Taxation of Income Any person (natural or legal) resident of Cyprus is taxable with its whole world income.

Non tax-resident persons are liable for taxation with their income derived in Cyprus. A legal person (company, corporate body) is deemed to be resident of Cyprus if the management and the control of the company are located in Cyprus.Although there is no definition of "resident" in the sense provided by relevant laws, it is assumed that a company is a resident of Cyprus if the majority of the directors resides in Cyprus or if Board Meetings are regularly held in Cyprus.

A natural person is considered to be resident of Cyprus if he/she is staying in Cyprus at least 183 days a year. The Cypriot Income Tax Law prescribes a uniform taxation of corporations of 10% of the taxable income. The taxable income includes:

• profits deriving from business
• profits from interest
• profits from licensing fees
• profits from rental income of real estate
• capital gains from securities

Ship management companies may choose to be either taxed by a corporate tax of a 4,24% tax on their profits or a taxation based on tonnage.

There is no limit to loss carry-forwards.

Within a firm group, gains of one company can be set off against the losses of another company. Group profit will be taxed in this case.

 

Foreigners and their companies generally remain unaffected by the defence tax.

According to the Law on Special Contribution to Defence Tax (Defence Tax Law), a natural person resident of Cyprus, has to pay a 15% Defense Tax on its paid dividends. If the recipient of the dividends is a legal entity, that entity is exempt from the tax defense, unless the legal entity itself pays no dividends for at least two years.

Residents of Cyprus (natural or legal persons) pay 10% defense tax on income deriveed from interest. It is therefore appropriate to distribute profits or, if they are not to be distributed, to invest them in securities.
Interest income on bank accounts in Cyprus of non-resident persons (foreigners as a natural or legal person) is not subject to Defence Tax.
Should your company distribute dividends to its shareholders, these dividends may thus remain on a Cyprus bank account in the name of the shareholder; defence Tax will not be applied.

Income from dividends is categorically not taxable in Cyprus.

Income of a company taxable in Cyprus, which consists of dividends paid from another taxable company in Cyprus, is not subject to the Law on Special Duty to Defence tax.

Income of a taxable company in Cyprus, which consists of dividends paid from another non-taxable company in Cyprus is not subject to the Law on Special Contribution to Defence Tax, if the taxable company holds at least 1% shares of the company paying the dividends.

Income of a taxable company in Cyprus, which consists of dividends paid from a company out of Cyprus is not subject to the Law on Special Contribution to Defence Tax and is also not taxable according to the Income Tax Law.

The above exemptions do not apply if;

• more than 50% of the income of the company paying the dividends comes from income occurred from financial investments and
  
• the profits of the company paying the dividends are taxed with half or less than half of the Cypriot Corporate Tax, i.e. 5% or less.

Both above conditions must be met in order to occur non-applicability.

There is no capital gain tax in Cyprus and no withholding tax on dividend payments to non tax-residents.

 

The Cypriot tax legislation basically distinguishes between interest income from bank deposits and interest income occurring within the ordinary course of business.

Interest income from bank deposits

50% of interest income from bank deposits is exempted from income tax. This concerns taxable residents of Cyprus (natural or legal).
However, according to the Law on Special Contribution to Defence Tax, interest income from bank deposits is taxed by 10%. Thus, the total tax duty for interest income from bank deposits is 15%.
Interest income from deposits on current accounts and business accounts is exempted from the above provisions (see below).
It is advisable therefore, to invest dividends either in securities, for example, or to distribute them.

Interest Income from Ordinary Course of Business of a Company

Interest income related to business activities is part of a company’s profit and therefore subject to 10% income tax of the company (corporate tax).
Special contributions in accordance with the Law on the Special Contribution of Defense Tax do not apply.

As per a definition in the official circulars of the Cyprus Tax Authority, the following activities are deemed to be business activities of companies:

• account activities (current and business accounts)
• for finance companies: interest income from loans, financing and leasing business
• interest from debtors of the company
• interest income of insurance companies
• interest income of intra-group finance companies

Non-taxable companies (whose management and operations are located outside of Cyprus) are exempt from any income tax and special contributions.

 

Royalties received by taxable persons (natural or legal persons) resident of Cyprus are fully booked as profits; correspondingly, royalties paid are fully booked as expenses of the company.

Royalties for the use of rights within Cyprus are subject to a withholding tax of 10%.
Royalties for the use of rights outside of Cyprus are not subject to withholding tax.

Non-taxable companies (whose management and operations are located outside of Cyprus) are not subject to withholding tax mentioned above.

Income deriving from the holding or purchase and sale of securities is not subject to any income tax.

The income derived from holding or the disposal of securities is not subject to any capital gains tax. Exception: If the securities are shares of a company which owns real estates in Cyprus, income from holding or from the disposal of such securities will be taxed with flat capital gains tax of 20%.

Securities in this sense are:

• Shares
• Bonds
• Governmental Bonds
• Founder’s shares and other legal shares of companies incorporated within and outside of Cyprus
• as well as options on the aforementioned.

Comprehensive revisions since the beginning of 2009:
The Tax Authority of Cyprus (“Commission for Income and Tax”) has announced an expanded redefinition of the scope of securities in an official circular!
As a result, income from holding of and the trade with the following securities is basically not subject to any income tax:

• Ordinary shares
• Founder’s shares
• Preference shares
• Options on aforementioned shares
  
• Debentures (obligations)
• Bonds
• Short Positions on titles
• Future and Forward Contracts on titles
• Exchange contracts (swaps) on titles
• Certificates of Deposit (i.e. Global Depositary Receipts on titles (GDRs) and American Depository Receipts (ADR)
• Claim rights on obligations and bonds (but not claim rights on interest thereof)
• Index certificates if they are conceptual designed on titles
• Repurchase rights or repos, if these are conceptual designed on titles
• Shares in companies (namely such as the Russian OOO and ZAO, the American LLC, provided that those are subject to taxation, the Romanian SA and SRL and the Bulgarian AD and OOD)
• Shares of open or closed investment vehicles, provided such do operate in the country of incorporation and are registered and regulated in that country.

Examples of such investment vehicles are:

• Investment Trusts
• All kind of open and closed funds
• Pension funds
• State funds
• Other similar investment funds of any kind

This latest revision is undoubtedly a significant step towards a first-class global financial center.

 

Loss Carried Forward

Losses from business activities may be set off against future profits for an unlimited period of time.

Offset of Losses for Groups of Companies

Losses of company that belongs to a group of companies can be set off against profits of companies which belong to the same group of companies. The condition to be complied with is that the companies are incorporated in Cyprus and belong to the same group of companies. Both companies must belong to the group of companies throughout the entire tax year.

Group of companies in this sense means that either at least 75% of one of the two companies belong to the other company, or that at least 75% of both the companies belong to a third company.
‘Belonging’ means that a company holds directly or indirectly at least 75% of the voting shares of the other company, and the holding company is entitled to at least 75% of the dividends, as well as to at least 75% of the values of the held company in the event of its liquidation.

Losses of a Permanent Establishment Abroad

Business losses of a permanent establishment of a Cypriot company abroad may be set off against the profits of the Cypriot company.
If the permanent establishment abroad shows profits again, an amount equal to the former loss of the foreign permanent establishment shall be counted towards the profits of the Cypriot company.

 

The exceedingly profitable EU Merger Directive fully applies in Cyprus.
All stipulations of the EU Merger Directive have been incorporated in the Income Tax Law and other applicable laws. In several cases, the rules of the Merger Directive have been enhanced in favour of the persons concerned, provided that these extensions remained within the framework of the intention of the merger guidelines.

Examples:

The EU provides for the application of the Merger Directive to companies. Since partnerships of natural and/or legal persons constitute a corporation under Cypriot law, the Merger Directive applies to them consequently.

The Cypriot legislation has expanded the applicability of tax-neutral reorganizations of groups of companies to company mergers from outside the EU.

The EU merger guidelines are not only applied to cross-border reorganizations, as provided by the EU Directive, but also to the reorganization of groups of companies within Cyprus.

Furthermore, Merger Directive is not only applied to capital gains tax, as provided by the EU Directive, but also to stamp duty and purchase tax (VAT).

Scope of Applicability

The rules of the EU Merger Directive are applied to mergers, divisions, transfers of assets and exchanges of shares.

Characteristics:

• The transfer of assets and liabilities, including provisions and reserves, does not cause any tax liability for the transferring company.
• Accumulated losses of a corporation may be transferred to the new company.
• If a transfer receiving company is shareholder of the transferring company, no tax liability arises to the receiving company on revenues from this transfer, even if the receiving company will loose its holdings of the transferring company during the reorganization.
• The exchange of shares is not subject to taxation. The value of newly subscribed shares is the same value as the value of the exchanged shares before the reorganization.

 

Cyprus maintains Double Taxation Treaties with the countries on the list below.

Taxes that were paid in a DTT partner country of Cyprus, are booked as a credit on the tax account of the same type of income of the Cypriot company. Any tax obligations of the Cypriot company that arise from the Income Tax Law or the Law on Special Contribution to Defense Tax may be set off against this tax credit.

Cyprus’ Unilateral Warranty:
Should there be no DTT in place between Cyprus and another country, or should the Cypriot company not qualified for the provisions of the EU Parent-Subsidiary Directive, then Cyprus unilaterally guarantees a tax credit for the tax paid in the other state. The tax credit cannot exceed the amount of taxes paid in the other state.

 

List of DTTs of Cyprus.

Withholding tax % *
	Received in Cyprus			Paid from Cyprus **
	Dividends	Interest	Royalties	Dividends	Interest	Royalties
Armenia***	Null	Null	Null	Null	Null	Null
Austria	10	Null	Null	10	Null	Null
Belarus	5	5	5	5	5	5
Belgium	10	10	Null	10	10	Null
Bulgaria	5	7	10	5	7	10
Canada	15	15	10	Null	15	10
China	10	10	10	10	10	10
Czech Republic****	10	10	5	Null	10	5
Denmark	10	10	Null	10	10	Null
Egypt	15	15	10	15	15	10
France	10	10	Null	Null	10	Null
Germany	15	10	Null	Null	10	Null
Greece	25	10	Null	25	10	Null
Hungary	5	10	Null	Null	10	Null
India	10	10	15	10	10	15
Ireland	Null	Null	Null	Null	Null	Null
Italy	15	10	Null	Null	10	Null
Kuwait	10	10	5	Null	10	5
Kyrgyzstan***	Null	Null	Null	Null	Null	Null
Libanon	5	5	Null	5	5	Null
Malta	Null	10	10	15	10	10
Mauritius	Null	Null	Null	Null	Null	Null
Moldova	10	5	5	10	5	5
Norway	5	Null	Null	Null	Null	Null
Poland	10	10	5	10	10	5
Qatar	Null	10/15	5	Null	Null	Null
Romania	10	10	5	10	10	5
Russian Federation	5	Null	Null	5	Null	Null
San Marino	Null	Null	Null	Null	Null	Null
Serbia-Montenegro*****	10	10	10	10	10	10
Seychelles ******	Null	Null	5	Null	Null	5
Singapore	Null	7/10	10	Null	7/10	10
Slovakia****	10	10	5	Null	10	5
Slovenia*****	10	10	10	Null	10	10
South Africa	Null	Null	Null	Null	Null	Null
Sweden	5	10	Null	5	10	Null
Syria	0/15	10	5	0/15	10	10/15
Tadzhikistan***	Null	Null	Null	Null	Null	Null
Thailand	10	10	5	10	10	5
Ukraine***	Null	Null	Null	Null	Null	Null
United Kingdom	15	10	Null	Null	10	Null
USA	5	10	Null	Null	10	Null
Uzbekistan***	Null	Null	Null	Null	Null	Null

Please note that only basic information is provided above. there are important exceptions and special rules in many DTts. You should therefore pay attention to the specific DTT that may apply.

Explanatory notes:

* Only ratified DTTs are listed. A total of 32 DTT s has been ratified, covering 42 States.
** According to Cypriot legislation, dividends paid to nonresident persons are not subject to withholding tax in Cyprus.
*** The DTT between Cyprus and the former Soviet Union applies.
**** The DTT between Cyprus and former Czechoslovakia applies.
***** The DTT between Cyprus and former Yugoslavia applies.
****** Since 1st of January, 2007.