The taxable profits of all Cypriot tax resident companies are taxed at the corporate tax rate of 12.5%.
Income arising from shipping management activities is subject to tax at 4.25%. A company can elect to pay special tonnage tax if it is more beneficial.
The Cyprus tax legislation distinguishes between tax resident and non-tax-resident companies. Cyprus tax resident persons (including companies and individuals) are subject to tax in Cyprus on their worldwide income, whilst non tax resident persons are subject to tax only on their income derived in Cyprus.
A company resident in Cyprus is thereby considered a Cypriot company for tax purposes if its management and control is in Cyprus. Therefore incorporation in Cyprus is of itself not sufficient to establish corporate residence in Cyprus.
Although no definition of management and control is provided in the law, it is generally accepted as being the place at which major decisions are taken and where the directors meet and most of the times reside.
A company which is non-resident will only be taxed on its profits arising from a permanent establishment in Cyprus. The term “permanent establishment” includes an office, a branch, a factory or laboratory, a mine, an oilfield or a construction site for a project exceeding three months. Rental from immovable property located in Cyprus and profit from sale of goodwill in Cyprus is also taxable irrespective of the existence of a permanent establishment.
The main income exemptions are as follows:
- Dividends income (may be subject to defence tax – see below).
- Profits of a permanent establishment situated outside Cyprus. This exemption does not apply if the permanent establishment engages more than 50% in activities which lead to investment income and the foreign tax burden on the income of the permanent establishment is substantially lower than the tax burden of the Cypriot resident company.
- Profits from the disposing of securities of both capital and revenue nature. Securities include shares, government stocks, debentures, bonds, founder’s shares and rights thereof as well as several other financial instruments.
- Interest income unless it is received in the ordinary course of business, or is closely connected to the ordinary course of business in which case it is taxed as ordinary trading income (could also be subject to defence tax).
In arriving at the chargeable income all expenses incurred wholly and exclusively for the purpose of earning the income are deductible. There are certain restrictions in respect to entertaining expenses, private motor vehicle expenses etc.
Intellectual Property Regime
Special provisions provide for an 80% exemption on royalty income (net of any direct expenses) arising from the exploitation of intellectual property by a Cyprus company. The remaining 20% will be subject to the corporation rate of 12.5%, resulting in an effective tax rate of 2.5% or lower.
Wear and tear allowances
The depreciation expense included in the financial statements is not a tax deductible expense. There are, however, predetermined rates in calculating the wear and tear allowance for business assets that are tax deductible.
There is no withholding tax on payments of dividends and interest to non tax resident persons (individuals or companies). Payments of royalties which are derived from abroad and are paid abroad are also free from withholding tax.
Losses and group relief
Losses can be carried forward indefinitely or can be surrendered to group companies provided certain conditions are met. Two companies are considered to belong in the same group for group relief purposes if one is controlled directly or indirectly by the other by at least 75% or both are controlled directly or indirectly by a third party by at least 75%.
Special provisions apply in respect to company reorganisations so as to avoid any adverse tax implications arising from reorganisations. These provisions are in line with the EU directive on mergers, acquisitions and reorganisations.
Unilateral tax relief
Relief for taxes paid abroad is granted in the form of a tax credit against tax payable in Cyprus. The relief is given unilaterally irrespective of the existence of a double tax treaty. Where a treaty is in force the treaty provisions (if more beneficial) would apply.