Introduction to the Cyprus Trading company

Cyprus has an excellent tax regime for international tax planning. Its entrance into the European Union as per 1 May 2004 has even enhanced the attraction of Cyprus for multinational companies, increasingly using Cyprus as a base for their international trading operations.

This section explains some of the tax benefits international trading companies enjoy in Cyprus.

Corporate Taxation

Capital gains
A capital gains tax of 20% is levied on gains from the disposal of immovable property located in Cyprus or the disposal of shares in companies whose assets include such immovable property. The latter does not apply to profits from the sales of shares listed on a recognized stock exchange.

In all other cases of share transfers, gains derived from these disposals are not subject to any corporate income tax.  This is based on the general tax exemption for profits from the sale of “securities”, included in the Cyprus Income Tax Act.  “Securities” are defined as “shares, bonds, debentures, founders’ shares and other securities of companies or other legal persons incorporated under a law in Cyprus or abroad including options thereon.”

Dividends
Dividends received by a Cypriot company are exempt from income tax. Dividends received by a Cypriot company from a foreign subsidiary are subject to a so-called Special Contribution for the Defence of the Republic (defence tax) at 15% rate.

However, dividend income from an overseas subsidiary is exempt from defence tax, provided that at least 1% is held in its share capital and the subsidiary does not meet the following cumulative conditions;

• It engages more than 50% in activities leading to “investment income,  and;
• Its income is subject to a tax burden of 5% or lower.

However, when interest income is the result of the ordinary activities of the company or is closely connected to the ordinary activities of the company, such income is subject to 10% Cyprus income tax only.

Royalties
No special provisions apply to the tax treatment of royalties. Royalty income is subject to the standard corporate income tax rate of 10%.

Deductibility of expenses
Expenses incurred wholly and exclusively for the production of the income are in principle fully deductible from corporate income tax in Cyprus.

Foreign permanent establishment
According to Cyprus’ domestic legislation, profits from a permanent establishment maintained outside Cyprus are exempt from corporate income tax. However, an exception applies and no exemption will be obtained, if;

• the permanent establishment engages more than 50% of its activities in producing investment income, and;
• the foreign tax burden on its income is 5% or lower.

Losses incurred by a foreign permanent establishment owned by a Cyprus company are deductible, but they are subject to recapture provisions in case of profits derived by the permanent establishment in subsequent years

Foreign tax relief
Foreign tax on income and gains of a Cyprus resident company can in many circumstances be credited against Cyprus tax payable over such income or gains. Such foreign tax relief cannot exceed Cyprus tax payable on this income.

Thin capitalization
As mentioned above, expenses incurred for the production of income are in principle fully deductible from Cyprus corporate income tax. This includes interest expenses. In Cyprus there are no thin capitalization rules, which might limit interest deduction to the extent that a company’s debt/equity ratio exceeds a certain level.

Transfer Pricing
There is a general provision in Cyprus (roughly) stating that the conditions in the commercial or financial relations between affiliated parties in which a Cyprus company is involved, should meet the arm’s length criterion. There are no further specific provisions regarding transfer pricing.

Loss compensation
Losses can be carried forward for an indefinite period of time in Cyprus. Loss carry back, which could lead to a refund of corporate income tax paid in previous years, is not allowed in Cyprus.

Consolidation
Companies forming part of the same group are allowed to consolidate their results, in the sense that a loss making company is allowed to surrender its loss to a profitable group company. Companies will be considered as belonging to the same group in the above sense if;

• A company is at least 75% subsidiary of the other, or;
• Both companies are at least 75% subsidiaries of a third company.
  

Administrative
The income tax year in Cyprus is equal to the calendar-year. An estimation of the taxable profit is due by 1 August of the income year in question (hereafter: “year X”).

Provisional tax is payable, in accordance with the filed estimation, in three equal installments on 1 August, 30 September and 31 December in year X.

The final tax return over year X must be filed at the end of the year following this year (or: “X + 1”). Any difference between the estimation and the tax actually due in accordance with the final return, will then be payable by 1 August of the year following the year of submission of the return (X + 2).

Withholding Tax

Royalties
Royalty payments made by a Cyprus resident company to a non resident licensor are not subject to any withholding taxes in Cyprus provided that the exercise of those royalty rights takes place outside Cyprus. 

The granting of a license to a foreign licensee typically qualifies as such.

Dividends
Cyprus does not impose any withholding tax on dividends paid to non-resident shareholders.

Interest
Cyprus does not impose any withholding tax on interest paid to non-resident creditors

Capital Tax
Cyprus does not levy any capital tax over capital contributions into Cyprus resident companies as such.

There is a stamp duty levied at 0,6% rate over the authorized share capital of a Cypriot company, upon incorporation, or at later increase of such capital.

Payroll taxes and Social Security

Persons liable to wage/income tax and Cyprus social security contributions
Residents in Cyprus are taxed on a worldwide basis. Non-residents will only be taxed on their Cyprus source income, which includes, amongst others, income from an office or employment in Cyprus. Residence is assumed if an individual stays in Cyprus for an aggregate period of more than 183 days during a calendar-year. Non-residence or residence outside Cyprus shall be construed accordingly .
A resident in Cyprus may be liable to wage/income tax and social security tax over salary received from employment. An exemption will apply in respect of the remuneration relating to services rendered for a permanent establishment of a resident employer situated outside Cyprus or to a non-resident employer outside Cyprus for a total aggregate period in the year of assessment of more than 90 days.

A non-resident will only become liable to tax for his remuneration relating to services performed in Cyprus, the remaining part of the remuneration (for services outside Cyprus) being exempt.

Taxes and contributions for employers and employees
Employers and employees may each be liable to social security payments of 6,3% of the monthly compensation granted to/received by the employee, up to a maximum amount of EUR 3.826. In other words, to the extent an employee’s salary exceeds  EUR 3.826, no social security contributions are due, neither by the employer nor by the employee. 

Furthermore, contributions to the so-called “Human resource industrial training and redundancy fund”, at a rate of 1,7%, have to be paid by employers over the salaries of their employees, up to the same EUR 3.826 maximum monthly amount.

Finally, employers must pay contributions to the so-called “Social Cohesion Fund”, at a 2% rate over the gross salaries of their employees (regardless of its level).
The income tax rates for individuals in Cyprus are as follows;

Note: individuals exercising an office or employment in Cyprus, whose residence was outside Cyprus before the commencement of the employment, are granted a tax exemption for 20% of their remuneration, or EUR 8.543, whichever is the lower, during a period of three years starting at the beginning of the year following the year of commencement of their employment.

VAT
VAT is imposed on the supplies  of goods and services made for consideration in Cyprus, as well as on the importation of goods into Cyprus. Taxable persons charge VAT on their supplies and are allowed to deduct VAT charged on goods or services, which they purchase in the furtherance of their business

Cyprus VAT legislation provides for three rates; the zero (0%) rate, the reduced rate (5%) and the standard rate (15%). Zero rated goods and services include amongst others exports, commissions received from abroad for exportation of goods and international air and sea transport.

VAT returns must be prepared and submitted quarterly and the payment of the VAT must be made within 40 days from the end of each quarter.

Double Tax Treaties
Cyprus has  double tax treaties in place with (at least) 43 independent States (see the attached chart).

Apart from that, a Cyprus company, being an EU-based entity, may be entitled to the benefits of the EU Parent-Subsidiary directive and the EU Interest and Royalty directive, under circumstances providing for withholding tax exemption for interest-, dividend- and royalty payments made by companies in other EU-member states to a Cyprus company.