How Companies are taxed in Cyprus?
All companies that are tax residents in Cyprus are taxed on any income earned or derived in Cyprus and overseas as a Cyprus Corporate income tax. A non-Cyprus tax resident company is taxed on income accrued or gained from economic activity conducted through a PE in Cyprus, as well as certain other revenue derived from sources in Cyprus.
The normal Corporate Income Tax rate in Cyprus is 12.5%.
Starting of January 1, 2019, CFC rules apply, which means that non-distributed profits of CFCs owned directly or indirectly by a Cyprus tax resident corporation may be subject to tax in Cyprus (certain exceptions may apply). A firm is deemed a Cyprus tax resident if it is managed and controlled from Cyprus.
The Cyprus Corporate Income Tax Legislation expressly allows for a variety of exclusions for a wide range of earnings, profits, and gains.
Types of Corporate Income in Cyprus
– CAPITAL GAINS
Earnings from the sale of corporate ‘titles’ are completely free from Cyprus Income Tax. ‘Titles’ include shares, bonds, debentures, founders’ shares, and other titles of businesses or other legal entities formed in Cyprus or elsewhere, as well as options on them. The term includes, among other things, futures/forwards on titles, short positions on titles, swaps on titles, depositary receipts on titles, repos on titles, units in stock exchange indices on titles etc.
*Capital gains on Cyprus-located immovable property (as well as non-quoted shares owning such Cyprus-located immovable property) are taxed individually in Cyprus.
– DIVIDEND INCOME
Dividends received from other Cyprus tax residents are tax-free, subject to specific anti-avoidance regulations.
Dividends received from overseas investments are free from Taxation in Cyprus, with the exception of dividends that are tax deductible for the sending firm. Such deductible overseas dividends are subject to Corporate Tax but not Special Defense Contribution (SDC). Other (non-deductible) overseas dividend income is likewise excluded (participation exemption) from SDC unless the following conditions are met:
- More over half of the activities of the foreign paying corporation result in investment revenue, either directly or indirectly.
- The international tax is much lower than the tax burden in Cyprus (lower than 6.25% effective tax rate).
In the absence of the previously mentioned Cyprus participation exemption on foreign dividend income, any foreign WHT imposition on dividends paid to the Cyprus company will be credited against the Cyprus flat SDC rate of 17% on those dividends, without the need for a Double Tax Treaty with the paying jurisdiction.
– INTEREST INCOME
The tax treatment of Corporate Interest Income is different that other type if Income in Cyprus.
Interest received by corporations in the regular course of business, including interest closely related to the ordinary course of business, is also considered ‘active’ interest income and is only taxed under Corporate Income Tax at the standard Tax rate of 12.5% (after deducting permitted costs).
When a company receives interest that does not meet the standards outlined above, the interest is termed ‘passive’ interest income and is subject to SDC (without cost deduction) at a rate of 30%. But, such ‘passive’ natural interest is free from Taxation.
As of June 20, 2022, ‘passive’ interest income earned from Cyprus government bonds, Cyprus and foreign corporate bonds listed on a recognized stock exchange, and bonds issued by Cyprus state organizations or Cyprus or foreign local authorities listed on a recognized stock exchange will be subject to SDC at a reduced rate of 3%. Moreover, beginning on June 8, 2022, Cyprus state organizations and municipal governments, pension funds, provident funds, and the Cyprus Social Insurance Fund will be subject to SDC at a lower rate of 3% on all interest income earned.
– ROYALTY INCOME
After deductible expenses, royalty income is taxed at a rate of 12.5% under Corporate Income Tax.
Cyprus has an IP box that is completely compliant with the provisions of the OECD BEPS Action 5 report (modified) nexus approach. Cyprus IP Box allows several specific categories of IP to be taxed at effective tax rate of 2.5%
– RENTAL INCOME
Rental income obtained by a Cyprus tax resident company, from immovable property located in Cyprus or abroad, is subject to the following two taxes:
- Corporate Income Tax
- Special Defense Contribution
In addition to Corporate Income Tax, after all the deductions, gross rental income is subject to SDC at the rate of 3%,effective rate of 2.25% because ethe tax is imposed only on 75% of the income.
* Non-Cyprus tax residents who get rental income from immovable property in Cyprus are due simply to Cyprus Income Tax and NOT to Special Defense Contribution.
– INCOME FROM FOREX ACTIVITIES
Except for profits/losses deriving from FX trading, all (realized or unrealized) FX disparities (gains or losses) will be tax neutral under the modified Income Tax Law (ITL).
In other words, with the exception of FX profits/losses deriving from FX trading, FX gains will not be taxed and FX losses will not be tax deductible, regardless of their nature (revenue or capital).
The law gives FX traders the ability to make an irreversible choice to be taxed solely on realized FX discrepancies. If such a decision is made, any unrealized FX differences will be taxed/deductible in the year they are realized.
Cyprus Tax Residency for Companies
A corporation is deemed as a tax resident in the Republic if it:
- Is managed and controlled by actual people in Cyprus, or
- Is formed or registered in Cyprus but managed and controlled from outside Cyprus
* As of 2023, a business with a Cyprus incorporation is automatically recognized as a tax resident of Cyprus, assuming the company has no other tax residency.
Tax Compliance in Cyprus
Tax Year:
Calendar year is used as the tax year. A company’s accounts may be concluded on a date other than December 31st, in which case taxable gains are allocated according to a time basis that is pertinent to the tax years.
Consolidated Returns:
Consolidated taxation is not permissible, and each firm must file a separate independent tax return. A set-off of group losses is conceivable if there is a 75% parent-subsidiary connection, which includes subsidiaries controlled by a common parent business. Group loss relief is possible only amongst resident firms (and EU-based corporations/companies with which Cyprus has signed a double tax treaty, providing they have exhausted all possibilities for using losses in their place of residence).
Filling Requirements:
Company tax returns must be filed electronically by March 31st of the year following the year under consideration (i.e. 15 months from the year-end). Businesses must pay provisional tax in two equal installments by the 31st of July and 31st of December of the year in question. Any underpayment must be settled through self-assessment by August 1st of the following year. If the income declared for provisional tax payment is less than 75% of the final income, an additional tax equal to 10% of the difference between the final and provisional tax is payable. The difference between the final and provisional tax is due.
Key Benefits of Cyprus Tax System
- Straightforward, clear, and EU-harmonized tax system based on OECD recommendations.
- A 12.5% corporate income tax rate, one of the lowest in the EU, with the prospect of a substantially lower effective tax rate.
- Notional Interest Deduction is available for firms obtaining fresh equity capital.
- Benefits from the tax advantages of EU Directives (Parent – Subsidiary Directive, Merger Directive and Interest and Royalties Directive).
- Extensive double tax treaty network of 65 nations until now (2023).
- Tonnage Tax (TT) system that is appealing to ship owners, managers, and charterers.
- An appealing tax jurisdiction for funds and an appealing tax regime for fund managers.
- Capital gains are tax-free (except for capital gains arising from the sale of Real Estate in Cyprus).
- Earnings from a foreign Permanent Establishment are tax-free.
- Profits from trading in securities (stocks, bonds, and other financial instruments) are tax-free.
- Credit relief for foreign taxes is granted unilaterally. There is no withholding tax on dividend, interest, or royalty payments made overseas (for use of royalties outside of Cyprus).
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