Cyprus

Tax residency – A company is tax resident in Cyprus, if it is controlled and managed from Cyprus.

Basis – All companies that are tax residents of Cyprus are taxed on 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 that is carried out through a permanent establishment (PE) in Cyprus and on certain other income arising from sources in Cyprus.

Tax rate – Corporate tax standard rate is 12.5%.

Capital gains – Capital Gains from disposals of shares, bonds, debentures and other titles of companies or other legal persons incorporated in Cyprus or abroad and options thereon are exempt.

There is a capital gains tax of 20% levied on gains arising from the disposal of immovable property situated in Cyprus or the disposal of shares in companies that own Cyprus-situated immovable property. Shares listed on any recognized stock exchange are excluded from capital gains tax.

Dividends -  Dividends received by Cyprus companies are exempt from all taxes, with the exception of foreign-source dividends that are deductible for tax purposes for the paying company.

Interests - Interest received by companies in the ordinary course of their business is taxed at the standard rate of 12.5%.

Interest income considered passive income (not related to the ordinary course of the business) is subject to the Special Defence Contribution at the rate of 30%. Such passive nature interest is, however, exempt from corporate income tax.

Royalties – Royalty income is subject to income tax.

Foreign-source income – Companies ordinarily residents and domiciled in Cyprus are taxed on their worldwide income. However, foreign P.E. income, as well as foreign-source dividends and capital gains may be exempt from taxation.

The PE exemption is applicable unless the below anti-avoidance rules apply:

• more than 50% of the foreign PE’s activities directly or indirectly result in investment income, and
• the foreign tax on the income of the foreign PE is significantly lower than the tax burden in Cyprus (i.e. an effective tax rate of less than 6.25%).

If foreign income is taxed in Cyprus, double taxation is avoided through granting tax credits for the foreign taxes, without the need for a DTT to be in place with the foreign jurisdiction.

Withholding taxes – Cyprus does not levy withholding tax on dividends, interest, and royalties paid to non-residents. However, a 10% withholding tax is levied on royalties earned on rights used within Cyprus.

Losses – Losses arising from taxable income may be carried forward 5 years. Carryback of losses is not allowed.

Inventory - Inventory valuations are usually made at the lower of cost or net realizable value. In general, the book and tax methods of inventory valuation will be acceptable. Last in first out method (LIFO) is not allowed for taxation purposes.

Anti-avoidance rules – Transactions between related parties should be carried out at arm’s length.

Cyprus is currently in the process of implementing ATAD1 directives in its local laws, which as in other EU jurisdictions will implement interest deductibility limitations, controlled foreign company (CFC) rules and exit taxation, among others. Once the legislation is gazetted, it is expected to apply retrospectively from January 1, 2019. Exit taxation will enter into force by January 1, 2020.

With respect to CFC rules, undistributed income from a CFC would be taxed only if it is derived from non-genuine arrangements to create a tax advantage.

Labor taxes – Employers required to make contributions to the Social Insurance Fund (7.8%), Redundancy Fund (1.2%), Training Development Fund (0.5%), Social Cohesion Fund (2%), Holiday Fund (8%). With the exception of the social cohesion fund, the maximum amount of monthly earnings on which the contributions are paid is EUR 4,533 for 2018. The employee must also contribute at the same rate as the employer to the social insurance fund (withhold by the employer), but not to the other funds.

Tax credits and incentives – The new Cyprus IP box allows for a deductible notional expense calculated as 80% x qualifying profits from qualifying IP.

For the purposes of the 80% deduction, qualifying IP may be legally or economically owned and comprise:

• patents
• copyrighted software
• utility models, IP assets that grant protection to plants and genetic material, orphan drug designations, extensions of patent protection, and
• other IP that are non-obvious, useful, and novel, that are certified as such by a designated authority, and where the taxpayer satisfies size criteria (i.e. annual IP related revenue does not exceed EUR 7.5 million for the taxpayer, and group total annual revenue does not exceed EUR 50 million, using a five-year average for both calculations).

Marketing-related IP, such as trademarks, do not qualify.

Qualifying profits include, inter alia:

• royalties or other amounts in relation to the use of qualifying IP
• amounts for the grant of a license for the exploitation of qualifying IP
• amounts derived from insurance/compensation in relation to the qualifying IP
• trading income from the sale of qualifying IP (note that capital gains on IP are excluded; as such, capital gains are not subject to taxation in Cyprus), and
• IP income embedded in the sale of products, services, or the use of processes directly related to qualifying IP assets.

In calculating the amount of the qualifying IP profits entitled to the 80% deduction, a fraction is applied to the above IP profits based on R&D activity of the taxpayer; the higher the amount of R&D undertaken by the taxpayer itself (or via a taxable foreign PE or via unrelated third party outsourcing), the higher the amount of R&D fraction (modified nexus fraction).

Compliance – On average, a Limited company in Cyprus may require 28 payments and 127 hours per year to prepare, file and pay taxes.

Personal income tax – An individual is tax resident in Cyprus if he or she resides 183 days during a calendar year in Cyprus, or resides 60 days in Cyprus and does not reside 183 days or is tax resident in any other country and is employed or has a business in Cyprus.

Tax residents are taxed on their worldwide income.  Non-residents are only taxed on their income and capital gains from Cyprus.

Personal income tax rates are progressive from 0% to 35%. Special Defence Contribution tax applies to dividends (17%) and interest income (30%) instead of Personal Income tax. For rental income, a Special Defence Contribution tax of 2.25% is charged in addition to personal income tax.

Non-domiciled tax residents may be exempt from Special Contribution Defence Tax. An individual is domiciled in Cyprus based on the provisions of the Will and Successions Laws (e.g. domicile of the parents at the time of birth) or he or she has been tax resident for at least 17 of the 20 years before the current tax year.

Capital Gains tax at the rate of 20% is imposed on gains arising from the disposal of immovable property situated in Cyprus or the disposal of shares in companies that directly own Cyprus-situated immovable property. Other capital gains are exempt from taxation.

Other taxes – In Cyprus, there are no inheritance, real property, net wealth and municipal taxes. There is an immovable property transfer tax up to 8%. Value-added tax is 19%