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Taxation in Cyprus

PERSONAL INCOME TAX

Where an individual is a resident in the Republic, tax is imposed on income accruing or arising from sources both within and outside the Republic.

Where an individual is not a resident in the Republic, tax is imposed on income accruing or arising only from sources within the Republic.

An individual is considered to be resident if he is present in the Republic for a period exceeding 183 days in a tax year.

Tax rates

Taxable Income
Tax Rate
%
Tax
Cumulative Tax €
0-19,500 0 0 0
19,501-28,000 20 1,700 1,700
28,001-36,300 25 2,075 3,775
36,301-60,000 30 7,110 10,885
60,001 and over 35*

*This rate is applicable as from the tax year 2011 onwards.

Tax is assessed on net income on a current year basis. The income tax year in Cyprus is the calendar year. For self employed individuals, an estimate of the tax due must be made by 31 July in the year of assessment and the estimated tax must be paid in two equal installments on the 31 July and 31 December. For employees Pay As You Earn (PAYE) income tax is deducted if applicable using the above rates on a monthly basis from his/her salary.

IMPOSITION OF TAX

Under the new tax regime that came into force on the 1 January 2003 all companies will be considered resident and taxed in Cyprus if their management and control is exercised from Cyprus.

Cyprus companies are liable to corporation tax at the reduced rate of 12.5%.

In case the management and control of the company is not exercised in Cyprus the tax rate could be 0% and in such cases the Cyprus company could be taxed in the country where the management and control is exercised.

CORPORATE TAX RATES

Companies and Public corporate bodies are taxed at 12.5%.

Exemptions from corporation tax

  • Dividend income
  • Interest Income that does not arise from the ordinary activities or is closely connected to the ordinary activities of the company
  • Profit from the disposal of securities.

Deductions

All expenses incurred wholly and exclusively for the production of income of the business are considered as tax deductible expenses.

Non- deductible expenses

The following are not deductible from income:

  • Business entertainment expenses in excess of 1% of the gross income. (the amount of the expense is limited up to €17,086)
  • Private (saloon) motor vehicle expenses
  • Immovable property tax
  • Professional tax
  • Interest payable or deemed to be payable in relation to the acquisition of a private motor vehicle, irrespective of whether it is used in the business or not, or other asset not used in the business. This restriction is lifted after 7 years from the date of purchase of the relevant asset
  • Contributions to the Social Cohesion Fund
  • Expenditure which is not supported by invoices or other supporting documentation.

Losses

Losses are carried forward indefinitely. As from 1 January 2013 losses are carried forward for only five years from the end of the tax year in which the tax loss arises.

Tax credit for foreign tax paid

Any tax suffered abroad on income which is subject to income tax will be credited against any income tax payable on such income irrespective of the existence of a double tax treaty.

SHIPPING COMPANIES

No tax is payable on the profits from the operation of a vessel registered in Cyprus or on the dividends received from a ship owning company flying the Cyprus flag and operating in international waters.

No tax is payable on the emoluments of the captain, the officer and the crew of a Cyprus ship.

Local companies/individuals or International Business Companies that carry out ship management and crew management from an office in Cyprus have the choice for the financial year ended 31 December 2000 onwards to be taxed at the rate of 4.25% or rates equal to 25% of the rates applicable to the tonnage tax for foreign vessels under their management that are registered outside Cyprus. This special tax regime for ship owning and ship management companies applies until the year 2020.

COMPANY RE-ORGANISATIONS

The transfer of assets and liabilities between companies can be affected without any tax consequences within the framework of a re-organization which includes: Mergers / Demergers / Transfer of activities / Exchange of shares.

INSURANCE COMPANIES

  • Losses of the life business can be offset against profits of the general business
  • Losses of the life business can be offset against profits from other sources
  • Losses of the life business can be carried forward indefinitely

FOREIGN PENSIONS

The pension income of any individual resident in the Republic, which arises from services rendered abroad, is taxed at:

  • a rate of 5% for amounts exceeding €3.420 per annum or
  • Normal rates.

Once the election is made it is irrevocable.

INTELLECTUAL PROPERTY RIGHTS etc

The gross income arising from intellectual property rights, other exploitation rights, compensations or other similar income arising from sources within the Republic, of a person who is not resident in the Republic, is subject to withholding tax at a rate of 10%.

Rights granted for use outside the Republic are not subject to any withholding tax.

FILM ROYALTIES

The gross income derived by a non-resident person in respect of royalties arising from film projection in the Republic is subject to withholding tax at a rate of 5%.

Royalties received by a connected company registered in a European Union Member State are exempt from tax (subject to conditions).

SPECIAL CONTRIBUTION FOR DEFENCE

Special contribution for defence is imposed on certain types of income.
Non residents are exempt from special contribution for defence.

Exemptions from Special Contribution for Defence

Dividends received from non resident companies are exempt from this tax if the company paying the dividend engages:

  • less than 50% in activities which lead to investment income and
  • the foreign tax burden is substantially lower than the tax burden of the company in Cyprus.

Dividends received from resident or non resident companies are subject to special defence contribution at 20% for the years 2012 and 2013 (15% up to 30 August 2011 and 17% up to 31 December 2011) but only on resident persons. Non resident persons are not liable to special defence contribution.

Any foreign tax paid on income which is subject to special contribution for defence will be given as an allowance against the Cyprus tax irrespective of whether there is a double tax agreement with the foreign country.

Deemed dividend distribution

If a Cyprus tax resident company does not distribute by way of a dividend at least 70% of its accounting profits within two years from the end of the tax year then the company is deemed to have distributed such profits and is liable to pay 20% (15% up to 30 August 2011 and 17% up to 31 December 2011) special contribution for defence on the deemed dividend distribution applicable to its shareholders who are Cyprus tax residents.

A non Cyprus tax resident receiving a dividend from profits subject to a deemed distribution, is eligible to a tax refund.

Interest Income

Interest income which is not closely connected with its business, earned by a Cyprus tax resident company, is subject to 10% special contribution for defence up to 30 August 2011, 15% up to 28 March 2013 and 30% thereafter.

Tax credit for foreign tax paid

Any tax suffered abroad on income which is subject to defence contribution will be credited against any defence contribution payable on such income irrespective of the existence of a double taxation treaty.

CAPITAL GAINS TAX

Full capital gains tax exemption on capital gains, except on sale of immovable property situated in Cyprus.

Capital Gains Tax is imposed on gains from disposal of immovable property situated in the Republic including shares of companies not listed on a recognized Stock Exchange which own immovable property situated in the Republic, at the rate of 20%.

In computing the capital gain the value of the immovable property as at 1 January 1980 (or cost if the date of acquisition is later), the value of any additions as at 1 January 1980 (or cost if the date of the addition is later), any expenditure incurred for the production of the gain and the indexation allowance, are deducted from the sale proceeds.

IMMOVABLE PROPERTY TAX

Immovable property tax is payable on 30 September each year and is imposed on the market value of immovable property as at 1 January 1980 and is calculated on the immovable property owned by the taxpayer on 1 January of each year. Both physical and legal persons are liable to this tax.

Applicable Rates up to 31/12/2011

 

Value of property € Rate %
0 – 170,860 0
170,861 – 427,150 0,25
427,151 – 854,300 0,35
854,301 and over 0,40

 

Applicable Rates from 1/1/2012

Value of property € Rate %
0 – 120,000 0
120,001 – 170,000 0,25
170,001 – 300,000 0,50
300,001 – 500,000 0,60
500,001 – 800,000 0,70
800,00 and over 0,80

SPECIAL LEVY TAX

As from 2011 an annual levy of €350 payable to the Registrar of companies is introduced for all companies incorporated in Cyprus. For groups of companies the maximum levy is fixed at €20.000.

For 2011, the levy is payable by 31 December 2011. The levy for 2012 onwards is payable by the 30 June of each year.

Companies are not subject to the payment of the levy for the year in which they have been incorporated.

In case the levy is not paid within the prescribed period, if the levy is then paid within two months from the due date, a penalty of 10% is payable which is increased to 30% if the levy is paid within five months from the due date. If the levy is not paid within five months, the Registrar of Companies will remove the company from the registry (something which is expected to restrict the company from filing documents or requesting certificate from the Registrar’s Office). The return of the company to the registry can be affected within two years with the payment of a levy of €500 per annum and thereafter with the payment of a levy of €750 per annum.

VALUE ADDED TAX (VAT)

Value Added Tax was introduced in Cyprus on 1 July 1992 and is imposed on the provision of goods and services as well as on the importation of goods into Cyprus.

VAT rates

Standard rate   – 18% from 14 January 2013
Standard rate   – 15% from 1 January 2003 (17% from 1 April 2012)
Reduced rate   –   8% from 1 January 2006
Reduced rate   –   5% from 1 July 2000
Zero rate         –   0% from 1 July 1992

VAT Registration:

Registration is compulsory for business:

  • If the value of the taxable supplies is in excess of €15,600 during the 12 preceding months
  • At any time, if the expected turnover is in excess of €15,600 in a period of 30 days.
  • Provides services to a VAT registered person within European Union with nil registration threshold

Businesses with turnover less than €15,600 have the option to register voluntarily.

 

The above is brief and general in nature.  Kindly contact our professionals for an in-depth analysis and advice.

June 2013