Cyprus

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

A Cyprus company is by default considered a tax resident of Cyprus provided it is not tax resident in any other jurisdiction.

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 corporate titles 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 earned from foreign companies are exempt from corporate tax in Cyprus, with the exception of dividends that are deductible for tax purposes for the paying company. Such deductible foreign dividends are subject to Corporate Income Tax and are exempt from the Special Defense Contribution (SDC). Other (i.e. non-deductible) foreign dividend income is also exempt (participation exemption) from SDC unless:

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

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. Companies that engage in transactions with related parties must prepare transfer pricing documentation including, as applicable, the preparation of Master File, Cyprus Local File, Summary Table and Minimum Transfer Pricing Documentation.

Exemptions from the preparation of a Local File may apply to companies whose related party transactions in the course of a tax year do not exceed EUR 750,000 per transaction category. Such companies should maintain Minimum Transfer Pricing Documentation to support the arm’s length nature of their related party transactions.

There is an interest limitation rule limiting the deductibility of related party interest payments - exceeding borrowing costs of the Cyprus CIT payer/Cyprus group to 30% of adjusted taxable profit (taxable EBITDA).

Non-distributed income of a CFC to the extent such income arises from non-genuine arrangements (arrangements that have been put in place for the essential purpose of obtaining a tax advantage) from a low-taxed CFC is attributed to the Cyprus resident company for tax purposes.

A CFC is a low-taxed non-Cyprus tax resident company in which the Cyprus company, alone or together with its associated enterprises, holds a direct or indirect interest of more than 50%.

A foreign permanent establishment of a Cyprus tax resident company that is exempt from tax in Cyprus is also considered a CFC.

A CFC is considered as low-taxed if the foreign corporate tax paid by it on its profits is lower than 50% of the corporate income tax charge that would have been payable in Cyprus.

CFC does not apply to to non-Cyprus tax resident companies (or exempt foreign PEs):

• with accounting profits of no more than EUR 750,000 and non-trading income of no more than EUR 75,000, or
• of which the accounting profits amount to no more than 10% of their operating costs for the tax period. For the purposes of this exception, operating costs do not include the cost of goods sold outside the country where the non-Cyprus tax resident company (or the exempt foreign PE) is tax resident and payments to associated enterprises.

Under the General Anti-abuse Rule (GAAR), when calculating corporate income tax payable, an arrangement or a series of arrangements shall be ignored if they have been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the tax law, are not genuine, having regard to all relevant facts and circumstances.

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%) for their resident employees. With the exception of the social cohesion fund, amounts are capped. The resident employee must also contribute at the same rate as the employer to the social insurance fund (withheld 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 

• full tax exemption on your worldwide dividend and ‘passive’ interest income;
• full exemption on special defense contributions (17%) on your worldwide dividend income;
• full tax exemption on the disposal of securities (capital gains);
• full tax exemption on employment income if the employment is carried on outside Cyprus for at least 90 days during a tax year; and
• 50% tax exemption on employment income from a Cypriot-source, as long as such employment income is at least EUR 100,000 p.a.

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%