Scope of Corporation Tax
imposes corporation tax on 'companies': this term includes
all companies incorporated or registered under any Cyprus
law, and any foreign company which carries on business
or has an office or place of business (permanent establishment)
establishment" has the same meaning as defined in the
OECD Model Tax Convention on Income and on Capital with
the exemption of "a building site or construction or
installation project", which constitutes a permanent
establishment only if it lasts more than three months.
July, 2002, as part of the Income Tax Act No. 118(I)
of 2002, Parliament approved a uniform 10% corporate
tax rate, to apply to both onshore and offshore companies,
plus a 2% levy on wage bills (meant to subsidise pensioners),
and a 'Special Contribution' related to defence which
in effect applies the 10% corporate tax rate to inter-company
dividend and interest payments. However, the rules are
complex. The tax rules were improved for collective
investment schemes in 2009 (see below).
10% corporate tax gives Cyprus one of the the lowest
rates in the EU, alongside Ireland (12.5%), with the
exception of the Isle of Man, Jersey and Guernsey, which
have all introduced a nil rate for non-financial services
firms (and 10% for financial services firms) - but these
islands are not in the EU anyway for most purposes.
additional tax of 5% was imposed on company profits
exceeding CYP1m for the years 2003 and 2004.
June 2010, a proposal was considered by the Cypriot
parliament for a temporary 1% increase in the rate of
corporate tax for the tax years 2010 and 2011, but was
rejected in the following month.
from 2003, Cyprus applied a residence-based taxation
regime: "Resident in the Republic", when applied to
a company, means a company whose management and control
is exercised in the Republic; and "non-resident or resident
outside the Republic" will be construed accordingly.
profits from activities of a permanent establishment
situated outside Cyprus are completely exempt. This
exemption will not apply to a Cyprus company if: (i)
its foreign permanent establishment directly or indirectly
engages in more than fifty per cent (50%) of its activities
in producing investment income, and (ii) the foreign
tax burden is substantially lower than that in Cyprus.
are exempted from tax; however, provisions have been
introduced under the Special Contribution for the Defence
of the Republic Law, 2002 ("Special Contribution").
2009, the The Cyprus Income Tax Law N.118(I)/2002 was
amended to clarify that interest income earned by a
collective investment scheme (CIS) is subject only to
income tax (less any allowable expenses) and exempt
from the Special Defence Contribution. This amendment
was made in a bid to attract more investments schemes
to set up and operate from Cyprus and to improve taxation
for companies holding interests in Cypriot and non-Cypriot
In addition, the changes mean that the redemption of
a unitholding in a collective investment scheme will
not be considered as a reduction in capital under the
Special Defence Law, therefore there will be no tax
obligations on the distribution arising from the redemption.
the Special Contribution for Defence Law was amended
in order to abolish the minimum participation requirement
of 1% when it relates to dividends received from abroad
by a Cyprus tax resident company. This makes it easier
for portfolio investors to benefit from the dividend
result of the amendment is that interest earned by a
Cypriot company is now reduced to a maximum rate of
10% in all cases, whereas prior to the change, interest
income could be taxed at 15%. The amendment was approved
by parliament on October 22, 2009 and came into immediate
force. It is enforceable from January 1, 2009.
Law of Offshore
for a fuller description of Cypriot investment law.
Savings Tax Directive
the EU finally agreed its Tax Directive in June, 2003,
the Commission said it intended to give the ten states
acceding at that time, of which Cyprus was one, until
2007 to implement the Directive, which included a 'Code
of Conduct' on 'harmful tax practices' and rules to
avoid the double taxation of royalty and interest payments.
a statement released by the Cypriot Ministry of Finance
said that Cyprus would adopt the new code in full from
2005. The royalties and company interest directive was
in place from January 2004, according to the ministry,
which pointed out that it was already compliant with
the Code of Conduct rules as a result of its recent
with other member states of the EU, Cyprus introduced
an exchange of information regime applying to the returns
on savings under the Savings Tax Directive as from 1st
was rated by a recent KPMG poll as the most attractive
tax regime in Europe (with the net attractiveness score
of 90%), followed by Ireland, Switzerland and Malta.
Levy on Banks
April 14, 2011, legislation was enacted to introduce
a special bank levy in Cyprus under which financial
institutions operating in Cyprus will be required to
pay 0.095% on the total amount of deposits held at the
end of each calendar year, up to a maximum of 20% of
banks' total taxable profits. Interbank deposits and
deposits held by foreign financial institutions are
excluded from the levy. However, subsidiaries and branches
of foreign banks are included within the law.
half of the revenues raised by the levy for the years
2011 and 2012 will be transferred to a special 'stability
fund' to help underpin the future stability of the island's
financial system. The rest will be treated as general
government revenue, but from 2013 all money raised by
the levy will be transferred to the stability fund.
institutions will be required to declare their taxable
deposits by March 31 each year and pay the levy on a
quarterly basis on the last day of March, June, September
and December. Banks which are found to have passed the
cost of the levy on to their customers face paying a
levy is not deductible for income tax purposes, but
reduces the amount of profits subject to deemed distribution.
levy is effective from the date that the law is published
in the Cypriot government's official gazette and regulations
regarding the operation of the stability fund must be
published within six months, beyond which banks will
be entitled to claim compensation from the government.
recent developments in Cyprus tax law include the following:
from April 1, 2011, all tax returns submitted by companies
and self-employed individuals with an annual turnover
of more than EUR70,000 must be accompanied by a Tax
Confirmation that is prepared and signed by an independent
tax advisor or auditor. This requirement follows the
issue by the Commissioner of Income Taxes of Circular
2011/1 on February 15, 2011. In addition, all tax
returns submitted by companies and self-employed individuals
with a turnover exceeding EUR70,000 for the 2010 and
subsequent tax years must submit their tax returns
April 2010, the Cypriot government announced a fiscal
stability plan designed to put government finances
back on a sustainable path, and gear the economy towards
recovery. The plan increases the value-added tax rate
on previously zero-rated goods, namely pharmaceuticals
and certain food items, to 5% in 2011. The standard
rate of VAT in Cyprus is 15%. The fiscal plan will
also step up the fight against tax evasion.
part of new austerity measures approved by parliament
in late August 2011, companies will be required to
pay a new annual fee of EUR350. However, proposals
to increase the rate of VAT to 17% were dropped from
the package of measures, which are designed to narrow
the budget deficit.
Branch or Subsidiary?
tax rates are the same, but the calculation of the taxable
base is different:
expenses are allowable in both cases
rules may be applied differently in the two cases
profits may be remitted to head office free of withholding
tax; corporate dividends are also now exempt from
on intercompany loans is generally deductible for
a company, but not for a branch.
Calculation of Taxable Base
expenditure needs to be incurred 'wholly and exclusively'
for the business; however, mixed private/company expenses
can often be apportioned. Among others, the following
expenses are allowable:
but not improvements, alterations or additions
to an approved fund
debts and provisions for them
scientific research expenditure
on patents or patent rights
types of charitable expenditure
on loans, other than for those used to acquire shares
and other compensation costs for employees and directors
are valued using FIFO
and tear allowances on prescribed scales which replace
depreciation in the tax calculation
allowances which are available for certain activities
are some restrictions on the use of losses from one
trade to offset profits from another. Unrelieved losses
can normally be carried forward to offset future profits,
but from 1996 they have only a 5-year life. Group relief
is available but with limitations.
of income from interest derived by a company is exempt
from corporate tax but the whole interest received or
credited will be subject to the new provisions of the
Special Contribution. Interest derived from ordinary
trading activities will only be subject to the Income
Tax Law provisions without any exceptions.
Group Relief rules, now enacted, provide for group relief
of tax losses among companies of the same group. A company
will be considered as member of a group if:
company is at least 75% subsidiary of the other, or
companies are at least 75% subsidiaries of a third
company will be considered to be 75% subsidiary of another
company if and so long as not less than 75% of its ordinary
share capital with voting rights are owned directly
or indirectly by that other company and that other company
is entitled to not less than 75 per cent of:
profits available for distribution to the equity shareholders,
assets of the subsidiary company which would be available
for distribution to its equity holders on a winding
tax losses may be set off as long as both companies
are Cypriot tax residents and are members of the same
group during the whole year of assessment.
the loss of any year of assessment of a company can
be set off against the other company's profits of the
corresponding year of assessment. Losses brought forward
will not be available for Group Relief.
payment for acquiring the tax losses will not be taken
into account in the tax computation nor will it be considered
to be a dividend or an allowable expense.
from the sale of shares, bonds, debentures and other
titles of companies established anywhere in the world
are exempt from tax.
Filing Requirements and Payment of Tax
tax returns must be filed in respect of each fiscal
(calendar) year by 31st December in the year following
the fiscal year, together with balance sheet and profit
and loss account, auditor's report, income tax and Defence
Tax computation and additional information report.
operates, and corporation tax payments have to be made
on 1st August, 30th September and 31st December of the
year of assessment. Fines apply to late or materially
Cyprus Withholding Tax
royalties arising from the use of an asset outside Cyprus
and interest payments to non-residents are now exempt
from withholding tax. Other types of payment to non-residents
are subject to withholding tax at 10%, although if the
payment is in respect of a right outside Cyprus, there
is no withholding. The rate of withholding for film
royalties earned by a non-resident is 5%.