Cyprus Tax Advantages

Cyprus is attractive due to its low tax rates. The corporate income tax in Cyprus is only 12.5%. There are no inheritance taxes on the island, and from January 1, 2017, the annual real estate tax has been abolished. Over 60 international double tax treaties are contributing to the above advantages. Below we describe in more detail some of the basics of taxation of individuals and legal entities in the Republic of Cyprus.

Basics of personal income taxation.

In 2017, a unique tax instrument was introduced in Cyprus, which allowed skilled investors to expand their opportunities in individual tax planning. It is called Cyprus Non-Domiciled Tax Residency.

In general, Cyprus has adopted a residency-based taxation system. The new provisions define domicile in accordance with the rules of the Wills and Succession Law:

• A domicile of origin (i.e. the domicile received by an individual at birth); and, 
• A domicile of choice (i.e. the domicile acquired by an individual by establishing a home with the intention of a permanent or indefinite stay).

An individual born outside of Cyprus shall be deemed as domiciled of choice if he/she retains a Cyprus tax residency for a period of at least 17 years out of the last 20 prior to the tax year in question. Until then, such a person will be considered a non-domiciled tax resident.

According to the provisions of the Cyprus tax laws, an individual who becomes a tax resident of Cyprus but remains “non-domiciled”, will be exempt from income tax and from the 17% Special Defence Contribution (SDC) on the following types of income:

• on any dividends received either in Cyprus or from abroad;
• on any interest income received from third parties.

Domiciled tax residents are also not subject to income tax on the above incomes, but they are subject to the SDC.

Rental income of non-domiciled tax residents is exempt from the SDC, which is imputed for domiciled tax residents in the amount of 3% of 75% of the rental income received. However, for all tax residents in Cyprus, rental income is included in the calculation of total income tax.

In order to maintain the status of a non-domiciled tax resident, an individual not born in Cyprus must have a physical presence in the country for at least 60 days per annum in aggregate.

With effect as from 1 January 2017, an individual may be considered a tax resident in Cyprus, receive a TIN (Tax Identification Number), related tax and other benefits if (s)he satisfies all of the following conditions:

• do not reside in any other single state for a period exceeding 183 days per annum in aggregate;
• is not considered to be a tax resident by any other state;
• resides in Cyprus for at least 60 days per annum in aggregate;
• carries out any business activity or office and/or works, for hire and/or holds any paid position in the Republic of Cyprus at any time during the year of assessment; and
• maintains a permanent residence in Cyprus which is owned or leased by him/her.

Days in and out of Cyprus for any Cyprus tax resident are calculated as follows:

• the day of departure from Cyprus counts as a day of residence outside Cyprus;
• the day of arrival in Cyprus counts as a day of residence in Cyprus;
• arrival and departure from Cyprus on the same day counts as one day of residence in Cyprus;
• departure and arrival in Cyprus in the same day counts as one day of residence outside Cyprus.

The following annual income tax rates apply to individuals, Cyprus tax residents (€):

* Individuals who are hired in Cyprus with an annual income of over €100,000 will be entitled to a 50% exemption from their income for a 10-year period starting from the year of employment.

Foreign pension income is taxed at a flat rate of 5% on amounts over €3,420. However, the taxpayer may decide to be taxed at the usual tax rates presented above. Cyprus source widow(er)’s pension is taxed at a flat rate of 20% on amounts over €19,500. However, the taxpayer may also decide to be taxed at the usual tax rates. Taxpayers may submit their decisions annually.

Social Insurance and General Healthcare contributions applicable to individuals are:  

Please consider that minimum and maximum limits apply.

For the General Healthcare contribution where the sum of the contributor’s remuneration, pensions and other income exceeds €180,000 per annum, the contribution is payable only on the amount of €180,000 which is calculated cumulatively in the following order: the remuneration of employee, self-employed, officers, pensions and finally the dividends/ interest/ rental/ other income.

Basics of taxation of legal entities.

A company is considered to be a Cyprus resident if its management and control are located in Cyprus. Namely, the registered office where the board of directors makes decisions is in Cyprus, as well as most of the board members (or a sole director) are Cypriots.

Cyprus tax resident companies are taxed on their profits accrued or derived in Cyprus and abroad from sale of goods, services and consulting at a flat rate of 12.5%.

Profits earned from the following are totally exempt from the above tax:

• Sale of securities (shares, bonds, debentures and other);
• Dividend income*;
• Interest not arising from ordinary activities**;
• Profits from a permanent establishment abroad; and
• Gains related to foreign exchange differences (forex), unless forex itself is a business.

An 80% exemption is provided on profits earned from royalties and other Intellectual Property. Whereas the profit from the production of films, series, TV shows and other related audiovisual programs is tax exempt with the lower of: either 35% of the eligible expenditure, or 50% of the taxable income.

* Dividends received from abroad are exempt from taxation, but If 50% of the income of a foreign subsidiary arises from investment income and the foreign tax levied on the profits of this company is lower than 6.25%, this exemption does not apply. In this case, dividends are subject to 17% SDC. However the final result might be nil again, because any tax paid directly or indirectly on dividends in a foreign country (which usually is the case) can be used as a deduction from the SDC.

** Interest earned in the ordinary course of business (banking, financing, collective investment schemes) is taxed as part of the trading profit after deducting interest payable and other expenses. If the interest earning is not part of the normal business, then it is taxed at 30% SDC on its gross amount in accordance with the rules applicable to the calculation of SDC.

Special Contribution to the Defense Fund (SDC)

SDC does not apply to enterprises if their owners are either not tax residents of Cyprus or Cyprus tax residents, but not domiciled. Companies with owners that are Cyprus domiciled tax residents are to withhold SDC, which is currently 17% on actual and/or deemed company’s dividend income for distribution. A deemed distribution rule sets 70% of the accounting profits after tax and before offsetting losses brought forward from previous years, after accounting for any dividends actually paid, as the basis for SDC. The deemed distribution is applicable two years after the end of the year of assessment.

Capital gains tax (CGT) of 20% applies on gains from any disposal (incl. exchange, leasing, gifting to unrelated parties, abandoning use of right, granting of right to purchase etc.) of immovable property located in Cyprus where the disposal is not subject to income tax. The same applies to shares of companies that directly own Cyprus immovable property if at least 50% of the market value of the shares comes from this immovable property. In such cases only the portion of the gain related to the immovable property is subject to CGT. Adjustments for inflation and expenses related to the acquisition and disposal of immovable property, as well as interest expenses on related loans, transfer fees, legal expenses, etc. are allowed. Many exemptions and reliefs apply.

In accordance with applicable law, there are four Value Added Tax (VAT) rates. The standard rate is 19%, reduced rates are 9% and 5%, and a zero rate of 0% applied in accordance with the category of goods and services offered.

Social Insurance and General Healthcare contributions are:

Please consider that minimum and maximum limits apply.

The calculation of the tax base.

Expenses incurred in earning taxable income and supported by documentary evidence are normally wholly deductible for corporate tax purposes.

Tax losses can be carried forward for up to 5 years, or set off against the profit of another company in the Group. A Group is recognised in Cyprus when one company directly or indirectly holds at least 75% of the voting shares of another company, or a third company owns 75% of the voting shares of both companies.

Cyprus does not impose any withholding tax (WHT) on dividends, interest and royalties paid to non-residents of Cyprus, with the exception of royalties earned on rights used within Cyprus that are subject to a WHT of 10% (5% in the case of cinematographic films). Such Cyprus WHT on royalties for rights used within Cyprus can be reduced or eliminated in accordance with the double tax treaties concluded by Cyprus or the EU Interest and Royalty Directive adopted in Cyprus tax law.

Cyprus companies can be very useful as vehicles for optimizing tax structures and retaining investments and various assets. However, when planning your business, please note that this is a very brief overview of Cyprus Tax law thus it should not be used to form an opinion or as a direct guideline. For any queries, we advise you to consult us, specifying the details of your matter.

Want to learn more about Cyprus tax benefits that best suit your needs? Please contact us for a personal consultation.