Overview of Cyprus tax system - Corporations
Basis of taxation
All companies tax resident in Cyprus are taxed on their income accrued or derived from all sources in Cyprus and abroad (i.e. on their worldwide income). A non Cyprus tax resident company is taxed on income accrued or derived from a business activity which is carried out through a permanent establishment in Cyprus and on certain income arising from sources in Cyprus.
Companies are considered as tax resident in Cyprus if they are managed and controlled from Cyprus.
Income tax rate
The income tax rate applicable for Cyprus companies is 12.5% (effective as from 1st January 2013) except from semi government organisations which are taxed at 25%.
Income subject to tax
The Income Tax law of Cyprus provides that tax is payable upon the income of any resident person (physical or legal) arising or derived from sources within and outside Cyprus in respect of gains or profits from any trade, business, profession or vocation, any office or emolument including benefits in kind, dividends, interest or discount, pension, charge or annuity, rent, royalty, premium or other profit arising from property, any profit from any farming or animal breeding business and any profit from the disposal of goodwill.
Deductible expenses for income tax purposes
The general rule is that all expenses incurred wholly and exclusively in earning the income of the company and supported by documentary evidence are deductible expenses.
Filing of company income tax returns
The tax year in Cyprus is the same as the calendar year. Under the Assessment and Collection of Taxes Law, the deadline for submission of the annual income tax return to the Income Tax Office for a company is the 31 December following the tax year.Companies that prepare audited financial statements should submit their income tax returns electronically. In this case, deadline for submission is further extended for 3 months.
Temporary income tax assessment and payments
A company, in each tax year, has to submit its temporary income tax assessment by 31 July of that year to the Income Tax Office.
Based on that, a company is required to estimate the taxable profit that will produce in the tax year and pay tax on it provisionally (i.e. in advance) in two equal instalments within the tax year by:
- 31 July (first instalment)
- 31 December (second and final instalment)
If the provisional declaration is less than 75 per cent of the final assessment an additional tax equal to one-tenth of the difference between the final tax and the provisional tax is payable.
Any balance of tax remaining is payable by 1 August following the tax year.
Taxable losses carried forward and group relief
A tax loss incurred by a Cyprus tax resident company during a tax year and which cannot be set-off against other income of the same year is carried forward and is set-off against future profits of the next five years. This provision is applicable for all losses incurred from 1997 tax year onwards.
In relation to losses arising from a permanent establishment abroad, these can be set off against profits arising in Cyprus. However, subsequent profits of the permanent establishment abroad, are taxable in Cyprus at 10% up to the amount of losses already surrendered to the Cyprus company.
As regards group relief of taxable losses, the current year loss of one company can be set off against the profit of another company provided the companies are both Cyprus tax resident companies of a group. A group is defined as:
- One company holding at least 75% of the shares of the other company
- At least 75% of the voting shares of the companies are held by another company
Dividend received by a Cyprus tax resident company
In accordance with the Income Tax Law of Cyprus, dividends paid to a company which is tax resident in Cyprus are exempt from income tax (refer also to the Special Defence Contribution implications of dividend paid to Cyprus tax resident companies).
Profits from the disposal of titles
Profits from the disposal of titles are income tax exempt in Cyprus. For the purposes of this exemption, the term `title` is defined in the Income Tax law of Cyprus to include shares, bonds, debentures, founders’ securities and other securities of legal entities incorporated in Cyprus or abroad, including options thereon.
Withholding taxes in Cyprus
Cyprus does not impose any withholding tax on dividend, interest and royalty payments made to non-Cyprus resident recipients.
In the case of royalties, the exemption applies for royalty payments when the right/asset is used outside of Cyprus. When the royalties are connected with the use of the right/asset within Cyprus there is a 10% withholding tax, subject to treaty provisions.
Transfer pricing
There are no transfer pricing rules in Cyprus. There is a general provision in the Income Tax law of Cyprus which states that all transactions between connected parties should be on an arm’s length basis.
Controlled foreign company rules
There are no controlled foreign company rules in Cyprus.
Thin capitalisation rules
There are no thin capitalisation rules in Cyprus.
Reorganisations
Transfers of assets and liabilities between companies can be effected without tax consequences within the framework of a reorganisation.
Reorganisations include:
- mergers and demergers
- partial divisions
- transfer of registered office
- transfer of assets
- exchange of shares