Focus on: Tax in Cyprus

Elias Neocleous & Co LLC

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Overview

The Cyprus tax regime is one of the most attractive in Europe for individuals, investors and businesses.  It offers one of the lowest corporate tax rates (12.5%) and the country can boast of a network of more than 60 double taxation agreements. Cyprus provides an ideal environment for group holding and finance companies, offering tax free flow of dividends through Cyprus and beneficial exit opportunities. There is a full participation exemption and no tax on capital gains apart from gains derived from real estate in Cyprus. The network of double tax agreements provides excellent planning opportunities and unilateral relief is available for taxes paid overseas if no double tax agreement applies. The EC Merger Directive has been fully adopted and therefore mergers and reconstructions can be carried out with full exemption from any form of taxation in Cyprus.

A member of the EU since 2014, Cyprus  bases its tax policy on offering an internationally competitive tax environment that is fully compliant with international best practice and the highest standards of transparency and fairness. The EU Anti-Tax Avoidance Directives ATAD I and ATAD II entered into force in June 2020 and apply retroactively as from 1 January 2020 (except for the reverse hybrids which will be in effect from 1 January 2022). Cyprus was also one of the initial 68 signatories to the Multilateral Convention on Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (‘BEPS’).  New and updated double tax agreements are aligned with the latest OECD standards and, on 21 February 2021, in line with the 5th Anti money Laundering Directive, the process of collecting information for  a UBO register and a Trust register was begun.

Oversight

The tax year runs from 1 January through to 31 December and the Tax Department is the key regulatory authority overseeing both direct and indirect taxation. Its decisions can be challenged by submitting an appeal to the Tax Tribunal, which is an independent body, or to the Administrative Court. The Tax Tribunal is required to reach a conclusion within a year of receiving an application, however there are no set time limits for the Courts to adhere to. A decision of the Administrative Court and the Tax Tribunal may be the subject of an appeal to the Supreme Court.

Since 2014 the Department has undergone significant and much needed modernisation of its infrastructure and procedures.  It is now mandatory for most filings and payments to be made online. Advance tax rulings are available, and taxpayers may, on payment of the prescribed fee (currently at €2,000)  request an expedited ruling, guaranteeing a response within 21 working days provided all the necessary information is supplied.

Residency

Personal

An individual will qualify as tax resident of Cyprus if they fall into one of the following categories:

  1. They are physically present in Cyprus for more than 183 days in the tax year.
  2. For tax years 2017 onwards, during a tax year they maintain a permanent establishment (“PE”) in Cyprus, undertake business or employment in Cyprus which continues until the end of the tax year, and are present in Cyprus for at least 60 days. In this instance, the individual must not be a tax resident of any other country and should not be physically present in any other country for more than 183 days of the tax year in question.

Companies

For companies, residence is based on the locus of effective management and control. Mere registration in Cyprus is not sufficient to establish residence: the key decisions which are necessary for the conduct of the business of the company must be made in Cyprus. The Tax Department’s application form for the issuance of a Tax Residency Certificate, gives an indication of what are the criteria that the Tax Department considers, including the location where the directors’ and shareholders’ meetings are held, where the directors are residents, and where minutes and statutory and other records are kept.

Additionally, the government intends to enact a law in 2021 whereby a Cyprus incorporated company will, by default, be deemed tax resident in Cyprus.

Both resident individuals and resident companies are subject to tax based on their worldwide taxable income. A non- Cyprus tax resident company is taxed on income accrued or derived from a business activity which is carried out through a permanent establishment in Cyprus and on certain income arising from sources in Cyprus. Foreign taxes paid can be credited against the Cyprus corporation tax liability.

Personal Income Tax

Tax is levied on an individual basis with no distinction made for married couples. In general dividends and interest received are not subject to income tax, and there are various deductions available which can be used to reduce a person’s taxable income. The first 19,500 of taxable income received is tax free, thereafter it is taxed as below.

Taxable income in year € Tax rate % Accumulated tax €
19,501 – 28,000 20 1,700
28,001 – 36,300 25 3,775
36,301 – 60,000 30 10,885
>60,000 35 No ceiling

 

Pension Income

Widow or widower pensions originating from Cyprus are subject to a flat rate 20% tax on amounts above €19,500. Pensions from overseas are subject to a flat rate 5% tax on amounts above €3,420.  In both cases the recipient can elect to be taxed under the general rates shown above.

Incentives for foreign workers

High earners

A person not previously tax resident in Cyprus and whose income from employment in Cyprus exceeds €100,000 may gain exemption from income tax for 50% of the first ten years’ income from employment in Cyprus. The exemption is not available to anyone who was resident in Cyprus in any three of the five tax years preceding the year in which the employment in Cyprus began, or to anyone who was resident in Cyprus in the year preceding the year in which the employment began. The exemption is available in respect of any tax year in which income from employment exceeds €100,000, irrespective of whether the income falls below that amount in any year, provided that when the employment started the income exceeded €100,000 and the tax authorities are satisfied that the variations in the annual income are not made for the purpose of obtaining this tax benefit.

Lower paid individuals

Individuals becoming tax-resident and taking up employment in Cyprus are entitled to an annual exemption equal to the lesser of €8,500 or 20% of their income from employment in Cyprus. The exemption commences 1 January following the year of employment, whichever is less, for up to the first five years of residence. The exemption is available for a period of 5 years with the last eligible tax year being 2030.

It is not possible to claim both benefits in one year.

Corporate Income Tax

Tax resident companies, except for shipping companies, are subject to corporate income tax at 12.5% on worldwide taxable income. Group relief is available, and losses may be carried forward for up to five years for offset against future profits.

The following types of income are fully exempt from corporate income tax:

  • Profit from the sale of securities;
  • Dividends;
  • Passive interest earned;
  • Income of any approved pension or provident fund;
  • Profits from a permanent establishment situated entirely outside Cyprus, unless the permanent establishment directly or indirectly engages more than 50% in activities, which lead to investment income and the foreign tax burden is substantially lower than the tax burden in Cyprus;
  • Income of any company formed exclusively for the purpose of promoting art, science or sport, and of certain educational and charitable companies; and
  • Profits earned or dividends paid by a Cyprus shipping company, which owns ships under the Cyprus flag and operates in international waters, for which the tonnage tax scheme is mandatory.

IP Box Regime

Significant tax exemptions can also be obtained by utilizing the  Cyprus ‘Intellectual property box’ (IP Box) regime. The Cyprus IP Box basically provides a tax exemption of up to 80% for expenditure concerning research and development from qualifying intangible assets. Qualifying intangible assets include, amongst other, ‘software programs’ and ‘patents’. The Cyprus IP Box regime is applicable to qualifying persons and includes Cyprus tax resident taxpayers, tax resident permanent establishments of non-tax resident persons as well as foreign permanent establishments that are subject to tax in Cyprus. The Research and Development need not be carried out within Cyprus but can even be outsourced so long as the Research and Development is attached to a Cyprus company that is a tax resident in Cyprus. If a Cyprus IP company is incorporated, a tax exemption can be claimed under the Cyprus IP Box regime, assuming the sum of total research and development costs (‘qualified expenditure’) incurred in any tax year, are wholly and exclusively for the development, improvement or creation of qualifying intangible assets and which costs are directly related to the qualifying intangible assets. The level of tax exemption that is finally granted is subject to the discretion of the Tax Commissioner.

The Merchant Shipping (Fees and Taxing Provisions) Law of 2010 ( the Tonnage Tax Law).

Cyprus operates the only EU approved shipping ‘tonnage tax’ scheme.  This approval has recently been extended to 2029.  Under the scheme, subject to qualification, shipowners, ship managers and charters in qualifying shipping activities have the option to be taxed based on the tonnage of the vessel rather than on income or profit. This offers the owner the advantage of certainty.

Taxes other than income tax

Outside of income tax other taxes for individuals and businesses to be aware of are listed below.  Cyprus does not levy inheritance tax or immoveable property tax.

Value added tax (VAT)

Currently individuals and businesses must register for VAT if their turnover per annum reaches 15,600. Businesses trading in goods with other EU Member States with value more than €130,000 for exports and €55,000 for imports during any calendar year are also obliged to register for VAT and Intrastat. Cyprus’s standard rate of 19% is among the lowest in the EU and reduced rates of 5% and 9% apply to certain goods and services. Companies that do not have trading activities within the EU need not register for VAT but of course they will be unable to recover input tax. Companies receiving taxable services from out of Cyprus are obliged to register for VAT when such services exceed the registration threshold.

Special Defence Contribution (SDC)

SDC is payable on the following categories of income at the following rate:

  • Rents received – 3% of 75% of the gross income.
  • Dividends received – 17%
  • Interest received other than in the course of business – 30%

Individuals who are both resident and domiciled in Cyprus and, Cyprus resident companies are obliged to pay SDC.

Note however,

  • Relief or credit exists for any tax already paid abroad on such income.
  • Dividends received by one resident company from another resident company are exempt.
  • Dividends received by a corporate or individual shareholder from a resident company are exempt.
  • Companies that do not distribute at least 70% of accounting profits after tax within two years of the end of the relevant year will be deemed to have made such a distribution. They will be required to pay 17% SDC on the notional dividend where the ultimate shareholders are domiciled and resident in Cyprus.  Offset is available against any actual distributions that may have been made.

Capital Gains Tax (CGT)

CGT is only imposed on gains made from;

  • The sale of immoveable property in Cyprus, and
  • The sale of shares of unlisted companies directly or indirectly owning immoveable property in Cyprus.

Gains are taxed at 20%. An exemption exists for the sale of property originally purchased on an ‘arm’s length’ basis between 16 July 2015 and 31 December 2016.

Stamp Duty

Stamp duty is payable on contracts relating to property or business in Cyprus. Transactions with a consideration up to €5,000 are exempt as are several categories of document , including documents relating to corporate reorganisations (which are exempt from all forms of taxation) and ship mortgage deeds or other security documents. Where no amount of consideration is specified in the contract, the stamp duty is €34. Where a transaction is evidenced by several documents, stamp duty is payable on the main contract and ancillary documents are charged at a flat rate of €2.

The general rate applied is as follows:

  • Transactions with a consideration more than €5,000 but not exceeding €170,000 – €1.50 for every €1,000 or part thereof,
  • Transactions with a consideration more than €170,000 – €2.00 for every €1,000 or part thereof is payable.

The maximum stamp duty payable on a contract is capped at €20,000.

Social Insurance

Both employer and employee are required to make a Social Insurance contribution equal to 8.3% of the employee’s gross earnings up to an earning ceiling of €57,408 per annum (reviewed annually).  The employer is also required to make a 3.7% contribution to other Social Insurance funds.

Self-employed individuals contribute of 14.6% on income which falls between upper and lower limits that are specific to the nature of the trade undertaken.

General Healthcare System (GHS)

Companies and individuals are required to contribute to the GHS on a variety of income sources as follows:

Employees, Pensioners, Government Officials, 2.65% of gross earned income or pension
Employers 2.9% of all salaries paid by them
Self-employed 4% of gross remuneration
Recipients of rent, interest or dividends 2.65%  of gross income

 

For every natural person, the total maximum annual amount on which contributions will be paid is € 180,000. If the natural person is not a tax resident of Cyprus, he/she will pay contributions only for the income, earnings and pensions that derive from the Republic of Cyprus, excluding dividends and interest. Employer’s contributions are tax deductible.  Employee contributions are deductible within a limit equal to 1/6 of their total income.

Filing and payment requirements

Corporate Income Tax

Each company, including those within a group, must submit an individual tax return.  The return is filed electronically and must be submitted within 15 months of the year end the return relates to. Hence a return for the year ended 31 December 2019 must be submitted by 31 March 2021.  Companies are required to pay provisional tax for a year in two equal instalments on 31 July and 31 December of that year. Any underpayment must be corrected by 1 August in the following year via self-assessment.   If the estimated income declared proves to be less than 75% of the actual final income a fine is levied.  Currently this is set at 10% of the difference between the actual and the estimated amounts of tax payable.

Personal Income Tax

Employees have tax deducted through the PAYE system.

Individuals submit a provisional tax return by 31 July each year.  They are required to pay provisional tax in two equal instalments on 31 July and 31 December in that year. The provisional income estimate may be revised prior to 31 December.  A final return is submitted electronically by 31 July the following year.

This differs for a person required to submit audited financial statements. A physical person is obliged to submit audited financial statements if his/her annual income from trade/business, rents, dividends interest, royalties or income relating to trading goodwill exceeds €70.000.  Such physical person should pay income tax for a specific year by 1 August in the following year and submit a final tax return within 15 months of the year end that the return relates to.

SDC

SDC unless withheld at source is payable in two instalments on 30 June and 31 December in the year that the income is received.

GHS

GHS not withheld at source is payable on dividends, rental income and interest received 30 June and 31 December in the year received.

VAT

VAT returns are prepared quarterly and  must be submitted online by the 10th day of the second month following the end of the quarter.  Ordinarily any payment due must also be made by this deadline.  However, exceptional temporary payment deferrals have been permitted because of the impact of the Covid-19 pandemic.