Corporate Tax in Cyprus

ASAP GlobalTax AdvisorsCorporate Tax in Cyprus

Companies’ taxation depends on their residential status. A company is considered to be a Tax Resident if it’s managed and control is in Cyprus.  While the tax law doesn’t give a definition about managed and control, it’s generally accepted that it’s the place where board of decisions are taken and where the directors reside.

Tax Resident companies are subject to tax based on their worldwide income, while non-Tax Residents companies are liable to tax based only on the income earned in Cyprus.

Below are the corporation tax rates that are applied in Cyprus:

 Profits (€)

Rates (%)

Semi- government organizations

25

Other companies

12.5

Tax exceptions

  • Dividends received. The entire amount.

  • Profits from disposal of securities. The entire amount.

  • Profits from permanent establishments abroad under certain conditions.The entire amount.

  • Interest derived not from the ordinary activities of the company. 50% of the amount.
  •  

    Tax Deductions

  • Donations to approved charities. The entire amount.

  • Employer’s contributions to social insurance and approved funds.   The entire amount.

  • Expenses incurred wholly and exclusively in earning the income of the company. The entire amount.

  • Expenditure incurred for the maintenance of a building for which there has to be either a Preservations order or certificate by the Minister of Interior that the expenses are in respect of preservation work for restoring the building. The amount that can be deducted depends from the size of the building and can be €340 or €510 or €600 per square meter.

  • Entertainment expenses for business purposes. The amount can be no more than 1% of the total turnover (sales) and moreover maximum amount for deduction is €17.100.

  • Bad debts incurred. The entire amount.
  •  

    The following expenses can not be deducted from companies income:

  • Expenses for a private saloon vehicle (i.e. petrol, maintenance) including the saloon car.

  • Interest incurred for the acquisition of a capital investment for the first 7 years.

  • General Bad debt provisions and doubtful debt provisions are not allowable.
  • Taxable losses

    Taxable losses acquired throughout a year of assessment, which can not be set off against other income of the same year, are carried forward for an indefinite period and set off against future profits. This provision is valid for all loses acquired from the year 1997 forward.

    A partnership or an individual trader transferring business into a company can carry forward tax losses into the company and balance it with future profits.

    Losses from a permanent establishment abroad can be offset with profits of the company in Cyprus.

    Group relief

    If two companies are members of the same group for the whole year of assessment and also are both Cyprus Tax Residents, subsequently the taxable losses of one company can be set off against the taxable profits of the other company. A company is considered to be in a group of companies when

  • Is holding the 75% of the voting rights of the other company.

  • Both companies are 75% owned by a third company or individual.
  • Reorganizations

    Transfers of assets and liabilities between companies under the provision of reorganization can be tax free.

    Reorganizations are defined as mergers or de-mergers of companies, transfer of activities and exchange of shares. Any reorganization plan must be approved by the Cyprus Taxation authorities.

    Special Contribution for Defense

    Individuals and Companies that are Cyprus Tax Residents are subject to special contribution for Defense in contrast of non Tax Residents that are except from the contribution.

    The rates for the special Defense are as follows

    Type of income

    Individuals %

    Companies %

    Dividends from Company resident in Cyprus

    20

    NIL(Note1)

    Dividends from overseas companies

    20

    NIL or 20% (Note 2)

    Interest derived in the normal course of business of the company (considered to be profit)

    NIL

    NIL

    Interest received

    10 (note 3)

    10

    Profit of semi-governmental

    N/A

    3

    Rent received (less 25%)

    3

    3

    Interest from Government saving, Certificates, Government bonds, Approved provident funds

    3

    N/A

     
     
    Notes

  • Dividends received from companies before the 31stDecember 2002, which according to the law that was forced at that time it was net 20% withholding tax, and not distributed as dividends up to 31stDecember 2002, can be distributed within six years from the date of their receipt without any further tax deduction.

  • Dividend income from abroad is exempt from defense fund contribution as long as the company that is receiving the dividend holds at least 1% of the share capital of the company paying the dividend. The exception does not affect if the company paying the dividend engage directly or indirectly more than 50% of its activities that give rise to an investment income and the foreign tax is under 5%.

  • For individuals the rate is reduced to 3% if the total income including interest income is not exceed the amount of €11.960.21 in a year of assessment. Interest income from savings and development bonds of the Cyprus government and all interest earned by a provident fund is subject to special contribution for defense at 3%
  • Deemed dividend distribution

    If a Cyprus resident company does not distribute a dividend within two years from the end of assessment year then:

    70% of accounting profits after adjustments, are deemed to have been distributed

    15% special contribution for defense is imposed on deemed dividend distribution applicable to shareholders who are residents and not to Companies or non tax residents of Cyprus.

    Deemed distribution is reduced with payments of actual dividends, which have already been paid during the two years following the year in which the profits relate to.

    When an actual dividend is paid after the deemed dividend distribution, then special contribution for defense is imposed only on the additional dividend paid.

    The deemed dividend distribution applies to accounting profits starting from the year 2003 onwards.

    In the case of interest and dividends received gross any defense due is payable at the end of following month from the one in which they were received.

    International business companies electing to be taxed at the rate of 4.25% for the years 2003, 2004 and 2005 will not be subject to defense fund contributions on any income arising on the three year transitional period.

    Foreign taxes paid can be credited against the defense tax liability.

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