1. Personal taxation
2. Corporation tax
3. Special contribution for defence
4. Capital gains tax
5. Double taxation treaties
6. VAT

1. Personal taxation

All Cyprus tax residents are taxed on all income from all sources in Cyprus and abroad. Individuals who are not tax residents of Cyprus are taxed on income from sources in Cyprus.

An individual is tax resident in Cyprus if he spends in Cyprus more than 183 days in any one calendar year.

2. Corporation tax

Basis of taxation

A company is considered as resident in Cyprus for corporate tax purposes if its management and control is exercised in Cyprus. The following conditions should be considered to determine whether a company qualifies as a tax resident of Cyprus:

• All strategic (and preferably also day-to-day) management decisions are taken in Cyprus by the directors exercising their duties from Cyprus. This is usually achieved by having meetings of the Board of Directors take place in Cyprus and signing contracts, agreements and other relevant company documents relating to the management, control and administrative functions of the company in Cyprus.
• The majority of the directors of the company are preferably tax resident in Cyprus and they exercise their office from Cyprus. These directors should be sufficiently qualified with prior experience in the related industry.
• An actual administrative office is maintained in Cyprus, through where the actual management and control of the company is exercised.
• Hard copies of commercial documentation (agreements, invoices, etc.) are stored in the office facilities of the company.
• The bank accounts of the company are operated from Cyprus, even if the accounts are maintained with banks established outside Cyprus.

Credit for foreign taxes

Any foreign taxes paid on income subject to corporation tax can be offset as a credit against the Cypriot corporation tax paid on such income. The tax credit cannot exceed the corporation tax due on the same income and any unrelieved foreign tax paid remains as a cost to the company.

Corporation tax rate – 12,50%

Tax deductions

Any expenditure which is not supported by invoices, receipts or other supporting documents as required by relevant Regulations will not be deductible under income tax.

All expenses incurred wholly and exclusively in earning the income of the Company and supported by documentary evidence, including:

Expenditure incurred for the acquisition of shares in an innovative business.

The whole amount of interest expense incurred for the direct or indirect acquisition of 100% of the share capital of a subsidiary company will be treated as deductible for income tax purposes provided that the 100% subsidiary company does not own (directly or indirectly) any assets that are not used in the business. If the subsidiary owns (directly or indirectly) assets not used in the business the interest expense deduction is restricted to the amount which relates to assets used in the business.

Equity introduced to a company in the form of paid-up share capital or share premium is eligible for an annual notional interest deduction (NID). The annual NID deduction is calculated as an interest rate on the new equity. The relevant interest rate is the yield on 10 year government bonds (as at December 31 of the prior tax year) of the country where the funds are employed in the business of the company plus a 3% premium (subject to a minimum amount which is the yield on the 10 year Cyprus government bond as at the same date plus a 3% premium). Certain anti-avoidance provisions apply. The NID deduction cannot exceed 80% of the taxable profit derived from assets financed by new equity (as calculated prior to the NID deduction).

Non - deductible expenses

The following expenses are not deductible for corporation tax purposes:

• Expenditure for improvements, alterations or additions to immovable property
• Expenses in relation to the usage of a private motor vehicle
• Interest applicable to the cost of acquiring a private motor vehicle, irrespective of its use, and to the cost of acquiring any other asset not used in the business. This provision applies for 7 years from the date of acquisition of the asset.
• Salaries for which contributions in respect of provident funds, pension funds, social security and other related funds were not paid within the year of due payment are not allowed to be deducted. If paid within two years from the due date, the salaries and the related contributions will be allowed as a tax deductible expense in the year of payment.

Transfer pricing

Application

The intra-group back to back financing arrangements apply where loans are granted by a financing company to related parties, financed by financial means and instruments, such as private loans, cash advances, bank loans and debentures.

Arm’s length principle for intra group financing transactions

The intra-group financing transaction should correspond to the price which would have been accepted by independent entities in comparable circumstances, taking into account the economic nature of the transaction. The Cypriot tax legislation, allows adjusting the reported profits of a Cypriot tax resident company in case the transfer prices differ from prices that would have been agreed between independent entities.

Simplification measures

A financing company which meets the substance requirements and is engaged in purely intermediary financing activities, borrowing from related entities and lending to related entities, will be deemed for the sake of simplification to comply with the arm’s length principle if it receives in relation to its controlled transactions a minimum return of 2% after-tax on assets.

The simplification procedures can only be used by a group financing company, which meets the criteria for substance, such as an actual presence in Cyprus, which takes into account the number of the members of the board of directors who are tax resident of Cyprus, the number of meetings of the board of directors taking place in Cyprus and the availability of qualified personnel to control the transactions performed.

In order to benefit from this simplification measure, entities should communicate to the Tax Department the use of the simplification procedure, by completing the relevant field in the tax return of the corresponding fiscal year. A deviation from the minimum return of 2% is not allowed unless it is duly justified by an appropriate transfer pricing analysis.

The Transfer Pricing Analysis should be prepared by a Transfer Pricing Expert and must be submitted to the Cypriot Tax Department by a person who has licence to act as auditor of a company in Cyprus, who is required to carry an assurance control of the transfer pricing analysis.

Entering into force of the new tax treatment

The new transfer pricing framework for intra-group financing companies applies as from 1 July 2017, for existing and future transactions, irrespective of the date of entering into the relevant transactions and irrespective any tax rulings issued prior to the said date.

Losses carried forward

The tax loss incurred during a tax year and which cannot be set off against other income may be carried forward and set off against taxable income of the five succeeding years only.

3. Special contribution for defence

Basis of taxation

Notes:

(i) Legal entities are subject to Special Contribution for Defence if they are tax resident in Cyprus. As from 16 July 2015 individuals are subject to Special contribution for defence if they are both Cyprus tax resident and Cyprus domiciled. An individual is domiciled in Cyprus for the purposes of Special Contribution for Defence if he has a domicile of origin in Cyprus per the Wills and Succession Law (with certain exceptions) or if he has been a tax resident in Cyprus for at least 17 out of the 20 tax years immediately prior to the tax year of assessment. Anti-avoidance provisions apply.

(ii) Dividends declared by a Cyprus tax resident company to another Cyprus tax resident company after the lapse of four years from the end of the year in which the profits were generated are subject to defence contribution. Dividends which emanate directly or indirectly out of such dividends on which special contribution for defence was previously suffered are exempt.

(iii) Dividend income from abroad is exempt from defence fund contribution. This exemption does not apply if:

1. More than 50% of the paying company’s activities result directly or indirectly in investment income, and
2. The foreign company that pays the dividend is subject to tax in the foreign country at a rate which is lower than 6,25%.

When the exemption does not apply, the dividend income is subject to special contribution for defence at the rate of 17%.

As from 1 January 2016 this section only applies to dividends which are not deductible for tax purposes by the paying company. Dividends which are deductible for tax purposes by the paying company are subject to Corporation Tax.

(iv) Interest income, earned by individuals, from Cyprus government savings bonds and development bonds and all interest earned by a provident fund is subject to special contribution for defence at the rate 3%. In the case where the total income of an individual (including interest) does not exceed €12.000 in a tax year, then the rate is reduced to 3%.

(v) All the interest income of Collective Investment Schemes is considered to be arising from the ordinary activities or closely related to the ordinary activities of the Scheme and taxable under corporation tax.

Other information

When the tenant is a company, partnership, the state or local government, Special contribution for defence on rental income is withheld at source. In all other cases the special contribution for the defence on rental income is payable by the landlord in 6 monthly intervals on 30 June and 31 December each year.

For interest and dividends received gross any defence tax due is payable at the end of the month following the month in which they were received.

However, special contribution for defence on dividends from abroad and interest income from abroad is payable in 6 month intervals on 30 June and 31 December each year.

Foreign taxes paid can also be credited against the defence tax liability.

4. Capital gains tax

Capital Gains Tax is imposed at the rate of 20% on gains from the disposal of immovable property situated in Cyprus including gains from the disposal of shares in companies which own such immovable property, excluding shares listed in any recognised stock exchange.

Further, as from 17 December 2015 shares of companies which indirectly own immovable property located in Cyprus and at least 50% of the market value of the said shares derive from such immovable property are subject to Capital Gains Tax.

5. Double taxation treaties

The Cyprus double tax treaties have been drafted very closely to the Organisation in Economic Cooperation and Development (OECD) Model Treaty. The OECD model has been changed where necessary in order to conform with the tax systems of the countries concerned.

The Double Tax Agreements concluded and their respective date of enforcement between Cyprus and other countries can be found on the official website of the Ministry of Finance of Cyprus.

6. VAT

In accordance with the Value Added Tax law of 2000 International Business Companies (IBC’s) are treated in the same way as all the other Cypriot companies in relation to VAT.

The current standard VAT rate is 19%.

IBC’s which belong to the Republic and which trade in goods or provide services within EU member states are liable for VAT Registration in Cyprus.

IBC’s which belong to the Republic which trade in goods or provide services outside EU member states or third countries may be liable to register for VAT purposes.

From 1st January 2010 businesses are required to complete and submit a declaration for Intra Community Supplies (within EU) of services which are taxed under the reverse charge provisions of another member state. This form is called VIES. Services which are supplied to non member states are not included.

The VIES form is also completed from Companies which are performing triangular transactions.