Cyprus has one of the most attractive tax regimes in Europe with taxation highlights of 12.5% corporate tax or 2.5% for QUALIFIED Intellectual Property profits and for non-tax domiciled persons 0% tax on dividends, 0% tax on sale of shares and securities and 0% capital gains tax (with exception of real estate in Cyprus). This guide provides general information on the personal and corporate taxation in Cyprus.
Personal income tax
1. Tax Residence
There are significant tax advantages for persons who opt to become tax residents in Cyprus. Such persons will be considered as non-domiciled tax residents for the next 17 years of residence in Cyprus.
Non-domiciled tax residents are exempt from paying “Special Contribution for Defence” tax, which gives them the following benefits:
- 0% tax on dividends,0% tax on interest (except for interest arising in the ordinary business activities or that are closely related to the ordinary business activities of an individual),0% tax on remuneration from salaried services provided outside Cyprus for more than 90 days in a tax year to a foreign employer/ company.
- 0% tax on lump sum received as retiring gratuity or commutation of pension.
- 0% capital gains taxes (exception for real estate in Cyprus),0% tax on profit from the sale of securities bonds and shares.
2. Requirements for tax residence
In order for a person to be a Cyprus tax resident the following conditions must be met:
- Reside in Cyprus for at least 60 days per tax year, Not reside in another country for more than 183 days per tax year,Not be tax resident of any other state, Conduct any type of business/work hold an office (e.g. as director) or be employed in Cyprus, Maintain an owned or rented permanent residence in Cyprus.
3. Personal Tax Rates
4. Other Tax Exemptions
20% deduction of tax deriving from rental income for a physical person, Foreign pension income is taxed at a flat rate of 5% for pension income over €3,420 (however the individual can choose to be taxed according to the above personal income tax rates),50% tax exemption of an individual’s remuneration from employment in Cyprus whose salary exceeds €100,000. An individual is eligible for this exemption provided that he was not a Cyprus tax resident in 3 out of the last 5 years and not a tax resident in the tax year immediately before commencement of employment. This sizeable tax exemption is applicable for 10 years.
5. Scope of taxation
Cypriot tax residents are taxed on their worldwide income but, as aforementioned, with significant exceptions. Non-Cyprus tax residents are only taxed on income accrued through their business activities and sources in Cyprus.
Companies are taxed in Cyprus where the effective management and control of a company is in Cyprus. In addition, authorities worldwide are starting to consider the actual presence of a company as a decisive factor for the place of its taxation. Despite the lack of a generally accepted definition of a what constitutes actual presence, the existence of an actual office of a company, having employees (for whom social insurances are paid) and an economic reason for being in a country are some of the strong indicators of actual presence.
2. Tax Rates
Corporate tax in Cyprus is 12.5%. In addition, the following apply:
- 0% tax from sale of securities (shares bonds debentures) mergers and acquisitions.
- 0% tax on dividends,0% tax on interest not arising from the ordinary activities or being closely related to the ordinary activities of the company,0% tax on profits from a foreign permanent establishment (there can be an election to pay tax in Cyprus with a tax credit for tax already paid abroad if any),0% tax on profits arising from gains relating to foreign exchange differences (with the exception of forex arising from trading in foreign currencies and related derivatives).
3. Tax Deductions
The following tax deductions apply as an expense reducing profit:
- 80% deduction as an expense of the net profit deriving from qualifying intellectual property (patents software utility models etc).
- Interest paid for the direct or indirect acquisition of the entire (100%) share capital of a subsidiary company. This is provided that the new company does not own assets that are not used in its business – if so the entire expense deduction is restricted to the amount which relates to the assets used in the business.
- Notional interest deduction – When equity is introduced in the company (new equity) in the form of share capital or share premium an annual notional interest deduction is applied yearly. This means that a notional interest is considered as an expense at the rate given. The interest rate is the yield on the 10-year government bonds of the country where the funds are employed in the business of a company plus a 3% premium. The minimum interest is 6.489% for 2017. The notional interest deduction can be up to 80% of the profit of the new subsidiary.
By way of an example: if €100.000 are introduced as new equity capital in the company, the company will be able to add on its existing expenses a minimum €6.489 for notional interest.
4. Losses carried forward
Losses can be carried forward for 5 years.
Losses can be set-off against members of the same group (whereas part of the same group means either that one of the two companies owns 75% of the voting shares in the other or a third company owns 75% of both.)(If one of the aforementioned group companies is not in Cyprus. Group relief can still be applicable provided the third country company is in an EU member state or a country with which Cyprus has a double tax treaty.),A Cyprus tax resident company may also claim the tax losses of a group company which is tax resident in another EU country provided such EU company firstly exhausts all possibilities available to set-off or otherwise use its losses in its country of residence or the country of residence of its directly holding company.
Capital gains, VAT & other taxation
The only activity at which capital gains tax applies is at the sale of immovable property situated in Cyprus or the sale of shares in companies owning immovable property (with the exception of shares listed on a recognized stock exchange). The taxation rate is 20%. Gains from the sale of immovable property situated outside Cyprus are tax exempt. The normal VAT rate is 19%, however, it is reduced in some cases. VAT for the construction or purchase of a property to be used as the primary residence is 5%. The 5% rate applies for the first 200 square meters of property (excluding basements) and the full rate of 19% applies for the rest square meters of the property. A reduced VAT application must be submitted to benefit from the 5% VAT rate on the residential property. The immovable property tax has been abolished from January 2017. Estate Duty (Inheritance Tax) has also been abolished, since January 2000. Withholding taxes do not apply for dividends, interests, or royalties paid to non-residents of Cyprus.
Cyprus International Trusts
There is no separate taxation for Cyprus International Trusts. Taxation applies according to the Beneficiary’s tax residence as mentioned above.
Note. This guide contains information for general guidance and does not substitute professional advice which must be sought prior to taking any actions.