FOCUS ON
COMPANY TAXATION
THE NEED FOR CYPRUS TAX RESIDENCY
Under the general principle, expenses are allowed as a deduction from the taxable profits if they are incurred wholly and exclusively for the production of income, provided that are supported by invoices and receipts, and are not specifically disallowed under the Cyprus Income Tax Law.
A company is tax resident in Cyprus if it is managed and controlled in Cyprus. Several factors should be considered to establish where the management and control of a company is exercised. Such factors are:
- the make up and the residence of the Board of Directors
- the place where major decisions are taken
- the place where the major contracts are signed
- the place where the books and records are maintained and the accounting function is operated
Cyprus tax resident companies are taxed on their worldwide income under the Cyprus tax system and they enjoy the wide network of Double Tax Treaties (DTT) of Cyprus as well as all European Tax Directives.
Non–tax resident companies are taxed on income derived from a business activity which is carried out through a permanent establishment in Cyprus and on certain income arising in Cyprus (double tax treaties and double taxation relief exist).
CAPITAL ALLOWANCES
Under the general principle, expenses are allowed as a deduction from the taxable profits if they are incurred wholly and exclusively for the production of income, provided that are supported by invoices and receipts, and are not specifically disallowed under the Cyprus Income Tax Law.
ANNUAL WEAR AND TEAR ALLOWANCE TABLE
| Buildings | |
|---|---|
| Commercial buildings and apartments | 3% |
| Industrial, agricultural and hotel buildings | 4/7%* |
| Plant and machinery | |
| Machinery | 10/20%* |
| Furniture and fittings | 10/20%* |
| Computer hardware and operating systems | 20% |
| Application software | 33.33% |
| Application software up to €1.708 | 100% |
| Commercial vehicles | 20% |
| Tools | 33.33% |
| Boreholes | 10/20%* |
| Agricultural machinery | 15/20%* |
| Boats | |
| New cargo vessels | 8% |
| New passenger vessels | 6% |
| Sailing vessels | 4.50% |
| Motor launches | 12.50% |
| Used vessels | useful life |
| *For the period 2012 – 2016 | |
THE GENEROUS TAX DEDUCTIONS
GENERAL PRINCIPLE
Under the general principle, expenses are allowed as a deduction from the taxable profits if they are incurred wholly and exclusively for the production of income, provided that are supported by invoices and receipts, and are not specifically disallowed under the Cyprus Income Tax Law.
INTEREST
Interest incurred by a Cypriot company is generally deductible if incurred for the funding of the acquisition of assets used in a business which derive taxable income. In respect of interest incurred for the direct or indirect acquisition of 100% of the share capital of a subsidiary company will be treated as deductible for income tax purposes provided that the 100% subsidiary company does not own (directly or indirectly) any assets that are not used in the business.
NOTIONAL INTEREST DEDUCTION (NID) ON NEW EQUITY INTRODUCED
New equity introduced from 01/01/2015 in the form of paid-up share capital or share premium is eligible for annual Notional Interest Deduction (NID). The annual NID is calculated as an interest rate on the new equity. The interest rate for that calculation is the higher of: 1) The yield on 10 year government bonds as at 31 December of the prior tax year, of the country where the funds are employed plus a 3% premium or 2) The yield on 10 year Cyprus government bond as at 31 December of the prior tax year, of the country where the funds are employed plus a 3% premium.
DEEMED DEDUCTION FOR IP INCOME
Deemed deduction of 80% on the net profits from the exploitation of the intellectual property is allowed. The net profit is calculated after deducting all direct expenses incurred for the production of the income as well as the amortization of capital expenditure over a 5 year period.
OTHER SPECIFIC DEDUCTIONS
Expenses for Business entertainment are allowable whilst being subject to a cap which is the lower of €17.086 or 1% of gross income.
Donations to approved charities are deductible in full.
Employer’s contributions to social insurance and approved funds to employee’s salaries are deductible in full.
CAPITAL ALLOWANCES
Capital allowances on the cost of plant, machinery, buildings and other fixed assets used in the business, are granted as deductions. Capital allowances are granted on the original cost and subsequent expenditure of a capital nature based on the annual rates outlined in the following table:
ADDITIONAL ASPECTS TO CONSIDER
LOSSES
The tax loss incurred during a tax year and which cannot is carried forward and set off against the profits of the next five years.
Losses from a permanent establishment abroad can be set off with profits of the company in Cyprus; however, subsequent profits up to the amount of the loss will be taxable in Cyprus.
GROUP RELIEF
The current year loss of one company can be set off against the profit of another company, subject to conditions, provided the companies are Cyprus tax residents and are both within the same group. (Group is defined as: *One company holding at least 75% of the voting shares of the other company or *Both of the companies are at least 75% (voting shares) held by another third company). As from 1 January 2015 a Cyprus tax resident company may also claim the tax losses of an EU tax resident company, provided both companies are within the same group and the EU tax resident company has exhausted all possibilities available for using its tax losses in its respective country or in the country where its immediate holding company resides.
UNILATERAL TAX CREDIT RELIEF
Relief for taxes paid abroad is given for overseas income that is subject to tax in Cyprus. The relief is given unilaterally irrespective of the existence of a double tax treaty. Where a treaty exists, the treaty provisions apply if more beneficial. The relief shall not exceed the Cyprus Tax Liability for that income.
REORGANIZATIONS
Reorganizations are fully exempt from corporation tax, capital gains tax, stamp duties and property transfer fees. Also, tax losses can be carried forward to the receiving company. A reorganization generally includes a merger, division, transfer of assets and exchange of shares.
FULL ACCESS TO EU TAX DIRECTIVES
The Cyprus Tax Legislation is in line with all EU Directives including the Interest and Loyalty Directive, the Parent – Subsidiary Directive and the Directive on Mergers.
WIDE NETWORK OF DOUBLE TAX TREATIES
Cyprus developed an extensive network of tax treaties, currently with more than 50 countries. Most treaties provide for reduced or nil rates of withholding tax on dividends, interest and royalties paid from the treaty country and the avoidance of taxation in both countries.
NO WITHHOLDING TAXES ON OUTGOING PAYMENTS
Dividends paid to non Cyprus tax resident shareholders (companies or individuals) or to Cyprus tax resident individuals who are not Cyprus Domiciled are exempt from withholding tax in Cyprus. Also, no withholding tax is imposed on interest paid from Cyprus as well as on royalties paid from Cyprus in respect of intellectual property exploited outside Cyprus to any company or individual. The nil withholding tax rates apply irrespective of the country of residence of the recipient or whether a relevant tax treaty exists.
BASIC ADMINISTRATION ISSUES
- Every company must be registered with tax authorities and TAXISnet
- Every company must keep proper book and records
- Every company must submit annual corporate income tax return to tax authorities electronically through TAXISnet. This return should be certified and submitted by a registered auditor or professional tax advisor.
- Companies that have employees must submit on annual basis the employer’s total payroll return
- Income tax is paid under a self-assessment regime. The payment of tax is effected thought the submission of temporary tax return which should be submitted on 31st July of the year in the profits are generated. Estimated income can be revised anytime before the year end. Provisional tax payments must be made on estimated current year income in two installments. When the temporary tax return is submitted and at the year end. A final payment must be made after the year end by self- assessment so as to bring the total installment payments to the level of the actual tax liability due according to the corporate income tax return.