exempt if the following two conditions are satisfied:
- The Company receiving the dividend must hold directly at least one percent (1%) of the share capital of the Company abroad paying the dividend, and
- The Company paying the dividend
- must not engage more than fifty percent in activities which lead to passive income (non-trading income) OR
- The foreign tax burden on the income of the Company paying the dividend is not substantially lower than the tax burden in Cyprus.
(A tax rate of five percent (5%) or more in the country paying the dividend satisfies this condition)
Dividends paid from one Cyprus Company to another are free from withholding or any other tax in Cyprus.
Taxation of the Cyprus Holding Companies
A Cyprus Holding Company can be effectively utilised for International Tax Planning purposes, and at the same time enjoy the status of being located at a reputable business centre.
All Companies tax resident of Cyprus are taxed on all their income accrued or derived from all sources in Cyprus and abroad. A non Cyprus tax resident Company is taxed on income accrued or derived from a business activity which is carried out through a permanent establishment in Cyprus. A Company is resident of Cyprus if it is managed and controlled in Cyprus.
Corporate tax for resident Companies is imposed at the rate of 12,50% (ten percent) for each year of assessment upon the taxable income derived from sources both within and outside Cyprus.
A Company is considered to be tax resident in Cyprus if its management and control is exercised in Cyprus. In order to achieve tax residency, several factors are taken into consideration by the Tax Authorities such as the make up of the Board of Directors, the place where major decisions are taken and where major contracts are signed. Tax residency is required in order for a Company to be taxed under the Cyprus tax laws and also for taking advantage of all European directives as well as the Double Tax Treaty (DTT) network that Cyprus has secured for tax resident persons.
Taxation of Interest Income
Passive Interest Income
Thewhole gross interest income is subject to the Special Contribution tax at the rate of ten per cent (30%).
Active Interest Income
Active interest is the interest accruing from, or is closely connected with, the ordinary carrying on of any business. Active interest income is taxed like any other income at the flat corporate tax rate of ten percent (12,50%).
EU Interest and Royalty Directive
The taxation of gross amounts of royalties earned from sources within Cyprus by a company which is not a resident of Cyprus is liable to ten percent (12,50%) withholding tax, If such right however is granted to a Cyprus company for use outside Cyprus, then there is no withholding tax and corporate rate is applied only on the profit margin left in the Cyprus company.
Taxation of royalties
Royalties received by a non-resident from sources within Cyprus are liable to withholding tax. However, if a Cyprus company is granted the right to use a patent, trademark or innovation outside Cyprus, then there is no withholding tax and the Cyprus company is taxed at the corporate tax rate on the profit margin that it realises on the use of the right.
Treatment of tax losses
Taxable losses incurred during a tax year which cannot be set-off against other income of the same tax year are carried forward and set-off against future profits. Taxable losses cannot be carried forward if there is a change in the ownership of the company and a significant change in the nature of business within three years from the year in which the loss arose.
The taxable losses of any company may be set-off against the taxable profits of another company in the same group provided that the two companies are members of the same group for the whole year and are both tax residents of Cyprus. For the purpose of group relief, a company is deemed to be a member of the same tax group if (a) it is 75% subsidiary of another company, or (b) both are 75% subsidiaries of a third company
Personal Income Tax
Income tax is imposed on every tax resident of Cyprus on his or her worldwide income. Non-tax residents of Cyprus are only taxed on their income accrued or derived from sources in Cyprus. Tax resident is any person, irrespective of nationality, who spends more than 183 days in aggregate in Cyprus in any year of assessment.
Chargeable income Tax rate Accumulated tax
Personal income tax rates
- 0 – 19.500 – 0%
- 19.501 – 28.000 20%
- 28.001 – 36.300 25%
- 36.301 – 60.000 30%
- over 60.000 35%
Foreign pension is taxed at the rate of 5%. The following types of income are exempt from taxation
Type of income Exemption limit
- Interest income – The whole amount
- Dividend income – The whole amount
Profits of a permanent establishment abroad The whole amount(under certain conditions)