Advantages of Cyprus tax system
'Ideal holding company location in the EU'
'Fully compliance with the EU and OECD'
'Lowest tax rate in the EU at 12.5%'
'Extensive Double Tax Treaty network'
'Dividend income is fully exempt'
'No withholding tax on dividend payments'
'No Capital Gains Tax on the disposal of assets and shares'
'Group relief provisions are available'
Head of Corporate & Administration
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Cyprus Tax Facts
Cyprus offers possibly the most attractive tax system in Europe as well as one of the most appealing and simple systems in the world. The country provides an effective and transparent tax regime that is fully compliant with EU laws and regulations. In addition, the Organisation for Economic Cooperation and Development (OECD) includes Cyprus on its “white list” as one of the 45 countries that have introduced and implemented the highest of internationally agreed standards on harmful tax practices.
A brief outline of Cyprus’ tax framework:
Corporation tax: flat rate of 12.5%
Exemptions from tax for companies:
Complete exemption on dividend income in almost all instances;
On trading profits of foreign branches of Cypriot companies;
Unconditional capital gains exemption on gains /profits from the disposal of shares regardless of holding period or shareholding percentage as well as bonds and debentures and many other securities;
No tax on capital gains from the sale of immovable property outside Cyprus;
Deemed deduction of 80% on the net income derived from intellectual property (see relevant section further below).
No withholding tax at all times on:
Dividends paid to non-resident shareholders;
Interest and most royalties paid from Cyprus;
Capital gains and income on the disposal of either the shares of the subsidiary’s share capital or the share of the Cypriot holding company;
No exit taxes on the liquidation or capital reductions of a Cypriot holding company.
In line with its efforts to continuously improve the investment environment and make it even more attractive, the Government of the Republic of Cyprus has recently announced a series of additional taxation incentives aiming at promoting growth:
The provision for an increased 25% discount on taxable income payable by employers for each additional employee hired;
100% tax deduction until 2016 on capital expenditure related to innovation, research, information, communications and renewable energy;
The extension until 2016 of the increased tax deduction, with a minimum 20%, on capital expenditure on other assets.
Double Taxation Treaties
In addition to the above, Cyprus has an extensive and constantly growing network of attractive Double Taxation Treaties (DTTs), which supports the overall tax system and forms a significant part of the overall system’s attractiveness. The objective of the DTTs is to ensure that the same income is not taxed in more than one country, which provides for reduced or nil withholding taxes on dividends, interest and royalty flows between the countries. Furthermore, these agreements allow the tax payable in the other country involved to be treated as credit against tax payable in Cyprus. Therefore, the item of income is charged to tax only once or/is not subject to taxation twice. At the moment the ratified treaties in place are 46 while a number of others are under negotiation.
Armenia, Austria, Belarus, Belgium, Bulgaria, Canada, China, Czech Republic, Denmark, Egypt, Finland*, France, Germany, Greece, Hungary, India, Ireland, Italy, Kuwait, Kyrgyzstan, Lebanon, Malta, Mauritius, Moldova, Montenegro, Norway, Poland, Portugal*, Qatar, Romania, Russia, San Marino, Serbia, Seychelles, Singapore, Slovakia, Slovenia, South Africa, Sweden, Syria, Tajikistan, Thailand, Ukraine, U.A.E., United Kingdom and the United States of America.
* Effective January 1st, 2014
Income Tax of Individuals
Cyprus offers one of the lowest income tax regimes in Europe with taxation of individuals ranging from 5% to a maximum of 35%. An individual tax resident of Cyprus is an individual who resides in the republic for more than 183 days in a calendar year. Cyprus tax residents are taxed on income earned both in Cyprus and abroad, whereas nontax residents are taxed on certain income earned from Cyprus sources only.
The following tax provisions apply to individuals:
50% of salaried income from first employment in Cyprus in the first ten years if annual remuneration exceeds €100,000;
Alternatively, 20% of salaried income from first employment in Cyprus in the first three years with a maximum deduction of €8,550;
No tax on profits of a permanent establishment abroad and on salary earned abroad (90-day rule), under certain conditions;
No tax on profits gained from the sale of securities such as shares, bonds, debentures etc.;
Lump sums received in the form of retirement gratuity, compensation for death or injuries, provident fund, pension fund or other approved funds are exempt from tax;
No inheritance tax.
Cyprus international trusts are widely used as a vehicle for international tax planning, offering the following tax advantages:
Income and gains of a Cyprus international trust are exempt from any Cyprus taxes;
Dividends, interest or other income received by a Cyprus international trust are also not subject to any Cyprus taxes;
No capital gains tax is charged on the disposal of assets of a Cyprus international trust;
No withholding tax on distributions made by a Cyprus international trust to beneficiaries or indeed any other parties;
Exemption from taxation in the case of an alien who creates an international trust in Cyprus and retires in Cyprus under certain conditions.
Intellectual Property Tax
Cyprus seeks to promote Research, Development and Innovation, in line with EU strategy. Tax law provisions introduced in 2012 provide for generous exemptions from tax of income related to IP under certain conditions. More specifically:
80% of any income generated from IP owned by Cyprus resident companies (net of any direct expenses) is exempt from income tax,
80% of profit generated from disposals of IP owned by Cyprus resident companies (net of any direct expenses) is exempt from income tax, and,
any expenditure of a capital nature for the acquisition or development of IP may be claimed as a deduction in the tax year in which it was incurred and the immediate four following years.
Consequently, the Cyprus effective tax rate on IP related incomes and gains are below 2.5%.
Diclaimer: The above is intented to provide a brief guide only. It is essential that appropriate professional advice is obtained. XpertAdvice will be glad to assist you in this respect. Please do not hesitate to contact us.