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10.5. Other Regimes

There are no other regimes, but the Cypriot tax and legal environment has been particularly conducive to international business and structuring.

General

Cyprus offers a competitive taxation regime. There are currently a great number of international business entities registered and operating out of Cyprus. A significant number of these companies have fully fledged offshore offices on the island.

The general aspects of the tax system which contribute to making Cyprus an attractive location for international business and cross-border structuring may be summed up as follows:

  • Profits of Cyprus companies are subject to corporation tax at the rate of 12.5% which is presently one of the lowest tax rates in Europe. However due to various possible exemptions and careful planning, the effective tax rate may be reduced as low as 0%.
  • Profits earned from a permanent establishment (PE) located overseas are fully exempt from corporation tax under certain conditions.
  • Dividend income received in Cyprus from a foreign company is in most cases wholly exempt from corporate tax. Also, an exemption from Defense Contribution will apply unless the Overseas company paying the dividend:
    • engages more than 50% in activities that give rise to Investment Income; and
    • the foreign tax burden on the income of the company paying the dividend is substantially lower than the Cyprus tax burden (this has been interpreted as a tax burden of less than 5%)
  • No withholding tax on dividends, interest and (unless the rights are used in Cyprus) royalties paid to non-residents of Cyprus.  
  • Gains from the disposal of securities (shares, bonds, options etc.) are tax exempt (capital gains are not subject to tax except on sale of immovable property situated in Cyprus or shares in private companies owning immovable property in Cyprus).  
  • Interest income derived from the "ordinary carrying on of a business", including interest "closely connected with the ordinary carrying on of a business" is subject to corporation tax at 12.5%.  
  • Group relief provisions between Cyprus tax resident companies of the same group.  
  • Reorganizations, mergers, acquisitions and amalgamations of companies (including companies which are resident overseas) have no tax implications. A tax ruling is recommended prior to the re-organization.
  • International transactions are usually exempt from stamp duties  
  • Extensive double tax treaty network through which withholding tax rates are minimized.  
  • Unilateral credit relief for tax paid overseas even in the absence of a double tax treaty, in essence a double tax treaty with the rest of the world.  
  • Access to tax benefits provided under EU Directives such as the EU Parent-Subsidiary Directive, EU Interest & Royalties Directive and the EU Merger Directive.  
  • No CFC (controlled foreign company) rules, no thin capitalization or other debt-equity restrictions, and no minimum holding periods in order to be eligible for tax benefits.  
  • Special taxation regimes for shipping and ship management companies  
  • The Cyprus VAT system is in line with the relevant EU Directives.

Business Sectors

The general features of the tax system as listed above have created a thriving environment to the following business sectors in Cyprus:

  • Holding investments overseas.
  • Trading in "securities" (shares, bonds, options etc.).  
  • Finance companies.
  • Real estate companies.  
  • Collecting royalty income from overseas (holding intellectual property).  
  • International trading and re-invoicing companies. .  
  • Consulting companies  
  • Leasing structures.  
  • Employment companies.  
  • Regional headquarter/technical support companies.  
  • Low personal income tax rates.

Cypriot Residency Eligibility and Definitions

  • A company is taxed if it is a resident of Cyprus; it is deemed to be Cypriot if its management and control is on the island. The incorporation of a company of itself in Cyprus is not sufficient to establish residence.  
  • Although the term "management and control" is not defined in the legislation, it is generally understood to mean the place where the board meetings take place or where the majority of the board members reside.  
  • A company which is resident is taxed in Cyprus on its worldwide income.  This includes profit from business activities such as trading, manufacturing, industrial, mining, agricultural, professional or vocational, interest, rentals from immoveable property, royalties and profit from sale of goodwill.  
  • Foreign taxes already paid are credited against Cyprus tax paid on the same income.  
  • A company which is non-resident, will only be taxed on its profits arising from a permanent establishment in Cyprus. The term "permanent establishment" basically includes an office, a branch, a factory or laboratory, a mine, an oilfield, or a construction site for a project exceeding three months. Rental income from immoveable property located in Cyprus and profit from sale of goodwill in Cyprus is also taxable irrespective of the existence of a permanent establishment.

Start-up Companies

Effective 1 January 2017, qualifying investments in innovative and start-up companies are eligible for tax deduction, limited to the lower of 50% of taxable income in a year or EUR 150,000. Any surplus can be carried forward for up to five years. Qualifying investments are to be made directly or through an investment fund.

Qualifying conditions for an invested company include that the company must be operating in Cyprus, has been approved by the Ministry of Finance as an SME, and has spent at least 10% of its operating capital in R&D in at least one of the past three years.