Cyprus: Corporate Tax Comparative Guide

Last Updated: 22 August 2019
Article by Charles Savva
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1 Basic framework

1.1 Is there a single tax regime or is the regime multi-level (eg, federal, state, city)?

The tax regime of Cyprus is determined by the central government. Tax is imposed based mainly on the following legislation:

  • the Income Tax Law of 2002 (118(I)/2002), as amended;
  • the Special Defence Contribution Law of 2002 (117(I)/2002); and
  • the Capital Gains Tax Law of 1980 (52/1980).

1.2 What taxes (and rates) apply to corporate entities which are tax resident in your jurisdiction?

An entity is tax resident in Cyprus if it is managed and controlled within Cyprus.

All Cyprus tax resident entities are subject to income tax at a rate of 12.5% on income earned or accrued from all chargeable sources.

Cyprus tax resident entities are also subject to the special defence contribution (SDC), which applies to certain types of ‘passive' income. Specifically, SDC is levied at a rate of 30% on passive interest income, 3% on 75% of rental income and 17% on dividend income, where more than 50% of the paying company's profits were generated from investment income and where the foreign tax burden on those profits was lower than 6.25%.

Furthermore, a Cyprus tax resident company is deemed to distribute dividends of at least 70% of its post-tax profits (subject to some adjustments) within two years of the end of the tax year to which the profits relate. The deemed dividend distribution is reduced by any actual dividends distributed within this two-year period. With regard to the remaining deemed dividend distribution, SDC is charged at a rate of 17% to the extent that the shareholders (directly or indirectly) are Cyprus tax resident and domiciled individuals.

Non-tax resident entities are subject to income tax in Cyprus on income from any business exercised through a permanent establishment in Cyprus and on certain income from sources within Cyprus (eg, rental income from property located in Cyprus or profits from the disposal of real estate in Cyprus).

Lastly, any profits arising from the direct or indirect disposal of immovable property located in Cyprus are subject to capital gains tax at a rate of 20%, irrespective of the tax residency status of the seller.

1.3 Is taxation based on revenue, profits, specific trade income, deemed profits or some other tax base?

Income tax is levied on an annual basis at a rate of 12.5% on the entity's net taxable profits.

1.4 Is there a different treatment based on the nature of the taxable income (eg, gains on assets as opposed to trading income or dividend income)?

While a single income tax rate (12.5%) is applied to the net taxable profits, various types of income are exempt from income tax, such as the following:

  • dividend income;
  • interest income;
  • profits from the sale of securities;
  • profits arising from foreign exchange differences (assuming that these are not generated from trading in foreign currencies); and
  • profits attributable to a foreign permanent establishment.

1.5 Is the regime a worldwide or territorial regime, or a mixture?

Tax resident entities are subject to income tax on their worldwide income. Non-tax resident entities are subject to income tax on Cyprus-source income.

1.6 Can losses be utilised and/or carried forward for tax purposes, and must these all be intra-jurisdiction (ie, foreign losses cannot be utilised domestically and vice versa)?

Tax losses can be carried forward for up to five years.

Utilisation of intra-group current year losses (subject to a 75% holding threshold) is possible; since 2015, this has also been extended to cover losses from group companies located in other EU member states.

1.7 Is there a concept of beneficial ownership of taxable income or is it only the named or legal owner of the income that is taxed?

The concept of beneficial ownership of taxable income does not apply.

1.8 Do the rates change depending on the income or balance-sheet size of the taxpayer?

No, a single 12.5% tax rate applies irrespective of the size of the income or assets of the taxpayer.

1.9 Are entities other than companies subject to corporate taxes (eg, partnerships or trusts)?

Other types of entities which are deemed transparent for tax purposes, such as partnerships and trusts, are not subject to tax in Cyprus. Their taxable profits are subject to tax at the level of the partners/beneficiaries, which will therefore depend on the location of tax residency of the partners/beneficiaries.

2 Special regimes

2.1 What special regimes exist (eg, for fund entities, enterprise zones, free trade zones, investment in particular sectors such as oil and gas or other natural resources, shipping, insurance, securitisation, real estate or intellectual property)?

Insurers: The taxable profits of insurers are subject to the standard income tax rules and rates. However, if the corporate tax liability is less than 1.5% of the gross premiums, the difference is paid as an additional tax.

Intellectual property: 80% of the net profits (calculated using the modified nexus fraction) earned from the exploitation of intellectual property is exempt from tax, subject to conditions and to the eligibility of the intangible assets.

Shipping: Entities which operate in the shipping industry (eg, shipowners, ship managers, charterers) may elect (this is mandatory in some cases) to be exempt from all direct taxes and instead be subject to the tonnage tax regime.

Funds: Funds which are managed and controlled from Cyprus and which have a legal form which is not tax transparent (eg, companies) are subject to tax based on the normal tax rules and rates.

Gambling: Companies regulated by the National Betting Authority are also subject to gaming tax, which is applied at a rate of 13% of net gaming revenue.

2.2 Is relief available for corporate reorganisations or intra-group transfers of companies and other assets? Please include details of any participation regime.

The transfer of assets or liabilities through a qualifying corporate reorganisation is exempt from tax, subject to conditions.

2.3 Can a taxpayer elect for alternative taxation regimes (eg, different ways to calculate the taxable base, such as revenue-based versus profits based or cash basis versus accounts basis)?

No, taxation is applied uniformly to net taxable profits, unless the taxpayer falls under one of the special regimes mentioned in question 2.1.

2.4 What are the rules for taxing corporates with different functional or reporting currency from that of the jurisdiction in which they are resident?

For entities with a functional or reporting currency other than the euro, their net taxable profits must be converted into euros.

2.5 How are intangibles taxed?

80% of the net profits (calculated using the modified nexus fraction) earned from the exploitation of intellectual property is exempt from tax, subject to conditions and to the eligibility of the intangible assets.

2.6 Are corporate-level deductions available for contributions to pensions?

Yes, employers' contributions to approved pension schemes constitute tax-deductible expenses.

2.7 Are taxpayers from different sectors (eg, banking) subject to different or additional taxes or surtaxes?

As mentioned in question 2.1, different (or additional) taxes may apply to taxpayers in the insurance and shipping sectors, among others.

2.8 Are there other surtaxes (eg, solidarity surtax, education tax, corporate net wealth tax, remittance tax)?

No other surtaxes are applied to tax resident entities.

2.9 Are there any deemed deductions against corporate tax for equity?

Yes, a notional interest deduction is available for any new equity (ie, equity introduced after 1 January 2015) which is used to generate taxable income. The amount of the notional interest deduction cannot exceed 80% of the taxable income of the entity before applying the deduction.

The notional interest deduction is calculated as the higher of:

  • the return on the 10-year government bond of Cyprus as at 31 December of the previous year, plus a margin of 3%; or
  • the return on the 10-year government bond of the country in which the equity was invested as at 31 December of the previous year, plus a margin of 3%.

3 Investment in capital assets

3.1 How is investment in capital assets treated – does tax treatment follow the accounts (eg, depreciation) or are there specific rules about the write-off for tax purposes of investment in capital assets?

Tax depreciation (ie, wear and tear allowances) may be offset against an entity's taxable income. Tax depreciation is applied to the acquisition cost of the asset at a rate which depends on the type of asset.

3.2 Are there research and development credits or other tax incentives for investment?

The tax incentives available for research and development fall within the general exemption from taxation of profits generated from the exploitation of intellectual property.

In addition, other incentives are introduced from time to time, the latest being incentives for film production studios to undertake filming in Cyprus. Subject to conditions, various tax credits and benefits are available for production company under this scheme.

3.3 Are inventories subject to special tax or valuation rules?

There are no special tax rules for inventories. Their valuation for tax purposes follows the valuation in accordance with International Financial Reporting Standards.

3.4 Are derivatives subject to any specific tax rules?

No, the tax treatment of derivatives will depend on the underlying asset of the derivative.

4 Cross-border treatment

4.1 On what basis are non-resident corporate entities subject to tax in your jurisdiction?

Non-tax resident entities are subject to income tax in Cyprus on income from any business exercised through a permanent establishment in Cyprus and on certain income from sources within Cyprus (eg, rental income from property located in Cyprus or profits from the disposal of real estate in Cyprus).

4.2 What withholding or excise taxes apply to payments by corporate taxpayers to non-residents?

In general, Cyprus applies no withholding taxes on payments to non-residents, with the exception of income derived by non-residents from activities such as performances by public entertainers, technical assistance, oil and gas activities and film projections in Cyprus.

4.3 Do double or multilateral tax treaties override domestic tax treatments?

Yes, double or multilateral tax treaties override domestic tax treatments.

4.4 In the absence of treaties, is there unilateral relief or credits for foreign taxes?

Yes – in the absence of a treaty, Cyprus provides for a unilateral tax credit for any foreign taxes paid.

4.5 Do inbound corporate entities obtain a step-up in asset basis for tax purposes?

No.

4.6 Are there exit taxes (for disposed-of assets or companies changing residence)?

Currently there are no exit taxes for outbound entities. However, the full implementation of the EU Anti-Tax Avoidance Directive (expected by 1 January 2020) will introduce exit taxes.

5 Anti-avoidance

5.1 Are there anti-avoidance rules applicable to corporate taxpayers – if so, are these case law (jurisprudence) or statutory, or both?

While Cyprus has incorporated various anti-abuse rules into its tax laws, the general anti-avoidance rules are set out in the Income Tax Law as a result of the partial implementation of the EU Anti-Tax Avoidance Directive (expected to be fully implemented by 2020).

5.2 What are the main ‘general purpose' anti-avoidance rules or regimes, based on either statute or cases?

The General Anti-Abuse Rules (GAAR), which are applicable as from 1 January 2019, state that transactions which are not carried out for valid commercial reasons will give rise to tax liabilities, which will be calculated in accordance with the Income Tax Law.

5.3 What are the major anti-avoidance tax rules (eg, controlled foreign companies, transfer pricing (including thin capitalisation), anti-hybrid rules, limitations on losses or interest deductions)?

Apart from the GAAR, the following specific rules apply:

  • Interest deductibility: The deductibility of interest expenses is limited to 30% of taxable income before interest, tax, depreciation and amortisation, subject to conditions; and
  • Controlled foreign company rules – the undistributed profits of a controlled foreign company (if a Cyprus company directly or indirectly controls 50% of the foreign entity and the foreign entity is located in a low-tax jurisdiction) which arise from non-genuine arrangements are added to the Cyprus tax resident's tax base.

Upon full implementation of the EU Anti-Tax Avoidance Directive (expected to be fully implemented by 2020), Cyprus will also introduce the required exit taxation and hybrid mismatch provisions.

5.4 Is a ruling process available for specific corporate tax issues or desired domestic or cross-border tax treatments?

Yes, tax rulings may be obtained from the Cyprus Tax Department.

5.5 Is there a transfer pricing regime?

In accordance with Article 33 of the Income Tax Law, all related-party transactions should be carried out at arm's length. As from 1 July 2017, the Cyprus tax authorities introduced, via a tax circular, specific transfer pricing rules which currently apply only to intra-group financing transactions – that is, where the Cyprus resident entity obtains loans (irrespective of the source) and advances these loans to a related party. In such cases, the profit margin earned by the Cyprus resident entity should be supported by a transfer pricing study.

The rules allow entities which have a purely intermediary function to avoid conducting a transfer pricing study if their post-tax return is at least 2% of the value of the assets.

It is expected that the transfer pricing rules will be extended to cover all related-party transactions by 2020.

5.6 Are there statutory limitation periods?

The statutory limitation period is six years.

6 Compliance

6.1 What are the deadlines for filing company tax returns and paying the relevant tax?

The deadline for filing the corporate tax return (Form IR4) is 12 months after the year end. However, since the introduction of electronic filing of tax returns, this deadline has been extended to 15 months after the year end.

Cyprus tax resident entities must submit and pay their temporary tax estimation in two equal instalments by 31 July and 31 December each year. A 10% additional tax is imposed on the difference between the final tax liability and the temporary tax paid if the temporary tax paid is less than 75% of the final tax liability. The final tax liability must be settled by 1 August of the year following the tax year.

Any delayed payments or submissions of tax returns/declarations give rise to additional penalties and interest.

6.2 What penalties exist for non-compliance, at corporate and executive level?

The Assessment and Collections of Taxes Law imposes a wide array of penalties for non-compliance with tax obligations.

6.3 Is there a regime for reporting information at an international or other supranational level (eg, country-by-country reporting)?

As a full member state of the European Union, Cyprus participates in all required exchange of information initiatives. In addition, Cyprus participates in the Organisation for Economic Co-operation and Development's country-by-country reporting and automatic exchange of information systems.

7 Consolidation

7.1 Is tax consolidation permitted, on either a tax liability or payment basis, or both?

No, tax consolidation is not permitted. However, group loss relief provisions are available, as discussed in question 1.5.

8 Indirect taxes

8.1 What indirect taxes (eg, goods or service tax, consumption tax, broadcasting tax, value added tax, excise tax) could a corporate taxpayer be exposed to?

The main indirect tax is value added tax (VAT), which is currently set at 19%. Other than VAT, stamp duty may be applicable on the execution of certain documents in Cyprus.

8.2 Are transfer or other taxes due in relation to the transfer of interests in corporate entities?

In general, the transfer of interests in corporate entities should not give rise to taxes (some exceptions apply if the entity holds immovable property in Cyprus).

9 Trends and predictions

9.1 How would you describe the current tax landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

The Cypriot tax landscape is evolving and following current international trends, but at the same time the country remains one of the most favourable onshore international business jurisdictions. Within the next 12 months, full implementation of the EU Anti-Tax Avoidance Directive is expected, which will introduce exit taxation and rules relating to hybrid mismatches. In addition, it is expected that the transfer pricing rules will be extended to capture all related-party transactions.

10 Tips and traps

10.1 What are your top tips for navigating the tax regime and what potential sticking points would you highlight?

Although the Cyprus tax regime is fairly straightforward, one should seek advice from industry experts early on in order to avoid potential pitfalls in the future. In particular, extra care should be taken with the value added tax rules and regulations, which are quite comprehensive and complicated, and which change frequently.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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