Taxation

A Complete Guide on Cyprus Tax Regime

The Republic of Cyprus is an island that is a member state of the European Union (EU). Cyprus has one of the most attractive tax structures across the globe. The tax legislation of Cyprus is drafted in consonance with the European Union Laws and Directives as well as the Organization for Economic Cooperation and Development (OECD). It is one of the least tax misery states. It offers a corporate tax rate of 12.5% which again is one of the lowest among the EU Member states and a standard VAT Rate of 19%. It has Double Tax Treaties with more than 60 countries. Apart from these Cyprus Tax Regime provides several other benefits in the form of tax exemptions.

Cyprus Tax Regime: Individuals

A resident of Cyprus is taxed on the income accruing or arising from within and outside the Cyprus island. A non-resident’s income is taxed in Cyprus if it accrues or arises in Cyprus. Cyprus Tax Regime provides that a person who stays in Cyprus for more than 183 days is considered a tax resident. It further provides that a person can be a tax resident of Cyprus even if he stays for less than 183 days if he satisfies all the following conditions:

1. Doesn’t spend more than 183 days in any other country;
2. Stays at least 60 days in Cyprus
3. Is not a resident of any other country for tax;
4. Has a permanent home in Cyprus that is either owned or rented;
5. Either carries on business or is employed in or holds an office in Cyprus at any time during the tax year. However, if the employment/business or office is terminated during the tax year the residency of the person would cease to exist for that tax year.  A tax year is the same as a calendar year in Cyprus.

For calculating the days of presence, the following conditions have to be considered:

1. The day of arrival in Cyprus is counted as a day in Cyprus.
2. The day of departure from Cyprus is not counted as a day in Cyprus.
3. If the day of arrival and day of departure in Cyprus are on the same date then it will be counted as a day in Cyprus however;
4. If the day of departure and the day of return to Cyprus is on the same date it is not counted as a day in Cyprus.

Cyprus Tax Regime: Companies

For a resident company, tax is imposed on the global income of the company whereas, for a non-resident company, only the income which accrues or arises in Cyprus will be taxed in Cyprus. The rate at which a company is taxed is 12.5%. Tax residency^[1] of a company arises if the company is managed and controlled from Cyprus or if it is incorporated or registered in Cyprus. However, a company incorporated in Cyprus must not be a resident of any other country only then it will be considered a tax resident of Cyprus.

Special Modes of Taxation

Some incomes are taxed differently under the Cyprus Tax Regime. They are discussed below:

• Income of Insurance Companies

Generally, insurance companies are taxed in the same manner as other companies however, when there is no tax payable or when the tax payable on taxable income of a life business is less than 1.5% of the GPIs or Gross Insurance Premiums, then the insurance company has to pay the difference as the additional tax.

• Pension income arising from services rendered abroad

Any pension income of a resident of Cyprus arising from services rendered in any other country is taxed at a rate of 5% if the amount exceeds €3.40 per annum. Further, the taxpayer is granted the right to choose whether to be taxed under the special mode of taxation or as per the personal income tax rates. If the taxpayer chooses the latter, then the pension income is added to the individual’s taxable income.

• Widow’s Pension

The pension received by a widow from the Social Insurance Fund or any other approved pension fund is taxed at 20% if the amount exceeds €19.500. However, if the taxpayer chooses to be taxed as per the personal income tax rates then the pension income is added to the individual’s taxable income.

• Income from Intellectual Property

The gross income arising from intellectual property, other exploitation rights, compensation, or other similar income arising from sources within Cyprus of a non-resident in Cyprus and arising from a permanent establishment in Cyprus is subject to a 10% withholding tax. This rate of tax is applicable unless the tax treaty provides for a lower tax rate. However, withholding tax does not apply to royalties received by a connected company registered in EU member states.  Additionally, if any rights are granted for use of intellectual property outside Cyprus are also not subjected to withholding tax.

• Film royalties

The gross income of a non-resident person arising from film projection in Cyprus is subject to a 5% withholding tax unless a lower tax rate is provided in the tax treaty.

• Profits of professionals, entertainers, etc

When a non-resident of Cyprus involved in any profession or vocation or the remuneration paid to public entertainers non-resident of Cyprus and the gross receipts of any theatrical or musical or any group of public entertainers comprising football clubs and athletic works from abroad derives any income in Cyprus then the gross income of such person is subject to a 10% withholding tax. This 10% withholding tax rate is applicable only if the tax treaty provides for a lower tax rate.

• Income from Oil & Gas related activities

If a non-resident derives an income in Cyprus from extraction, exploration, or exploitation of the continental shelf, sub-soil, or natural resources or by installation & exploitation of pipelines & other installations on the ground, seabed, or above the surface of the seabed then the person is subjected to 5% withholding tax. This 5% withholding tax is applicable only if the tax treaty does not provide for a lower tax rate.

• Income from technical assistance

When a non-resident in Cyprus provides technical assistance, the gross income of the non-resident arising in Cyprus is subjected to a 10% withholding tax. However, if the service is provided by a permanent establishment in Cyprus then it is exempt from withholding tax.

• Payment of tax withheld

Any tax of a non-resident of Cyprus if withheld should be paid to the Tax Department by the end of the succeeding month. In case of late payment, interest, and penalties are imposed.

Capital Gains Tax

 Under the Cyprus Tax Regime, Capital Gains Tax is imposed on the following:

1. Gain arising from the disposal or sale of immovable property situated in Cyprus.
2. Gain arising from disposal or sale of shares of a company that is not listed on a recognized stock exchange and owns immovable property situated in Cyprus.
3. Gain arising from the disposal of shares of a company that indirectly owns immovable property situated in Cyprus and derives at least 50% of its market value from such immovable property.

The computation of capital gain is done in a manner where the following are deducted from the sale proceeds:

• The value of the immovable property as of 1^st January 1980 or the cost of the date of acquisition is later
• The cost of any additions made post 1^st January 1980/the date of acquisition if later
• The expenditure incurred wholly & exclusively for the production of gains such as transfer fee, real estate agent commission, and interest expense.

Value Added Tax

Under the Cyprus Tax Regime, Value Added Tax (VAT) is the tax imposed on the supply of goods and services, on the acquisition of goods from other member states, and when importing goods from a third country. A Standard rate of 19% applies to the supply of goods and services in Cyprus. Apart from the standard rate, there are two reduced rates I.e. 9% and 5%, and one zero rate I.e. 0% tax rate. Those individuals or entities who are not established in Cyprus or are not a resident of Cyprus but are engaged in taxable activities in Cyprus are obligated to register for VAT purposes.

Double Tax Treaties

The Cyprus Tax Regime provides for Double Tax Treaties between Cyprus and other countries. The Double Tax treaties prescribe the maximum limit of withholding tax rates that are required to be deducted from income received by a Cyprus tax resident from a person resident of another country to the Double tax treaty. Cyprus exempts payment dividends, interest, and royalties for use outside Cyprus from withholding tax.

Conclusion

Cyprus Tax Regime is the reason why many companies have established their businesses in Cyprus. The appealing tax benefits are the reasons which make Cyprus a ‘business friendly’ place to invest in.  Businesses channel their funds through Cyprus to avail of tax benefits and reduce costs. Thus, making Cyprus Tax Regime beneficial for the residents, non-residents, and the government of Cyprus as well.

Also Read: Cyprus Company Incorporation Process