Globalserve – Cyprus Company Formation – бизнес на кипре
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CORPORATION TAX

Tax Basis

A company is tax resident of Cyprus if its management and control is exercised in Cyprus. Some of the most important factors used for deciding the place where the management and control of a company is exercised are the following:

  • the place where the board meetings are held
  • the place where the majority of the board of directors lives
  • the place where the company has its central offices, from where the strategic decisions are taken
  • the place from where the company’s bank accounts are maintained

Cyprus Tax Residents

Companies tax residents of Cyprus are taxed on their whole income accrued or derived from all sources in Cyprus and abroad.

Non – Cyprus Tax Residents

Companies which are not tax residents of Cyprus are taxed on their income accrued or derived from business activities which are carried out through a permanent establishment in Cyprus and/or any other certain type of income arising from sources in Cyprus.

Corporation Tax Rate

The tax rate for companies is 12.5%.

Tax Exemptions  

Type of income                                                                                                           Exemption limit

  • Interest income                                                                                                                      100%

Provided that the interest income arises from activities other than the ordinary activities of the company or closely related to the ordinary activities of the company.

The interest income of Collective Investment Schemes is considered to be arising from the ordinary activities of the Scheme.

  • Dividends                                                                                                                         100%
  • Profits from the sale of securities                                                                                100%
  • Profits of a permanent establishment abroad, under certain circumstances      100%

Tax Deductions

All expenses incurred wholly and exclusively for the generation of the company’s income are tax deductibles (Note 1) including:

Type of expenditure                                                                                                 Deduction limit

  • Interest related to the acquiring of assets used for business purposes                100%
  • Expenses incurred for the maintenance of a building                    Up to €700, €100 or €1.200

in respect of which there is a Preservation                      per square meter (depending on the size

Order                                                                                                                                 of the building)

  • Donations to approved charities (with receipts)                                                         100%
  • Profit from the trading and/or sale of IP rights                                                             80%
  • Employer’s contributions to social insurance and                                                       100%

approved funds on employees’ salaries

Note:

  1. Any wages and salaries relating to services offered within the tax year on which contributions to the Social Insurance Fund, Human Resource Development Fund, Social Cohesion Fund, Pension Fund and Provident Fund have not been paid in the year in which they were due will not be tax deductible for the calculation of taxable income.

In case the above contributions (including penalties and interest) are paid in full within two years after the last due date, such wages and salaries will be tax deductible in the tax year during which they were paid.

Non Deductible Expenses

The following expenses are non tax deductible:

Type of expenditure                                                                                           Limit not deducted

  • Entertainment expenses for business purposes            Excess of 1% of the company’s

gross income or €17.086 (lower of the two)

  • Expenses of a private motor vehicle                                                                            100%
  • Professional tax                                                                                                                 100%
  • Immovable property tax                                                                                                  100%
  • Interest related to the cost of acquiring a private motor vehicle                            100%

irrespective of its use in the business and to the cost of acquiring                       (for 7 years starting from

any other asset not used in the business*                                                                       the acquisition year)

Losses carried forward

Any tax loss incurred during a tax year is carried forward over the next five years from the end of the tax year in which the loss was incurred and set off against future profits.

Set off of losses between Group Companies

The current year losses of a company are permitted to be netted off against the profits of another group company provided the companies are Cyprus tax residents belonging to the same Group for the whole tax year. From year 2012 and onwards, in cases where a company has been set up by its parent company during the year, this company will be deemed to be member of the group for the whole year for group relief (at least 75% shareholding must exist). Group is defined as follows:

  • One company holding at least 75% of the shares of the other company
  • At least 75% of the voting shares of the companies are held by another company

A sole trader or a partnership transferring business into a company can carry forward tax losses into the company for future utilization for five years provided that the sole trader/partnership prepared audited financial statements for the years the losses were incurred.

 

Losses from a permanent establishment abroad

Losses from a permanent establishment abroad can be set off with profits of the company in Cyprus. However, any subsequent profits of the permanent establishment abroad are taxable in Cyprus up to the amount of losses previously allowed.

Tax paid abroad

Any tax paid abroad in respect of income taxed in Cyprus under corporation tax will be allowed as credit against the tax payable on such income irrespective of the existence of a Double Tax Treaty between the countries.

Special Types of Companies

Shipping companies

The new Tonnage Tax System as introduced by the Merchant Shipping Law 44(I) of 2010 provides for exemption from all direct taxes and taxation under tonnage tax regime of qualifying ship owners, charterers and ship managers. This provides operation of qualifying ships (ships with a flag of an EU member state or of a country in the European Economic Area) as well as foreign ships (under conditions), in qualifying activities. The foreign ships can enter the tonnage tax regime provided the fleet is composed by at least 60% community ships. If however this is not met, then non community ships can still qualify if certain criteria are met.

The Tonnage Tax System covers the ship owning activities as well as the ship management and chartering activities. It is compulsory for owners of Cyprus flag ships and optional for owners of non-Cyprus flag ships, charterers and ship managers. However, anyone choose to enter the Tonnage Tax System must remain in this for at least 10 years.

 

Ship owning activities

The exemption applies to:

  • Profits from the use / chartering of the ships.
  • Profits from the disposal of the ships.
  • Profits from the disposal of ship owning companies as well as distribution of these profits.
  • Interest income relating to the working capital of the company.
  • Dividends out of the profits of such activities (at any level of distribution).
  • No income tax is charged on the profits earned or dividends paid by bare boat charterers of vessels flying the Cyprus flag under parallel registration.

Chartering activities

The exemption applies to:

  • Profits from the operation of chartered ships.
  • Interest income relating to the working capital of the company.
  • Dividends out of the profits of such activities (at any level of distribution).

The above exemptions are given provided that the option to register for Tonnage Tax is exercised for all the ships of the fleet and provided that at least 25% of the net tonnage of the vessels owned or bare boat chartered in.

Ship management activities

The exemption applies to:

  • Profits from crew management.
  • Profits from technical management.
  • Interest income relating to the working capital of the company.
  • Dividends out of the profits of such activities (at any level of distribution).

Additionally, ship managers must satisfy the following criteria ii order to qualify as such:

  • At least 2/3 of total tonnage under management must be managed within the community (any excess of 1/3 taxed under corporation tax).
  • At least 51% of all onshore personnel must be community citizens.
  • They must maintain an office in Cyprus with sufficient number of personnel and qualification.

Insurance companies

  •  Profits of insurance companies of the general and life business are taxed in the same way as all other companies. However, in the case of life business insurance companies where there is no tax payable or the tax payable on taxable profits is less than the 1,5% of the gross amount of the insurance premiums then the difference is paid as additional corporation tax.
  • Losses of the general sector can be set off against profits of the life insurance sector.
  • Losses of the life insurance sector can be set off against the profits from other sources.

SPECIAL CONTRIBUTION FOR DEFENCE

Special contribution for defence is charged on income earned by Cyprus tax residents only. Non residents are not subject to the defence contribution.

The rates of defence tax on income are as follows:

  • Dividends                                                                                                                              17%
  • Interest income                                                                                                                    30%
  • Interest received by an individual from Government Savings                                    3%

Certificates

  • Interest received by an individual from Government Bonds                                       3%
  • Interest earned by an approved Provident Fund                                                            3%
  • Rental income (reduced by 25%)                                                                                       3%

Deemed dividend distribution

A company resident in the Republic is deemed to have made a distribution of dividends of 70% of its accounting profits after tax at the end of the two years following the tax year in which the profits relate. A special contribution for defence of 17% is imposed on such deemed dividend distribution applicable to shareholders who are residents of Cyprus (3% on deemed dividend distribution of Collective Investment Schemes).

Deemed distribution is reduced with payments of actual dividends already paid during the two years from the profits of the relevant year. In cases where actual dividends are paid after the two year period, any deemed distribution reduces the actual dividend on which the defence contribution is withheld.

In the case of a non tax resident shareholder receiving dividend from a company tax resident in Cyprus deriving out of profits which were at any stage suffered with deemed distribution, any defence contribution paid thereon may be claimed back by the non resident shareholders upon receipt of actual dividends.

In the case of a company disposing of an asset to an individual shareholder or a relative of his up to second degree relationship or his spouse for a consideration less than its market value or at no consideration, the difference of the market value and the consideration value will be deemed to have been distributed as a dividend to the shareholder and defence tax will be payable thereon. The provision, does not apply for assets originally donated to the company by an individual shareholder or a relative of his up to second degree relationship or his spouse.

Company dissolution

In the case of a company dissolution, the aggregate amount of profits arising in the last five years prior to the dissolution, which have not been distributed or be deemed to be distributed, are considered as distributed on dissolution and are subject to defence contribution at the rate of 17% (3% for Collective Investment Schemes).

However, the above does not apply in the case of dissolutions under reorganization schemes as this are defined by certain regulations. Also, it does not apply where the shareholders of the company being dissolved are non-residents in Cyprus.

Reduction of capital

In the case of a reduction in the company’s capital, any amount due or paid to the company’s shareholders in excess of the amounts originally paid by the shareholders, is considered as distributable dividends and is subject to special contribution for defence at the rate of 17% (after deducting any amounts which have been deemed as distributable profits and defence tax thereon has been paid).

Tax paid abroad

Any tax paid abroad in respect of income taxed in Cyprus under special contribution for defence tax will be allowed as credit against the defence tax payable on such income irrespective of the existence of a Double Tax Treaty between the countries.

INCOME TAX

Individuals

Tax Basis

An individual is tax resident of Cyprus if he/she remains in the Republic for a period exceeding 183 days in a tax year.

Where an individual is a tax resident in the Republic, tax is imposed on income accruing or arising from sources all over the world (both within and outside the Republic).

Where an individual is not a tax resident in the Republic, tax is imposed on income accruing or arising only from sources within the Republic.

The tax rates for individuals are the following:

Taxable income Tax rate Tax Cumulative amount of tax
%
0 – 19.500
19.501 – 28.000 20 1.700 1.700
28.001 – 36.300 25 2.075 3.775
36.301 – 60.000 30 7.110 10.885
Over 60.000 35    

In the case of company director or an individual shareholder, or his/her spouse, or any relative up to second degree, receiving a loan or financial assistance (cash withdrawal) from the company, then that person is deemed to have obtained a monthly benefit in kind in equal to 9% p.a. on the above facility. This amount will be included in the individual’s income subject to Income Tax in accordance with Income Tax Law.

Exemptions

The following are exempted from income tax:

  • 20% of any remuneration from employment exercised in the Republic by an individual whose residence was outside the Republic before the commencement of the employment or €8.550 whichever the lower is. The exemption is applicable for 3 years from the 1st of January of the year following the year of the commencement of the employment.
  • 100% of any remuneration earned from the rendering of salaried services outside the Republic to a non-resident employer or to a permanent establishment outside the Republic of a resident employer for a total aggregate period in the year of more than 90 days.
  • Cyprus for the purpose of being employed by a Cyprus employer and whose annual income from employment exceeds €100.000 per annum. The exemption is given for 5 years starting from the year of commencement of the employment in Cyprus.
  • 100% of profits from a permanent establishment abroad (under certain conditions).
  • 100% of any dividend income.
  • 100% of any profits arising from the sale of securities.
  • 100% of any interest income.
  • 100% of any lump sum received by way of retiring gratuity or commutation.
  • 100% of any lump sum repayment received from approved provident funds or from life insurance schemes.
  • 100% of widow pensions received from approved pension schemes.
  • 100% of life insurance repayments or amounts received from approved provident funds.
  • 100% of the rental income from preserved buildings (under certain conditions).

Deductions

The following are deducted from an individual’s income:

  • 100% of any interest related to the acquisition of fixed assets used in the business.
  • 20% of any gross rental income as a compensation for any expenses incurred for the letting of buildings.
  • 100% of subscriptions paid to trade unions or professional bodies.
  • 100% of donations to approved charitable organizations (accompanied with the receipts).
  • 100% of special contribution paid
  • 100% of capital allowances on fixed assets used for business purposes.
  • 80% of the profit from the trading and/or sale of IP rights.

 

Non-deductible expenses

The following expenses are not deductible from an individual’s income:

  • 100% of professional tax.
  • 100% of immovable property tax.
  • 100% of interest payable* or deemed to be payable in relation to the acquisition of a private motor vehicle, irrespective of whether is used for business purposes or not. This restriction applies for a period of 7 years from the date of purchase of the motor vehicle.
  • 100% of private motor vehicle expenses.
  • Any amount of business entertainment expenses in excess of 1% of the gross income or €17.086, whichever is the lower.

*From 1 January 2012, interest payable is deductible in cases where shares are acquired directly or indirectly in a wholly owned subsidiary provided the subsidiary does not own any assets which are not used for business purposes.

Personal allowances

The following allowances are deducted from an individual’s taxable income:

  • 100% of the social insurance contributions as well as contributions to approved Provident Fund schemes and pension funds, contributions to medical or other approved funds provided that
  • the whole amount does not exceed the 1/6 of the taxable income before this allowance is deducted
  • 100% of insurance premiums in respect of life insurances
  • the annual premiums are restricted to 7% of the insured amount
  •  in the event of cancellation of life insurance contracts within 6 years from the date it was entered into, part of the life insurance premiums already given as an allowance will be taxable as follows:
  • cancellation within 3 years                                                      30%
  • cancellation between 4 to 6 years                                         20%

Losses carried forward

Any tax loss incurred during a tax year is carried forward over the next five years from the end of the tax year in which the loss was incurred and set off against future profits.

Individuals who can claim such losses are those who have an obligation to prepare audited financial statements, therefore they are considered to be the individuals with turnover in excess of €70.000.

Tax credit for foreign tax paid

Any tax paid abroad in respect of income taxed in Cyprus under income tax will be allowed as credit against the tax payable on such income in Cyprus irrespective of the existence of a Double Tax Treaty between the countries.

CAPITAL GAINS TAX

Capital gains tax is charged on profits arising from the disposal of immovable property situated in Cyprus, including the profit arising from the disposal of shares in companies not listed on a recognized Stock Exchange which own immovable property situated in the Republic.

The capital gains tax rate is 20%.

Τhe capital gain arising on a disposal is calculated as the difference between the sale proceeds and the value of the immovable property as at 1 January 1980 (or cost if the date of acquisition is later), the cost of any additions after 1 January 1980 or the date of acquisition if later, any expenditure incurred for the production of the gain and the indexation allowance.

Expenses not considered as expenses incurred wholly and exclusively for the production of the profit are not deductible in the capital gain calculation. Such expenses are the following:

  1. Immovable Property Tax
  2. Immovable Property Fees
  3. Sewerage Council Fees

Exemptions

The following disposals of immovable property are exempted from capital gains tax:

  • transfers arising on death
  • gifts between parents and children, between spouses and between relatives up to third degree
  • gifts by a family company to its shareholders provided that the company had also acquired the property by way of gift and given that the property will remain in the shareholders’ ownership for at least 3 years
  • gifts to a company whose shareholders are members of the donor’s family and continue to be members for a period of 5 years from the date of the gift
  • gifts to any approved charitable organizations or to the Republic
  • exchange or disposal of immovable property under the Agricultural Land Laws
  • exchange of property, provided that the profit is used for the acquisition of the new property. In this case the profit that is not taxable is used to reduce the cost of the new property acquired and the tax is paid when the latter is disposed
  • expropriations
  • transfer of assets/shares of non-listed companies, which own immovable property, in the case of company’s reorganization
  • transfer of property of a missing person under administration
  • transfer of ownership as settlement by court decision i.e. between ex spouses, in accordance with the Settlement of Property Relationships Law

Deductions

Individuals are entitled to the following lifetime deductions in respect of capital gains tax:

  • Disposal of main residence (subject to conditions)                                                 85.430
  • Disposal of agricultural land by a farmer                                                                   25.629
  • Other disposals                                                                                                                17.086

The above deductions are given only once to each individual. However, no individual can claim all three deductions but can only claim one of these deductions whichever is the higher.

IMMOVABLE PROPERTY TAX

Immovable property tax is imposed on the market value of immovable property as at 1 January 1980. It is calculated on the value of the immovable property as at 1 January of each year.

The rates applying for the calculation of the immovable property tax are the following:

Value of property Tax rate
%ο
1 – 12.500
1 – 40.000 (*) 6%o
40.001-120.000 8%o
120.001 – 170.000 9%o
170.001 – 300.000 11%o
300.001 – 500.000 13%o
500.001-800.000 15%o
800.001-3.000.000 17%o
Over 3.000.000 19%o

* For immovable property value over 12.500, the immovable property tax is calculated on the total value of the property.

Exemptions

The following properties are exempted from immovable property tax:

  • public cemeteries, churches and other religious buildings
  • public schools, hospitals and other buildings owned by the Government as well as foreign embassies and consulates
  • buildings of charitable organizations
  • buildings under a preservation order subject to conditions
  • agricultural land used for agriculture used by a farmer
  • property of a missing person under administration
  • immovable property situated in inaccessible or depressed areas

TRANSFER FEES

Transfer fees are paid on transfers of immovable property and are calculated on the market value of the property as estimated by the Land Registry Department. The transfer fees rates are as follows:

Market Value               Percentage     Fees     Cumulative

 €                                              %                 €                             €

0 – 85.430                               3               2.563                     2.563

85.431 – 170.860                   5               4.272                      6.835

170.861 and over                  8

Transfer fees applying in special occasions:

  • Transfer fees paid on the transfer of property to a family company are refunded in five years provided the company still owns the property and there have not been any changes to the company’s shareholders.
  • On the transfer of immovable property from a family company to its shareholders as well as on transfers by donation between spouses, spouses and children or relatives up to third degree relationship, transfer fees are calculated on the estimated value of property appearing on the title deed at the following rates:

Transfer to spouse           0,4%

Transfer to children         0,2%

Transfer to relative         0,4%

  • Transfers of immovable property by a company to another company for the purpose of company reorganization are exempted from transfer fees.

Transfer fees applying for the period 02/12/2011 – 31/12/2016

  •  Exemption from transfer fees if the transfer relates to a transaction that is subject to VAT.
  • In case a transaction is not subject to VAT, there is an exemption of 50% of the transfer fees. However, for the 50% allowance to be given the transaction must relate to transfers of plots of land, buildings or interests in land or indivisible interests that are sold for the first time from the date of issue of the relevant building permit and the relevant contract is prepared and submitted for the first time to the local District Land Registry within the time period the relevant law applies.

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