1
CORPORATE INCOME TAX
1.1
General
Cyprus
resident companies are taxed on their worldwide income at a uniform
taxation rate of 10%. The categories of
income applicable to companies are:
- Business profits;
- Interest and discounts (dividends are listed but exempt);
- Rents, royalties, remunerations or other profits from property; and
- Net consideration in respect of trade goodwill
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.
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% or
ii. the foreign tax burden is not substantially lower than that in Cyprus
(5% or more).
Losses of the PE can be set off against other income in a Cyprus Company,
but recapture rules apply.
1.3 Exemptions
| Type of income | Exemption limit |
| Profit from the sale of securities (see specific section 1.4 below) | Whole amount |
| Dividends | Whole amount |
|
Interest not arising from the
ordinary activities or closely related to the ordinary activities of the company (see notes 1 and 2) |
Whole amount |
|
Profits of a permanent
establishment abroad, under certain conditions (see specific section 1.2 above) |
Whole amount |
Notes:
- All the interest income of Collective Investment Schemes is considered to be arising from the ordinary activities or closely related to the ordinary activities of the Scheme.
- Such interest income is subject to Special Defence Contribution at the rate of 10% (see SDC section below for further details).
1.4 Definition
of security
Inland Revenue has clarified the definition of a security as being the
following:
- Ordinary Shares, Founder's Shares, Preference Shares.
- Options on titles.
- Debentures, Bonds.
- Short positions on titles.
- Futures/ forwards on titles.
- Swaps on titles.
- Depositary receipts on titles such as ADRs and GDRs
- Rights of claim on bonds and debentures without including the rights on the interest of those products.
- Index participations only if they result in titles.
- Repurchase agreements or Repos on titles.
- Participations in companies (Russian OOO and ZAO, USA LLC*, Romania SA and SRL and Bulgarian AD and OOD).
*provided that they are subject to taxation on their profits.
Promissory Notes are not included in definition, however, derivatives are if
you can prove that the underlying is a security. If however there is an
element of interest, then it is taxable in normal way.
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.
1.5 Reorganisations
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. Also, EU Merger
Directive (90/434/EEC) on the common system of taxation was fully incorporated.
As a result, reorganizations, under certain conditions, can be effected without tax consequences, irrespective of including resident and/or non-resident companies.
Reorganisations include:
- Mergers
- Demergers
- Partial divisions
- Transfer of assets
- Exchange of shares
- Transfer of registered office
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:
- 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 partnership or a sole trader transferring business into a company can carry forward tax losses into the company for future utilisation.
- Losses from a permanent establishment abroad can be set off with profits of the company in Cyprus.
- As per recapture rules, subsequent profits of the permanent establishment abroad are taxable up to the amount of losses allowed.
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:
|
|
Tax Rates % |
|
|
ITEM OF INCOME |
Legal entities |
Individuals |
|
Dividend income from Cyprus resident companies |
Nil |
20 |
|
Dividend income from non-Cyprus resident companies |
Nil (note 1) |
20 |
|
Interest income arising from the ordinary activities or closely related to the ordinary activities of the business |
Nil |
Nil |
|
Other interest income |
15 (note 2) |
15 (note 2) |
|
Rental income |
3 (less 25%) |
3 (less 25%) |
Notes:
- Dividend
income from abroad is exempt from defence fund contribution.
This exemption does not apply if:
a) More than 50% of the paying company’s activities result directly or indirectly in investment income, and
b) The foreign tax is significantly lower than the tax burden in Cyprus. The tax authorities have clarified through a circular that “significantly lower” means a tax burden rate below 5%.
When the exemption does not apply, the dividend income is subject to SCD at the rate of 20%. - Interest
income from Cyprus government savings bonds and development bonds and all
interest earned by a provident fund is subject to SCD at the rate 3%
(instead of 15%).
In the case where the total income of an individual (including interest) does not exceed €12.000 in a tax year, then the rate is reduced to 3%.
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.
