All companies tax resident in Cyprus are taxed at 12.5% from 1st of January 2013 on their income accrued or derived from all sources both in Cyprus and abroad. A company is tax resident in Cyprus if it is managed and controlled from Cyprus.
The following types of income are exempt for taxation purposes:
Losses Carried Forward
- Profits from trading in securities
- Dividend income
- Interest not arising from the ordinary activities or closely related to the ordinary activities of the company
Tax losses of one year which cannot be set off against other income may be carried forward and set off against future profits up to 5 years. Alternatively, the current year losses of a company can be set off against the profits of another company provided that the companies are tax resident in Cyprus and are part of a group. A group is defined as:
- One company holding at least 75% of the shares of another company
- At least 75% of the voting shares of both companies are held by another company
Assets and liabilities may be transferred without tax consequences within a reorganisation structure and tax losses can then be carried forward by the receiving company. Reorganisations include mergers; demergers; transfer of assets and partial divisions.
Special Defence Contribution
Special contribution for defence is in some cases imposed on income earned by Cyprus tax residents. Non-tax residents are exempt from special defence contribution.
Deemed Dividend Distribution
- Dividend income received from Cyprus resident companies is not subject to special defence contribution
- Dividend income received from abroad is exempt from special defence contribution
- The exemption will not apply if 50% of the activities of the company paying the dividend result directly or indirectly from investment income and the foreign tax are significantly lower clarified by the tax authorities to mean below 6.25% than the tax burden in Cyprus. Where the exemption does not apply, the dividend income will be subject to special defence contribution at 17% for the year 2014 onwards
- Interest income arising from the ordinary activities of the Cyprus resident company or closely related to the ordinary activities will be exempt from special defence contribution
- Other interest is subject to 30% special defence contribution from 29 April 2013
If a Cyprus resident company does not distribute dividends within two years from the end of the tax year in which the profits were generated, then:
- 70% of the adjusted accounting profits are deemed to have been distributed
- 17% for the year 2014 onwards special defence contribution is imposed on the deemed dividend distribution applicable to Cyprus resident shareholders
- Deemed dividend distribution is reduced with payments of actual dividends which have already been paid during the relevant year or paid during the two following years from the profit of the relevant year
In case the Cyprus Company is ultimately wholly owned by non-resident individuals, defence contribution provisions will not apply.
Capital Gains Tax
Gains from the disposal of immovable property situated in Cyprus including gains from the disposal of shares in companies which hold such immovable property in Cyprus will incur a capital gains tax at the rate of 20%.
On certain types of documents, there may be stamp duty payable at the rate of 0.15% for the first € 170.860 and 0.2% thereafter, subject to a cap of €17.086.
Cyprus International Trusts are not subject to tax in Cyprus.
This provision means:
- All income of a Cyprus International Trust, whether trading or otherwise, is not taxable
- Dividend, interest and other income received by a Cyprus International Trust from a Cyprus company is not taxable nor subject to withholding tax
- Gains on the disposal of assets held by a Cyprus International Trust are not subject to capital gains tax
Where a Cyprus shipping company owns ships under the Cyprus or a foreign flag and operates in international waters, no income tax will be payable on profits earned or dividends paid.
Double Taxation Treaties
Cyprus has a network of 45 Double Taxation Treaties with countries across the globe. In the case where tax is paid in the treaty partner’s country, this is allowed as a credit against the tax payable in Cyprus for the same income.
Value Added Tax
Value Added Tax (VAT) is imposed on the provision of goods and services in Cyprus, on the acquisition of goods from the European Union and on the importation of goods into Cyprus. The standard rate of VAT is 19% from 31/01/2014.