The favourable tax regime together with many other benefits, such as the well-developed and transparent legal system, attract business people and investors to launch their business plans in Cyprus. A primarily considerable incentive that urges business people to implement their projects in Cyprus is that the corporate income tax in Cyprus is 12.5%, one of the lowest in Europe.
Cyprus and non-Cyprus tax resident companies:
A Cyprus tax resident company must register with the Tax Department within 60 days of incorporation. Our legal team may assist you with all the necessary procedures. Cyprus tax resident companies are taxed on all income accumulated or derived from all sources in the Republic of Cyprus and abroad.
On the contrary, a non-Cyprus resident company is taxed on income deriving from immovable property in Cyprus and on income accumulated/derived from a business activity, which is held in a permanent establishment in Cyprus. Permanent establishment denotes a fixed place of business through which the business activities of a company are partially or entirely carried out. For example, a permanent establishment can be a place of management, an office, a factory, etc.
It should be pointed out that pursuant to Section 5(4) of Income Tax Legislation (118(I)/2002), legal or natural persons who do not reside permanently in the Republic of Cyprus but maintain a permanent establishment in Cyprus, may elect to be treated as Cyprus tax resident persons.
A Company is a tax resident of Cyprus under the condition that it is managed and controlled in Cyprus. Cyprus legislation does not provide a precise definition of management and control. Nevertheless, there are the following requirements for management and control:
- The board meetings must be held in Cyprus;
- The decisions and the formation of the general policy must be held in Cyprus;
Corporate tax rate and exemptions:
The corporate tax for all companies is 12.5%. However, they are exempt from the corporate tax up to 100% :
Profits derived from the disposal of securities;
- Dividends income, apart from dividends that are tax deductible for the paying company;
- Interest not deriving from the ordinary activities or closely related to the ordinary activities of the Company;
- Profits from a permanent establishment located outside Cyprus given that more than 50% of the income of the permanent establishment arises from trading activities or the foreign tax burden rate is not lower than 6.25%;
- Gains related to foreign exchange differences apart from gains deriving from trading in foreign currencies or related rights and derivatives;
Tax deductions include expenses that are incurred wholly and exclusively for generating business income and are supported by receipts, invoices or other relevant documents. Note that tax deductions include also the following types of expenditures:
|TYPE OF EXPENSE||EXEMPTION|
|Interest expense related to the acquisition of the whole share capital of a subsidiary company.||Up to 100%|
|Notional interest expense is permitted annually on new capital introduced to a company after the 1st of January 2015.||Up to 80% of the taxable income prior to the deduction of the deemed expense.|
|Contribution of employers to social insurance and approved funds on employees’ salaries and benefits.||Up to 100%|
|80% of the net royalty income. Note that the net income derived from the sale of intangible assets owned by a Cyprus tax resident company would be considered as a deductible expense.||Up to 80%|
|Donations or contributions made for charitable purposes.||Up to 100%|
|Entertaining expenditures for business purposes||Less than 1% of the total gross income or €17086|
|Expenditures for the maintenance of buildings.
|Up to €1200 for a building area up to 120m2.
Up to €1100 for a building area of 121-1.000 m2.
Up to €700 for a building area above 1.000m2
|Expenses for the acquisition of shares in an innovative business.||Up to 100%|
Generally, the tax loss incurred during a year that cannot be set off against income from other sources is carried forward and set off against the profits of the next five years.
Note that losses during the year 2010, which were not set off against profits up to the year 2015, may not be carried forward to the year 2016 if:
- there is any change in the ownership of the shares of a company and a significant change in the business activities of the company within three years;
- there is any change in the ownership of the shares of a company at any time since the scale of activities has reduced or has become insignificant and before any significant reactivation of the business;
It should be clarified that no loss incurred before the change in ownership of the shares can be carried forward to the following years.
Set-off group losses are allowed only with respect to profits derived in the corresponding year of assessment. It should be pointed out that companies must be members of the same group for the whole year of assessment. However, a company incorporated by its holding company during the particular financial period is considered as a member of the group for the entire year of assessment.
Two companies are deemed to be members of the group if:
- One is by 75% subsidiary of the other;
- Both companies are by 75% subsidiaries of a third company;
- Losses caused by any person from any business held outside of the Republic of Cyprus can be set-off against the same individual’s income from other sources for the same year.
- If an owner of a business, including a partnership, transforms his/her business into a company, any accrued losses of the owner may be carried forward as losses of the company.
- A partnership or a sole trader converted into a limited liability company may transfer tax losses into the company for future use.
- As from 1st of January 2015, two companies can be considered members of the same group if the interposition companies are registered in and are tax residents of another EU member-state or of a country with which Cyprus maintains a bilateral or multilateral convention for the avoidance of double taxation or the exchange of information. The tax losses should be determined according to the provisions of the Cyprus tax laws.
Cyprus is an international business and investment centre with many considerable benefits. Obviously, the corporate income tax is a significant advantage that needs to be taken into account when you are defining your business and investment plans. The legal team of Michael Chambers & Co. LLC is able to provide you with custom-made solutions on tax planning and investment. Among the main principles of Michael Chambers & Co. LLC is to contribute to the successful implementation of your business and investment projects. If you wish to speak to one of our lawyers, then please contact us: [email protected]