The corporation tax rate is flat 12.5% for all kind of industries and it is the lowest tax rate within European Union.
In addition, many exceptions are in force which may result in a zero rate of effective tax.
The tax treatment of the major sources of income is as follows:
Under Cyprus tax law the trading income of a company (commercial or manufacturing) is taxed at 12.5%. There is not any official definition in the tax laws about trading income, but trading income is considered to be any income from the activities of the company, main or secondary. Under certain conditions, profits of a permanent establishment abroad are not subject to corporation tax.
According to the law, all expenses incurred wholly and exclusively for the production of the taxable income of the company are deducted from income before arriving at the taxable income. However, some expenses are specifically disallowed. Some of the expenses that are specifically disallowable expenses for tax purposes are:
- Incorporation expenses;
- All expenses related to saloon cars;
- Interest on loans to acquire securities since neither any dividends nor any profits received from the sale of securities are subject to tax. However, expenses for purchase of a subsidiary after 1 January 2012 are allowable expenses (under conditions);
- Mortgage expenses even if the loan is for trading activities;
- Contributions and donations to non-approved charities (donations to approved charities is a deductible expense only with receipts);
- Entertainment expenses above a certain level (1% of revenue capped to €17.086);
- Professional tax;
- Immovable property tax;
- Interest payable or deemed to be payable in relation to the purchase of a private motor vehicle, irrespective of whether it is used in the business or not, or other asset not used in the business. This restriction is lifted after seven (7) years from the date of purchase of the relevant asset;
- Expenditure not supported by invoices and relevant receipts or other supporting documentation as required by the relevant Regulations;
- Wages and Salaries relating to services offered within the tax year on which contribution due to the Social Insurance Office have not been paid in the year in which they were due.
Dividend income, from Cyprus or foreign companies, is not subject to corporation tax for Cyprus companies. However, as it is mentioned in the section entitled “Special Contribution for defence”, dividend income from foreign companies, under special rules, may be subject to defence fund contribution.
There are two kinds of interest in Cyprus that companies may receive namely, active and passive interest.
Active interest is the interest arising out of the ordinary business of the company or of business closely connected to the ordinary business of the company. Active interest is considered trading profit and includes interest earned by:
- Leasing companies;
- Financial companies and institutions (banks etc.);
- Companies considered as the financing vehicles of their group;
- The current accounts of a company.
Active interest is subject only to corporation tax of 12.5%.
Any other interest received by a company is considered to be passive interest. Passive interest includes:
- Interest on the loans provided by the company to its directors and shareholders if the company is not a financial institution;
- Interest earned by bank deposit accounts.
Passive interest is not subject to corporation tax. However, as further explained in the section “Special Contribution for defence”, passive interest is subject to defence fund contribution.
Profits from disposal of securities
Profits arising from the sale of securities are not subject to any taxes in Cyprus. The definition securities includes shares, debentures, bonds, options and all major financial instruments currently traded in international financial markets.
An exception to the rule is the case of sale of shares of a company that directly holds immovable property in Cyprus, which is subject to Capital Gains Tax for the value of immovable property (except if the shares are for listed company).
Rental income from the renting of immovable property, whether in Cyprus or abroad is subject to corporation tax at a rate of 12.5%. The expenses of the rental property are deductible expense for tax purposes.
Tax losses – Group relief
Tax loss incurred during a tax year and cannot be set off against other income are carried forward for a five-year period to be offset against future taxable income. However, losses cannot be carried forward if there is a change in the ownership of the company and significant change in the nature of business within three (3) years from the year in which the loss arose.
Companies that belong to a tax group and have incurred losses that cannot be set off with other income during the current year, may set off their losses against profits of another company that belongs to the same group. However, this may be done only for the year in which the particular loss arose. Where a company has been incorporated by its parent company during the tax year, this company will be deemed to be a member of the group for group relief purposes for that tax year. A group company which is tax resident in another EU country may also surrender current year tax losses to a Cyprus tax resident company, provided such company firstly exhausts all possibilities available to utilise its tax losses in its country of residence or in the country of any intermediary EU holding company.
For tax purposes, a company is deemed to be member of a tax group if:
- it is 75% subsidiary of another company, or
- both the parent and the subsidiary are 75% subsidiaries of a third company.
Tax losses arising from a permanent establishment outside the Republic may be offset against taxable profits of the company arising in the Republic in the same year. However, any subsequent taxable profits from such a permanent establishment are taxable, up to the amount of the tax losses previously offset.
Under Cyprus law, any profits arising out from the transfer of assets and liabilities between companies during a reorganization plan are not subject to any taxes. A reorganization plan includes:
- mergers divisions;
- transfer of activities;
- transfer of assets;
- exchange of shares;
- transfer of registered office.
Transfer pricing is the “Tax treatment of intra group back to back financing transactions”, hereafter “Back to Back Circular”.
The TP studies will be submitted to the Tax Department upon request prepared by a TP expert who possesses sufficient practical experience, competence and technical knowledge to prepare a TP study in accordance with the OECD TP Guidelines, as amended and the provisions of the Cyprus Tax Legislation, as amended.
A company which opts to apply simplification measures (2% margin after tax) because it is functionally reduced as it is purely an intermediary financing entity should only prepare a functional analysis.
The Back to Back Circular applies to both cross-border transactions and domestic transactions between related companies.
The Tax Department may assess the company’s taxable profits on the basis of the available information and at its own discretion in the absence of a TP study.
A TP study should be prepared when an intra group loan is initiated and updated when: (i) new loans are provided or received by the company, or (ii) significant terms of the existing loans change or amended, or (iii) the functional profile of the company changes, or (iv) the market and economic conditions change significantly (if applicable).
The above list is indicative and it is not exhaustive.
The information in this report is for information purposes only. It is not intended to constitute tax, legal or other professional advice, and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances. We accept no responsibility for any errors, omissions or misleading statements in this report, or for any loss which may arise from reliance on materials contained in this report.
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