TAX RESIDENCY AND LIABILITY
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 makeup 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 taxable income 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 taxable 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).
*The tax rate has been increased to 12.5% from 01/01/2013. From 01/01/2008 until 31/12/2012 the tax rate was 10%.
|Interest Income (not arising from the ordinary activities or closely related to them)||100%|
|Dividends (excluding from 01/01/2016 dividends which are tax deductible for the paying company)||100%|
|Profits from disposal of shares and other securities||100%|
|Profits from permanent establishment abroad under certain conditions||100%|
|Gains arising from foreign exchange differences (excluding foreign exchange differences arising from trading in foreign currencies and related activities)||100%|
In general, expenditure incurred wholly and exclusively for the production of taxable income and supported by documentary evidence are deductible for corporation tax purposes.
Specific expenses allowable for deduction:
Employer’s contributions to provident / pension funds for employees10% on employee’s remuneration
|Interest expense incurred for the direct or indirect acquisition of 100% of the share capital of a subsidiary company is 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. (applies from 1/1/2012)||100%_(if the subsidiary company owns (directly or indirectly) assets not used in the business, the interest expense deduction is restricted to the amount that relates to the assets used in the business.|
|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, plus a 3% premium.||Up to the 80% of the taxable profit derived from assets financed by new equity.|
|Expenditure incurred for the acquisition of shares in an innovative business.||100%|
|Royalty income, embedded income and other qualifying income derived from qualifying intangible assets.||80% of the net profit (Special criteria and conditions exist)|
|Tax amortization of any expenditure of a capital nature for the acquisition or development of intellectual property (IP) (excluding goodwill)||Allocated over the lifetime of the IP (maximum period 20 years)|
|Donations to approved charities.||100%|
|Employer’s contributions to social insurance and approved funds.||100%|
|Employer’s contributions to provident / pension funds for employees||10% on employee’s remuneration|
|Employer’s contributions to medical funds for employees||1% on employee’s remuneration|
|Entertainment expenses for business purposes.||Lower of €17.086 or 1% of gross income|
|Expenditure incurred for the maintenance of a building in respect of which there is in force a Preservation Order.||Up to €1.200 per square meter, depending on the size of the building|
|Capital allowances||Maximum rates ref. 2.5|
Specific expenses disallowable for deduction:
|Private motor vehicle/saloon-type motor vehicle expenses.||The whole amount|
|The allocation of the company’s annual interest expense to the cost of acquisition of a private motor vehicle irrespective of its use and to the cost of acquisition of any other asset not used in the business.||The allocated amount for 7 years|
|Fixed Assets||Allowance %|
|Plant and machinery||10 (Note 1)|
|Furniture and fittings||10|
|Machinery and tools used in an agricultural business||15|
|Computer hardware and operating systems||20|
|Televisions and videos||10|
|Application software (Expenditure on application software less than €1.709, is written off in the year of acquisition)||33 1/3|
|Commercial motor vehicles and motor cycles||20|
|Excavators, tractors, bulldozers, self-propelled loaders and drums for petrol companies||25|
|Industrial, agricultural and hotel buildings||4 (Note 2)|
|Greenhouse structures Wooden / Metallic||3|
|Greenhouse structures Wooden / Metallic||33 1/3 / 10|
|Wind power generators||10|
- For acquisitions during the tax years 2012 – 2018 capital allowances can be claimed at the rate of 20% (excluding such assets which are already eligible for a higher annual tax depreciation rate.
- For acquisitions during the tax years 2012 – 2018 capital allowances can be claimed at the rate of 7%
LOSSES CARRIED FORWARD
The tax loss incurred during a tax year and which cannot be set off against other income, is carried forward, subject to conditions and set off against the profits of the next five years.
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.
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.
A sole trader transferring a business into a company can carry forward tax losses into the company.
Under reorganizations (mergers, demergers, partial divisions, transfer of assets e.t.c.), transfers of assets and liabilities between companies can be effected without tax consequences, and losses can be carried forward to the receiving company.