Cyprus Tax Law (Main Advantages)

The Cyprus legislation aims to conform with European Union law and the EU code of conduct and abide by its commitment to the Organization of Economic Cooperation and Development (OECD) to eliminate harmful tax practices.

The main features of the tax laws are the following:

Corporation tax for legal entities

• The definition of resident of Cyprus is introduced. A company is resident in Cyprus if its management and control is in Cyprus.
• There is no longer a distinction between local companies and International business companies (IBCs). There is a change from the current principle under which IBCs were considered residents of Cyprus and taxed in Cyprus irrespective of the place of management and control. The taxable profits of all Cyprus resident companies will be taxed at the rate of  12,5%. Non-resident Companies will be taxed on profits from a business activity which is carried out through a permanent establishment in Cyprus, rentals from immovable property located in Cyprus and profits from the sale of goodwill.
• Dividend income from abroad and from Cyprus is wholly exempt from corporation tax.
• No taxation on the profits from the disposal of securities for all the companies that are residents of Cyprus. “Securities” is defined as shares, bonds, debentures, founders’ shares and other securities of companies or other legal persons, incorporated under the law in Cyprus or abroad and options thereon.
• Profits earned from permanent establishment abroad are fully exempt from corporation tax.
• No time restriction on the carrying forward of losses. From 2012 onwards the 5 years restriction has been  brought back so that any profits from 2006 onwards can be carried  forward only 5 years.
• Losses of a company can be set off against profits of another company of the same group. 100% of the interest income of a company resident of Cyprus is exempt from corporation tax. However interest income earned from the trading activities of a company (e.g. credit institution) is fully taxable
• In order to conform with the European Union, the new tax legislation adopts the appropriate European Union directive which enables without tax implications reorganizations, mergers, acquisitions and amalgamations of companies.
• No withholding tax on the payment of dividends, interest and royalties to non-residents of Cyprus.

Special contribution for defence for LEGAL entities

• Dividend income is subject to special contribution for defence at the rate of 15% (17% from 31/8/2011, 20% from 1/1/2012 and 17% from 1/1//2014) in the case where the shareholder is resident of Cyprus. In the case where a company resident of Cyprus does not proceed with the distribution of a dividend two years after the end of the fiscal year in which profits have been earned, 70% of the profit will be considered as distributed (notional/deemed distribution). In the case where the shareholder is non-resident of Cyprus there is no deemed distribution of dividends.
• Interest income is subject to special contribution for defence at the rate of 10% (15% from 31/8/2011 and 30% from 29/4/2013) in the case where the company is resident of Cyprus. Interest income earned from usual trading activities is not subject to special contribution for defence.
• Dividends received in Cyprus companies from foreign companies are not subject to defence tax. This provision does not apply though:

1. if the foreign company paying the dividend, is engaged directly or indirectly in more than 50% in activities which result in income from investments and

2. the foreign tax on the foreign company’s income (the company which pays the dividend) is materially less than the tax charge on the Cyprus Company

• As from 1 January 2012, any actual dividends paid between Cypriot companies, indirectly after the expiration of 4 years from the end of the year in which the profits were made, are subject to defence tax (if the ultimate beneficial shareholder is a Cyprus resident). Dividends paid out of income emanating directly or indirectly from dividends on which defence was previously suffered, are exempt from defence tax.

Income tax for individuals

• An individual is resident of Cyprus if he lives in Cyprus for one or more periods which exceed the total of 183 days per fiscal year.
• All individuals who are residents in Cyprus are taxed with the following rates:

• Dividend income from abroad and from Cyprus is fully exempt from income tax.
• The whole amount of interest income is fully exempt from income tax
• For non-Cyprus residents taking up residency in Cyprus to work for an employer in Cyprus and whose annual emoluments are more than EUR100.000 there is an exemption of 50% of their employment income. This applies for a period of 10 years starting from the first year of commencement of employment.
• No taxation on the profits from the disposal of securities for individuals that are residents of Cyprus. “Securities” is defined as shares, bonds, debentures, founders’ shares and other securities of companies or other legal persons, incorporated under the law in Cyprus or abroad and options thereon.
• Profits of an individual earned from permanent establishment abroad are wholly exempt from income tax (subject to provisions).

Special contribution for defence for individuals

• Dividend income is subject to special contribution for defence at the rate of 15% (17% from 31/8/2011, 20% from 1/1/2012 and 17% from 1/1/2014) in case where the shareholder is resident of Cyprus.
• Interest income is subject to special contribution for defence at the rate of 10% (15% from 31/8/2011 and 30% from 29/4/2013) in case where the individual is resident of Cyprus.
• In case where the total annual income including interest income does not exceed €12.000, the interest income is subject to special contribution for defence at 3%. Individuals earning interest income from Government savings bonds, Government development bonds and interest earned by a provident fund will be subject to special contribution for defence at 3%.

Value Added Tax (VAT)

• VAT is applicable at the rate of 19% (17% from 1/3/2012, 18% from 14/1/2013 and 19% from 13/1/2014) on most services and goods.