Cyprus Company Taxation
Applicable Tax Law in Cyprus
Income Tax Law of 2002 (118(I)/2002)
(Greek language version)
Corporate Tax Rate
The Corporate Income Tax rate for all Cypriot Companies is at the flat rate of 12, 5%
Tax Residency in Cyprus
A company is considered to be a Tax Resident of Cyprus if it is Managed and Controlled in Cyprus.
Although the term “management and control” is not defined in Cypriot tax legislation, it is generally accepted to be in line with international tax principles, that a company is considered to be a Tax Resident of Cyprus if:
- The Corporate sit of the company is in Cyprus
- The majority of Directors of the company are tax-resident in Cyprus and exercise their duties from Cyprus
- The meetings of the Board of Directors take place in Cyprus
- All strategic management decisions of the Board of Directors are made in Cyprus and all resolutions and contracts are signed in Cyprus.
- Accounting records of the company are prepared and kept in Cyprus.
- The bank accounts of the company are managed from Cyprus, even they are actually maintained by banks established outside Cyprus.
However, if the Articles of Association provide for any other body to manage and control the company, such as the shareholders or an “investment committee”, then the tax residency will be wherever such body is resident.
Important note:
With effect on 31 December 2022, a new Corporate Tax Residency Test based on Incorporation will be introduce.
According to this new test the definition of “resident in the Republic” is enhanced so that when a Cyprus Company has its management and control exercised outside the Republic, is considered to be a resident of the Republic, unless such company is a tax resident in any other jurisdiction.
This means that Cyprus incorporated / registered companies, with (i) management and control exercised outside Cyprus; AND (ii) not tax resident in any other jurisdiction will now (as of 31 December 2022) be considered as Cyprus tax residents and as such, taxed in Cyprus on their worldwide income.
Basis of Taxation in Cyprus
A Cyprus Tax Resident Company is taxed on its worldwide income, which includes the following:
- Business income
- Rental income
- Dividends, interest, and royalties
- Goodwill
A Non-Cyprus Tax Resident Company is taxed on the income it derives from a business that is contacted through a permanent establishment in Cyprus and on certain types of income arising from sources in Cyprus:
- Profits from a permanent establishment in Cyprus
- Rents from immovable property that is situated in Cyprus
- Goodwill for a Cyprus business
- Royalties
Credit on Tax Paid outside Cyprus
Foreign tax that has been paid abroad, can be credited against any tax liability in Cyprus on the same type of income. The tax credit can’t be more than the tax due to be paid in Cyprus for the same income and the foreign tax that that is in excess and can’t be credited remains a cost for the company.
This provision applies for tax paid in any country irrespective of the fact Cyprus has signed a Tax Avoidance Agreement with that country or not.
Exemptions
The following types of income are not accounted when calculating taxable income:
- All dividends received except those dividends that are exempt from the taxable income of the paying company
- Gains arising from the disposal of Securities (shares, bonds, debentures, founders’ shares and other securities of companies or other legal persons, incorporated in Cyprus or abroad and options thereon)
- All Interest income that is not closely connected with the ordinary carrying on of the business
- Gains relating to foreign exchange differences (Forex) with the exception of Forex arising from trading in foreign currencies and related derivatives
- All Gains arising from a Restructuring of the company’s credit facilities (in effect until 31/1/2019)
- All profits from derived from a permanent establishment of the Cyprus Company abroad (certain conditions may apply)
- Rent from preserved building (certain conditions may apply)
- Up to 50% of the income of a company which operates in Cyprus in the audiovisual industry (certain conditions may apply)
Deductible Expenditure
All expenses incurred wholly and exclusively for the production of income that are supported by invoices, receipts or other documents are deductible in calculating taxable income, including:
- Interest incurred for the acquisition of fixed assets used in the business
- 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
- Any new Equity introduced to a company in the form of paid-up share capital or share premium may be eligible for an annual notional interest deduction (NID). The deduction may be up to 80% of the taxable profit derived from assets financed by the new equity
- 80% of the net profit derived from royalty income, embedded income and other qualifying income derived from qualifying intangible assets in the “NEW Cyprus intellectual property (IP) box“
- Tax amortization on any expenditure of a capital nature for the acquisition or development of IP. Allocated over the
lifetime of the IP (maximum period 20 years) - Expenditure for scientific research including research and development undertaken amount by an innovative small / medium business
- Up to 20% of the expenditure on film infrastructure and technological equipment (certain conditions may apply)
- Expenditure for the maintenance of buildings under preservation order (certain conditions may apply)
- Donations up to the amount of €50.000 to Political Parties (certain conditions may apply)
- Business entertainment expenses. Up to 1% of the gross income or €17.086 (whichever is lower)
- Donations to approved charities (with receipts)
- Employer’s contributions to social insurance, national health system and approved funds on employees’ salaries
- Employer’s contributions to Medical fund for employees (1% on employee’s remuneration) and to Pension fund for employees (10% on employees remuneration)
- Any expenditure for the medical treatment of employees
Non Deductible Expenditure
The following types of expenses are not allowed to be deducted from taxable income:
- Expenses not incurred wholly and exclusively for the production amount of income
- Expenses not backed up by appropriate supporting documentation
- Business entertainment expenses Amounts in excess of 1% of the gross income or €17.086 (whichever is lower)
- Private motor vehicle expenses
- Interest payable or deemed to be payable in relation to the acquisition of a private amount motor vehicle, irrespective of whether it is used in the business or not, or other asset not used in the business
- Excess Borrowing Cost (EBC) which exceeds the 30% of taxable earnings before interest, tax, whole amount depreciation and amortization (EBITDA) in respect of fixed and intangible assets used in the business
- Wages and salaries relating to services offered within the tax year on which amount social insurance and other contributions have not been paid in the year in which they were due. In case the above contributions (including any penalties and interest) are paid within two years following the due date, such wages and salaries will be tax deductible in the tax year in which they are paid.
Annual wear and tear allowances on tangible fixed assets
| % | |
| Plant and Machinery | |
| Plant and Machinery | 10 |
| Furniture and Fittings | 10 |
| Industrial carpets | 10 |
| Boreholes | 10 |
| Machinery and tools used in an agricultural business | 15 |
| New Buildings | |
| Commercial buildings | 3 |
| Industrial, Agricultural and Hotel buildings | 4 |
| Flats | 3 |
| Metallic Greenhouse structures | 10 |
| Wooden Greenhouse structures | 33 1/3 |
| Vehicles and Means of Transportation | |
| Commercial motor vehicles | 20 |
| Motor cycles | 20 |
| Excavators, tractors, bulldozers, self-propelled loaders and drums for petrol companies |
25 |
| Armored Motor Vehicles (e.g. used by Security Services) | 20 |
| Specialized Machinery for the laying of Railroads (e.g. Locomotive engines, Ballast wagons, Container wagons and Container Sleeper Wagons) |
20 |
| New Airplanes | 8 |
| New Helicopters | 8 |
| Sailing vessels | 4,5 |
| Motor Yachts | 6 |
| Steamers, tugs and fishing boats | 6 |
| Ship-motor launches | 12,5 |
| New cargo vessels | 8 |
| New passenger vessels | 6 |
| Used cargo/passenger vessels | over their useful life |
| Other | |
| Televisions and videos | 10 |
| Computer hardware and operating systems | 20 |
| Application software | |
| -if not exceeding €1.710 | 100 |
| -if exceeding €1.710 | 33 1/3 |
| Wind Power Generators | 10 |
| Photo voltaic Systems | 10 |
| Tools in general | 33 1/3 |
Losses Carried Forward
Cypriot Companies may carry forward tax losses incurred during a tax year over the next five years to be offset against taxable income.
Group Relief
Current year tax losses may be surrendered by one Cypriot Tax resident or a Tax resident company in another EU member state group company to another (certain conditions may apply)
Reorganizations
- Transfers of assets and liabilities between companies can, subject to conditions, be effected in a tax neutral manner within the framework of a qualified reorganization, and tax losses may be carried forward by the receiving entity.
- Any losses incurred maybe transfer by the receiving company to the years ahead.
- The shareholder does not have any tax liability on any gain or profit that might have from the exchange of shares.
- Any gain or profit that might arise to a Cyprus Tax Resident Company or to a Company that has a Permanent Establishment in Cyprus from the cancellation of its shareholding in the receiving company is not taxable.
Special Defense Contributions
Special Contribution for Defense is imposed on dividend income, ‘passive’ interest income and rental income earned by companies tax resident in Cyprus and by individuals who are both Cyprus tax resident and Cyprus domiciled. It is charged at the rates shown in the table below:
| Dividends | 17% |
| Interest | 30% |
| Interest received from Government Savings Certificates and Government Bonds | 3% |
| Rental income less 25% | 3% |
Disclaimer
The material presented in this publication is for information purposes only and it is accurate as at the date of its publication. For a professional advise please contact us at info@evangelouloizou.com
