Tuesday, 6 January 2009
Introduction
The House of Representatives of Cyprus approved a tax reform in July 2002 (Law No. N118 (I) 2002), which has been effective since January 1, 2003. This tax reform aims to conform to the standards of the European Union and the EU code of conduct, as well as abide by its commitment to the Organisation of Economic Cooperation and Development (OECD) to eliminate harmful tax practices.
The main features of the tax reform are the following:
Corporation Tax for Entities
The definition of resident of Cyprus is introduced. A company is resident in Cyprus if its management and control is in Cyprus.
There is no longer a distinction between local companies and International business companies (IBC’s). The taxable profits of all Cypriot companies will be taxed at the rate of 10%. Existing IBCs that had income from their activities at 31 December 2001 can choose to be taxed with the rate of 4.25% until the end of the fiscal year 2005. This regime makes Cyprus the country with the lowest corporation tax in the European Union.
Dividend income from abroad and from Cyprus is wholly exempt from corporation tax.
Profits earned from permanent establishment abroad are fully exempt from corporation tax.
No taxation on the profits from the disposal of securities for all the companies that are residents of Cyprus. “Securities” is defined as shares, bonds debentures founders’ shares and other securities of companies or other legal persons, incorporated under the law in Cyprus or abroad and option thereon.
Abolition of the 5 year restriction for the carrying forward of losses. No time restriction on the carrying forward of losses.
Losses of the company can be set off against profits of another company of the same group.
In order to conform to EU standards, the new tax legislation adopts the appropriate EU directive, which enables without tax implications reorganizations, mergers, acquisition and amalgamations of companies.
Abolition of 10% minimum tax on utilization of losses brought forward from previous years.
50% of the interest income of a company resident of Cyprus is exempt from corporation tax. However, interest income earned from the trading activities of a company is fully taxable.
For 2002, 20% of the interest income earned by a company resident of Cyprus is exempt from corporation tax.
Abolition of exemptions available for the importation of foreign exchange from activities abroad.
No withholding tax on the payment of dividends, interest and royalties to non-resident of Cyprus.
There are special rules for an additional special tax for 2002, 2003 and 2004 for semi-governmental bodies and companies that not controlled by foreigners.
Income Tax for Individuals
An individual is resident of Cyprus if he lives in Cyprus for one or more periods which exceed the total of 183 days per fiscal year.
All individuals who are :
For the taxable year 2004:
Dividend income from abroad and from Cyprus is fully exempt from income tax.
The whole amount of interest income is fully exempt from income tax. For 2002, interest income of ?600 plus 50% of amount exceeding 600 is exempt from income tax.
No taxation on the profits from the disposal of securities for individuals that are residents of Cyprus. “Securities” is defined as shares and other securities of companies or other legal persons, incorporated under the law in Cyprus or abroad and options thereon.
Abolition of personal allowances deductions for individuals who are residents of Cyprus including married allowances and allowances for children. Social grants will be provided instead of the allowances abolished.
Abolition of reduced income tax rates for expatriates working in international business companies. For non-Cyprus residents taking up employment in Cyprus, a special exemption from income tax will apply for the first three years of their employment in Cyprus amounting to 20% of income earned of 5.000 per annum whichever is the lower.
Profits of an individual earned from permanent establishment abroad are wholly exempt from income tax.
Value Added Tax
According to the VAT law (Law No 95(I)/2000) adopted in June 2000 and which became effective the 1st of February 2002, the distinction between Cyprus IBCs and local companies has been abolished.
The VAT Law No. 95 (I) 2000 provides that International companies may be either entitled or obliged to register for VAT in Cyprus. This distinction will remain until the end of transition period, on the 31st of December 2005.
Voluntary registration
International companies, which are conducting trading abroad, may apply for voluntary VAT registration.
Compulsory registration
International companies, which are conducting trading in Cyprus or which receive income from services provided in Cyprus, if the value of the services received exceed CYP 9 000 in a calendar year, have to register for the VAT.
According to the new tax legislation adopted, VAT rate was increased from 10% to 13% as from 1 July 2002.
VAT was further increased to 15% as from 1 January 2003, thereby conforming to the minimum required by the EU Directive 77/388/EEC.
Tax Treaties
The existence of double tax treaties combined with the low tax paid by international entities offer tremendous possibilities for international tax planning through Cyprus in view of the fact that:
Eastern Europe
It should be noted that Cyprus is one of the few countries in the world that has concluded tax treaties with all Eastern European countries. As a result of the recent liberalization in Eastern Europe, the importance of these treaties in international tax planning has been enhanced.
Duty Free Benefits
International entities and expatriate employees are allowed to import into Cyprus, or buy in Cyprus duty free cars, office equipment and domestic appliances (except furniture and air conditioning equipment).
The House of Representatives of Cyprus approved a tax reform in July 2002 (Law No. N118 (I) 2002), which has been effective since January 1, 2003. This tax reform aims to conform to the standards of the European Union and the EU code of conduct, as well as abide by its commitment to the Organisation of Economic Cooperation and Development (OECD) to eliminate harmful tax practices.
The main features of the tax reform are the following:
Corporation Tax for Entities
The definition of resident of Cyprus is introduced. A company is resident in Cyprus if its management and control is in Cyprus.
There is no longer a distinction between local companies and International business companies (IBC’s). The taxable profits of all Cypriot companies will be taxed at the rate of 10%. Existing IBCs that had income from their activities at 31 December 2001 can choose to be taxed with the rate of 4.25% until the end of the fiscal year 2005. This regime makes Cyprus the country with the lowest corporation tax in the European Union.
Dividend income from abroad and from Cyprus is wholly exempt from corporation tax.
Profits earned from permanent establishment abroad are fully exempt from corporation tax.
No taxation on the profits from the disposal of securities for all the companies that are residents of Cyprus. “Securities” is defined as shares, bonds debentures founders’ shares and other securities of companies or other legal persons, incorporated under the law in Cyprus or abroad and option thereon.
Abolition of the 5 year restriction for the carrying forward of losses. No time restriction on the carrying forward of losses.
Losses of the company can be set off against profits of another company of the same group.
In order to conform to EU standards, the new tax legislation adopts the appropriate EU directive, which enables without tax implications reorganizations, mergers, acquisition and amalgamations of companies.
Abolition of 10% minimum tax on utilization of losses brought forward from previous years.
50% of the interest income of a company resident of Cyprus is exempt from corporation tax. However, interest income earned from the trading activities of a company is fully taxable.
For 2002, 20% of the interest income earned by a company resident of Cyprus is exempt from corporation tax.
Abolition of exemptions available for the importation of foreign exchange from activities abroad.
No withholding tax on the payment of dividends, interest and royalties to non-resident of Cyprus.
There are special rules for an additional special tax for 2002, 2003 and 2004 for semi-governmental bodies and companies that not controlled by foreigners.
Income Tax for Individuals
An individual is resident of Cyprus if he lives in Cyprus for one or more periods which exceed the total of 183 days per fiscal year.
All individuals who are :
For the taxable year 2004:
| Chargable Income, £ | Tax Rates % |
| up to 10 000 | 0 |
| 10 001 - 15 000 | 20 |
| 15 001 - 20 000 | 25 |
| 20 001 - and above | 30 |
Dividend income from abroad and from Cyprus is fully exempt from income tax.
The whole amount of interest income is fully exempt from income tax. For 2002, interest income of ?600 plus 50% of amount exceeding 600 is exempt from income tax.
No taxation on the profits from the disposal of securities for individuals that are residents of Cyprus. “Securities” is defined as shares and other securities of companies or other legal persons, incorporated under the law in Cyprus or abroad and options thereon.
Abolition of personal allowances deductions for individuals who are residents of Cyprus including married allowances and allowances for children. Social grants will be provided instead of the allowances abolished.
Abolition of reduced income tax rates for expatriates working in international business companies. For non-Cyprus residents taking up employment in Cyprus, a special exemption from income tax will apply for the first three years of their employment in Cyprus amounting to 20% of income earned of 5.000 per annum whichever is the lower.
Profits of an individual earned from permanent establishment abroad are wholly exempt from income tax.
Value Added Tax
According to the VAT law (Law No 95(I)/2000) adopted in June 2000 and which became effective the 1st of February 2002, the distinction between Cyprus IBCs and local companies has been abolished.
The VAT Law No. 95 (I) 2000 provides that International companies may be either entitled or obliged to register for VAT in Cyprus. This distinction will remain until the end of transition period, on the 31st of December 2005.
Voluntary registration
International companies, which are conducting trading abroad, may apply for voluntary VAT registration.
Compulsory registration
International companies, which are conducting trading in Cyprus or which receive income from services provided in Cyprus, if the value of the services received exceed CYP 9 000 in a calendar year, have to register for the VAT.
According to the new tax legislation adopted, VAT rate was increased from 10% to 13% as from 1 July 2002.
VAT was further increased to 15% as from 1 January 2003, thereby conforming to the minimum required by the EU Directive 77/388/EEC.
Tax Treaties
The existence of double tax treaties combined with the low tax paid by international entities offer tremendous possibilities for international tax planning through Cyprus in view of the fact that:
- Any tax paid in a country with which Cyprus has a treaty is deducted from the Cyprus tax payable on the same income; and
- Cyprus does not impose any withholding tax on dividends, interest and royalties paid by Cyprus international business companies.
Eastern Europe
It should be noted that Cyprus is one of the few countries in the world that has concluded tax treaties with all Eastern European countries. As a result of the recent liberalization in Eastern Europe, the importance of these treaties in international tax planning has been enhanced.
Duty Free Benefits
International entities and expatriate employees are allowed to import into Cyprus, or buy in Cyprus duty free cars, office equipment and domestic appliances (except furniture and air conditioning equipment).