Cyprus Tax System Overview
Overview
The tax reform that took effect on 1 January 2003 introduced major changes to the Cyprus Taxation system. There is a uniform Corporation Tax Rate at 12,5% (starting from the financial year 2013), which is one of the lowest in European Union and there is no distinction anymore between local and international companies. The maximum tax rate for resident individuals is 35%. The old, complex tax regime was replaced by a new system that eliminates discrimination and differential treatment between different categories of business and is simple and transparent. In addition the increase in the rate of VAT made possible a reduction of certain taxes and the abolition of others. From the 13th of January 2014 the standard VAT rate has been increased from 18% to 19%. In addition, the reduced VAT rate has been increased from 8% to 9%.
The main tax advantages of Cyprus Companies are as follows:
- Cyprus has the lowest tax regime in Europe. Corporation tax on net profit is only 12,5%.
- Extensive network of double tax treaties providing zero or low withholding tax rates on interest, dividends and royalties.
- Interest paid to non-resident group companies is tax deductible.
- There are no thin capitalisation rules.
- There are no transfer pricing rules but transactions between related parties should be “at arm’s length”.
- No withholding tax on dividends paid to non-residents shareholders.
- Cyprus is a member of the European Union since May 2004 and fully adopts the European Union Directives. Cyprus holding companies can now receive tax-free dividends from their EU subsidiaries in cases where the Parent – Subsidiary Directive applies, subject to any anti-avoidance provisions in the jurisdiction of the paying company. Interest and Royalties can also be free of withholding taxes through the application of the Interest and Royalties Directives.
- No taxation on dividend income received by Cyprus Companies but see participation exemption below.
Participation Exemption:
Defence contribution is imposed as follows:
17% on dividends received. Nil if received from a non-resident company. The exemption will not apply if the paying company derives more than 50% of its income from investments and foreign tax on its income is substantially lower than Cyprus taxes. - There is no holding period requirement for dividends or capital gains exemptions.
- Capital Gains are not taxable in Cyprus except for the 20% tax on gains on immoveable property that is located in Cyprus, and on any gain from the sale of shares in companies that own immoveable property in Cyprus. All other gains of a capital nature are not taxable.
- Any gains realised on disposal of securities / shares in subsidiaries are not subject to taxation in Cyprus. This applies to all gains including capital gains and gains from trading in securities.
- There is no general Controlled Foreign Corporation (CFC) legislation.
- Taxes withheld abroad can be credited against corresponding Cyprus Tax even in cases where there is no double tax treaty between Cyprus and the other country. Also, where tax was withheld on dividends by an EU country the tax credit includes the share of tax paid on the gains of the company paying the dividend and the gains of its subsidiaries.
- Losses can be offset against other sources of income can be carried forward subject to conditions and set off against the profits of the next five years. In addition losses of a company can be set off against profits of another company of the same Group (Group of Cyprus tax-resident companies) and world-wide losses can be set off against taxable income of the same year or carried forward.
- Advantageous tax system for pensioners and expatriates.
- Reorganisations, Mergers, Acquisitions, Amalgamations
Cyprus Tax Law adopted the Merger Directive of the European Union, but took into account emerging EU policies. The Cyprus Tax Law covers domestic and foreign reorganisations, and reorganisations abroad that have effect in
Cyprus; these are exempted from all taxes including Capital Gains Tax, VAT, Stamp Duties and Land Transfer Fees. - Cyprus Companies can be used for supply of goods in the European Union, triangular trade and distance sales and take full advantage of the large European Market.