1. CORPORATE INCOME TAX
Cyprus resident companies are taxed on their worldwide income at a uniform taxation rate of 12,5%, among the lowest in the EU. The categories of income applicable to Cyprus companies are:
The net results of these categories are aggregated to form taxable income. There is no explicit general rule in the law providing how income is to be determined. However, if no taxation rule provides otherwise, tax accounting follows legal accounting based on International Financial Reporting Standards (IFRS).
Taxable income is computed by aggregating income from all categories for the tax year and reducing this figure by allowable expenses incurred in the production of income and by any losses carried forward or surrendered by other group companies (group relief). The net figure is subject to corporation tax.
1.2 Permanent Establishment
Profits from activities of a permanent establishment (PE) situated outside Cyprus are exempt from Income Tax provided that;
i. passive income < 50%; and
ii. the foreign tax burden is not substantially lower than that in Cyprus (6,25% or less).
Losses of the PE can be set off against other income in a Cyprus Company, but recapture rules apply.
1.4 Definition of Security
Inland Revenue has clarified the definition of a security as including the following:
*provided that they are subject to taxation on their profits.
It should be noted that the taxpayer can retroactively apply the above definition to 01/01/03 if an annual tax return (IR4) has not been previously submitted.
Transfers of assets and liabilities between companies can be effected without tax consequences within the framework of a reorganisation and tax losses can be carried forward by the receiving entity.
Corporate reorganization provisions were introduced in the Income Tax Law of 2003. Furthermore the EU Merger Directive (90/434/EEC) on the common system of taxation has been fully incorporated.
As a result, reorganizations, under certain conditions, can be effected without tax consequences, irrespective of including resident and/or non-resident companies.
1.6 Tax Losses
Tax losses from the year 1997 and onwards can be carried forward without any restrictions.
Tax losses incurred from business carried abroad will be allowed as a deduction from profits accrued or arising in Cyprus during the same year only.
“Ring fencing” of losses between different trades within a company is not permitted.
Any loss is set off against income from other sources for the same year if a corresponding positive amount would be a taxable profit or gain under the Income Tax Law. Insofar as a loss exceeds the income of that year, the loss is carried forward and set off against the income of subsequent years without any time limit.
No carry-back is available.
In the case of any change of ownership in the shares of a company and a substantial change in the business of the company within any 3-year period the right to carry forward losses is lost. The same applies, when a company's activities have diminished and, before any substantial improvement, there is a change in the ownership of shares.
1.7 Group Loss Relief
The current year loss of one company can be set off against the profit of another provided the companies are Cyprus tax resident companies of a group.
A group is defined as:
2. SPECIAL CONTRIBUTION FOR DEFENCE TAX
SCD is imposed on income earned by Cyprus tax residents. Non-tax residents are exempt from SCD. It is charged at the rates shown in the table below, and applied to gross amounts received:
Special contribution for defence on rental income is payable in 6 monthly intervals on 30 June and 31 December each year. In the case of interest and dividends received gross any defence due is payable at the end of the month following the month in which they were received.
Foreign taxes paid can also be credited against the defence tax liability.
3. UNILATERAL TAX CREDIT RELIEF
Irrespective of the existence of a Double Tax Treaty, tax credit is granted in Cyprus for any tax paid abroad. Such tax can be credited against both Income Tax and Special Defense Contribution.