Introduction
With the new tax legislation in force as from 1st of January 2003, Cyprus has maintained and enhanced its competitiveness as an international financial center. It has been critically assessed of constituting an attractive location for holding companies from a tax perspective. This is due to the accession of Cyprus to the European Union and the enactment of the new Cyprus tax legislation which dictates that there is no longer a distinction between local companies and International business companies. This is in accordance with European Union Law and the EU Code of Conduct.
A uniform corporate tax rate, applicable to the worldwide income, is now levied on all resident companies which is the lowest corporate tax rate in the European Union. Thus, Cyprus becomes a stepping stone for investments to and from the European Union and a perfect location for investments to and from Russia, Central and Eastern Europe.
Cyprus combines a low-tax regime with a network of double tax treaties. It has concluded so far 43 double tax treaties which offer effective international tax planning and at the same time reducing the overall taxation for individuals and corporations.
Corporation tax
All companies which are tax resident in Cyprus are taxed on their worldwide income. Non-Cyprus tax resident companies are taxed on the income generated from permanent establishment in Cyprus. A “permanent establishment” is a fixed place of business through which the business of an enterprise is wholly or partly carried on. The term permanent establishment includes a place of management, a branch, an office, a factory and a workshop. According to Article 5 (4) of the Income Tax legislation, non-Cyprus tax resident companies may elect to be treated as Cyprus tax residents.
The test of “tax residency” is whether the relevant company has its management and control in Cyprus. Although there is no exact definition of this term, it has been interpreted that the basic requirements for establishing management and control in Cyprus are the following:
• the residency of the majority directors to be in Cyprus;
• the location where the board meeting of the company are held to be in Cyprus;
• the location of the formation of the general policy of the Company to be in Cyprus.
The law provides for a uniform corporate tax rate of 10%. However, certain exemption apply which are noted below:
• Profits from the disposal of securities are exempt from income tax;
• Dividend income received in Cyprus by a foreign corporation is wholly exempt from tax in Cyprus;
• Further to the amendments of Income Tax Law, 118(I)/2002 in October 2009, the gross amount of interest income received by a Cyprus company, which is not received in the ordinary course of business or in close connection thereto, is totally exempt from income tax (such interest is, however, subject to Special Contribution Tax);
• Profits earned from a permanent establishment abroad are fully exempt from corporation tax if more than 50% of the income of the permanent establishment abroad derives from trading activities and the tax rate applicable overseas is not significantly lower than the tax rate applicable in Cyprus.
Special defense contribution tax
Income
Special defense contribution tax (“SDC”) is imposed on income earned by Cyprus tax residents. Non-tax residents are exempt from such tax.
Dividends
The normal rate of SCT on dividends is 15%.
Prior to the recent amendments to the Special Contribution for the Defense Fund Law 117(I)/2002 in October 2009, if dividend was received by a Cyprus company from another company which was not a tax resident in Cyprus, then the following applies:
(a) The dividend was exempt from SDC provided that the Cyprus company held at least 1% of the share capital of the payer;
(b) The exemption in (a) above did not apply if:
(i) the paying company engaged directly or indirectly more than 50% in activities resulting in investment income and
(ii) the foreign tax of the paying company was substantially lower than the tax rate payable in Cyprus.
Pursuant to the amendments, the provision under (a) above has been abolished and there is no longer a minimum requirement to enable a Cyprus company to enjoy the exemption of the SDC.
Interest income
There is a 10% SDC on interest earned by an individual or a company resident in Cyprus.
Rent
There is a 3% SDC on rents earned by a Cyprus resident following a deduction of 25%.
Deemed dividend distribution
If Cyprus resident company does not distribute a dividend within two year from the end of the tax year, then 70% of accounting profits are deemed to be distributed and 15% SDC is imposed on deemed dividend distribution applicable to shareholders who are residents in Cyprus. This does not apply to shareholders who are not Cyprus residents.
Capital gains tax
Capital gains tax is imposed on gains from the disposal of immovable property situated in Cyprus, including gains from the disposal of shares in companies which own immovable property situated in Cyprus and such shares are not listed in any stock exchange. The tax imposed is 20% on the net profit from the disposal. If the immovable property is not situated in Cyprus, then no capital gains tax applies.