Basis of Taxation

The taxation of companies is based on residence. A company is resident of Cyprus if it is managed and controlled in Cyprus. Registration or incorporation in Cyprus is not sufficient to render a company liable to tax in Cyprus.

All companies that are tax resident in Cyprus are taxed on their worldwide income accrued or arising from sources both within and outside Cyprus. Non-resident companies are taxed in Cyprus only on income derived from a permanent establishment in Cyprus or immovable property situated in Cyprus.

Corporate Tax Rate

A uniform 12,5% corporate tax rate is applicable to the worldwide income of all Cyprus tax-resident companies. This is one of the lowest corporate tax rates in the European Union

Tax Exemptions

Dividend Income

Dividend income from overseas sources is exempted from corporation tax. It is also exempted from special defense contribution (at 20%) unless:

More than 50 % of the paying company’s activities result directly or indirectly in investment income; AND
The foreign tax is significantly lower than the tax burden in Cyprus. Per Cyprus tax authorities ‘significantly lower’ means a tax burden below 5%
When exemption does not apply, the dividend income is subject to 20% special defense contribution however tax credit for taxes paid abroad is available. Interest Income

When interest income arises from the company’s ordinary activities or is closely connected to those ordinary activities, it is subject to corporate tax at 12,5% in the same manner as any “active” trading income. Where interest income is not arising from the ordinary activities or it is not closely connected to those ordinary activities, is considered to be “passive” and is subject to both corporation and special defense tax.

“Passive” Interest income will be subject to special defense contribution tax at 30% on the whole amount of the interest received. Group finance interest income is considered as trading income.

Profits from the sale of Securities/titles

The gain arising on transactions with securities is fully exempted from corporation tax. The only exemption is in relation to gains on shares in non-listed companies, which own immovable property situated in Cyprus. In these cases a capital gains tax at the rate of 20% applies.

Profits from a Permanent Establishment abroad are exempted from corporate tax. The exemption does not apply if:

The permanent establishment directly or indirectly engages in more than 50% in activities that result in investment income; and
The foreign tax burden is substantially lower than the tax burden in Cyprus.

Expense Deductibility

The general rule is that expenses incurred wholly and exclusively for the production of income are allowed as a tax deduction.

Group Relief

There is a group relief available of tax losses between Cyprus tax-resident Companies (members of the same 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
Losses brought forward are not available for Group Relief.

A partnership or a sole trader transferring business into a company can carry forward tax losses into the company for future utilization. /p>

Losses carried forward (restriction of five years)

As from 2013 onwards a restriction of five years (following the year in which such losses were incurred) is imposed on the tax losses to be carried forward and be offset against future taxable income. Previously there was no such time limitation.

Reorganizations

There are tax exemptions available on the transfer of assets (including shares) under a reorganization (merger / de-merger / transfer of assets etc). Tax losses can be carried forward by the receiving company under certain condition

Cyprus Branches of Companies

With the accession of Cyprus in the EU, double taxation relief is available to all Cyprus branches, of companies resident in other European Union member states Dividend Distributions by Cyprus Companies.

Dividends paid to non-resident shareholders are exempted from withholding tax. Cyprus does not impose withholding taxes on payments of dividends, interest and royalties (provided the intellectual property rights are not used in Cyprus) to non-resident recipients.

Double tax treaties

A comprehensive network of double taxation treaties has been integral to Cyprus’s success as a financial center. It has concluded tax treaties with more than 40 countries, and treaties are under negotiation, or awaiting ratification, with half as many more.

Most of the Treaties follow the OECD model and their objective is that of reducing or eliminating the double taxation payments imposed by the Contracting states on cross border transactions. This is beneficial for trading and investment activities with other countries through Cyprus. Foreign investors have the opportunity to facilitate investments and trading through Cyprus, with a country that Cyprus has a treaty with, allowing for a reduction or elimination of the withholding taxes