Cyprus tax in a nutshell

Tax reform

As a consequence of Cyprus entering into the European Union on 1 May 2004, Cyprus entered a new tax era. The tax reform was approved by the European Union, and brought into effect on 1 January 2003. With this, the tax implication of “offshore” companies has been abolished for the new regime “Cyprus tax residency”.

Management & Control

A Cyprus tax resident company is a company which is considered to be managed and controlled in Cyprus. Cypriot residence for tax purposes for corporate taxpayers is determined on the basis of place of management and control. Management and control” is not defined in the Cypriot tax legislation.

However, it is generally accepted and in line with international tax practices that all (or most) of the following conditions should be considered to determine if a company classifies as a resident of Cyprus for tax purposes:

• All important decisions are made in Cyprus. This is achieved by either having meetings of the Board of Directors take place in Cyprus or providing a broad power of attorney to Cypriot entities or individuals, empowering them to manage the affairs of the company;
• The majority of directors are residents of Cyprus;
• Bank accounts are managed in Cyprus;
• An actual office is maintained in Cyprus.

You may obtain a certificate from the Income tax authorities in Cyprus confirming the tax residency in Cyprus once the above criteria are met.

Income tax

The standard rate of (Corporate) Income Tax in Cyprus on taxable income realised by Cypriot tax-resindent corporate taxpayers is 10%.

Taxable income under the Income tax law in Cyprus is calculated based on the accounting profits as defined by the International Financial Reporting standards but with various adjustments including (but not limited to):

• Capital allowances,
• interest paid for the acquisition of a fixed asset used in the business,
• business entertainment expenses etc.

Exemptions of the taxable income:

• 50% of interest received outside the ordinary course of business,
• all dividend income¹,
• profit from the disposal of securities¹,
• profits from a permanent establishment outside the Republic¹.

Group losses as defined in the Income tax law in Cyprus are available for group relief in the same year or as a carry forward indefinetly¹.

Company reorganisations are tax exempt under the Income tax law in Cyprus if certain conditions are met.

Special Contribution for Defence

Special Contribution for the Defence of the Republic, so called ‘Defence tax’ varies from 3% to 15%. It is applicable on certain types of income for tax residents in Cyprus.

Interest income for a Cyprus tax resident is subject to Defence tax at the rate of 10% whereas Dividend income is subject to 15%.

Certain exemptions are available:

• Dividends received from one Cyprus tax resident to another
• Dividends received by a Cyprus tax resident from a non tax resident company¹

Other exemptions to Defence tax are also available.

Capital Gains tax

Capital gains at a rate of 20% is imposed on profits from disposal of immovable property situated in Cyprus or shares in companies which own immovable property situated in Cyprus and which shares are not listed on a recognized stock exchange.

Several exemptions are applicable from capital gains tax in addition to available deductions.

Holding Company

Cyprus Income tax law favours the establishment and operation of the “Holding Company”. Below you will find only a few of the wide range of benefits offered by the legislation².

• Tax free gains from disposal of shares in a foreign subsidiary
• Dividends paid to foreign resident shareholders are free from withholding taxes irrespective from the country of residence
• Interest paid to a non resident company is also exempt from withholding taxes in Cyprus

Double tax treaties

Double tax treaties are available with over 35 countries from all continents (including almost all developed countries).

The adoption of the EU directive on Interest and Royalties and the Parent-Subsidiary Directive serve to strengthen the regime for Holding Companies in Cyprus.

¹ The exemption is valid subject to restrictions.

² The list given here is not indented to be exhaustive. Other benefits exist which might be applicable to specific circumstances.

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