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Cyprus Income Tax-Companies

Company tax residency
 
In accordance with Cyprus Income Tax laws, a company should be tax resident in Cyprus in order to enjoy the Cyprus tax benefits. A Company is considered to be tax resident in Cyprus if the effective management and control is exercised in Cyprus.
 
Management and Control
 
There is no definition in the Cyprus income tax laws as to what constitutes management and control; however the Cyprus Tax Authorities in practice tend to follow the definition of effective management and control as provided in the OECD model convention.
 
Although "Management and Control" is not a term defined in the Cyprus Tax Legislation, to archive tax residency and substance, the Cyprus Tax authorities take into consideration the following factors:
The composition of the Board of Directors. 
Where the Board Meetings take place and whether major decisions are properly taken during these meetings. 
The place where the discussion and approval of the Financial Statements takes place.
The Board of Directors must have control over the bank account which must be situated in Cyprus.
The place where the seal of the company is authorized to be used. 

Taxable Income for tax resident and non-tax resident Companies
 
Tax-resident in Cyprus
A company which is resident in Cyprus is taxed on its worldwide income.
 
The definition of income includes any profit from the following business activities: 
 
-trading, 
-manufacturing, 
-industrial, 
-mining, and agricultural, 
-profession or vocation, 
-interest, 
-rentals from immovable property, 
-royalties and profit from sale of goodwill. 
 
Any foreign taxes paid will be allowed against Cyprus tax paid on the same income.
 
 
Non-Tax resident in Cyprus
 
A company which is non-tax resident of Cyprus, 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 from immovable property located in Cyprus and profit from sale of goodwill in Cyprus is also taxable irrespective of the existence of a permanent establishment.
 
Income tax rate
All companies in Cyprus are taxed on their taxable income at the flat rate of 10%. The lowest corporate income tax rate in the European Union. As of 01 January 2013, the income tax rate will increase by 2,5% and therefore the Cyprus income tax rate will be 12,5%.

Despite the above changes have increased the Income Tax rate for Cyprus Companies by 2, 5%, Cyprus Company remains very competitive and retains one of the lowest corporate tax rates within the European Union.
 
Tax deductions
In accordance with the Cyprus Income Tax Law, any expenditure incurred by a Company wholly and exclusively for the production of income is an allowable deduction on its taxable income.
 
Tax exempt income
 
Dividend income received in Cyprus by a foreign corporation is wholly exempt from tax in Cyprus provided:
a. Less than 50% of the paying company’s income is a result of investing activities; and,
b. The foreign tax is not significantly lower than the tax burden in Cyprus (5% and less is considered as significantly lower)
 
Profits arising on the disposal of securities are not taxable for all Cyprus tax residents.
 
As of 1st January 2009 the interest income is exempt from the Cyprus Income Tax if it is not arising from the ordinary course of the business or is not closely connected with the business of the Company (e.g. interest on fixed deposits). However, it is subject to special defence tax contribution at the rate of 15%.From 01 January 2013, the defence tax contribution on interest derived from non trading activities will rise to 30%. If the interest arises in the ordinary course of the business, including interest closely connected with the carrying on of the business, and interest earned by open-ended or close-ended collective investment schemes, is not considered interest but trading profit and is taxable under income tax at the flat rate of 10%.
 
Profit of a foreign Permanent Establishment of a Cyprus Company is exempt from income tax in Cyprus provided:
 
a. Less than 50% of the PEs profit is a result of investing activities; and,
b. The foreign tax is not significantly lower than the tax burden in Cyprus (5% and less is considered as significantly lower)
 
 
Losses utilization 
 
Income Tax losses that may arise in the current year can be carried forward indefinitely to be set - off against future profits.
 
Limitation of losses carried forward indefinitely 
 
In December 2012, the Cyprus Parliament changed the provision in the Income Tax Law that the losses will be carried forward indefinitely. Companies will no longer be able to carry their losses forward indefinitely; a temporary limitation of five years is introduced in the tax system under which, losses will be allowed to be carried forward for offsetting future taxable income, for a period of five years from the year to which the profits relate. 
 
Permanent Establishment 
Any losses arising from a permanent establishment abroad can be offset against profits arising in Cyprus. However, any profits of the permanent establishment abroad that might be incurred in the following years will be taxable under the Income Tax in Cyprus at the rate of 10% up to the amount of losses already surrendered to the Cyprus Company.

Group relief
There are provisions for group relief whereby the current year’s trading losses of a Cyprus company can be transferred to be set off against taxable profits of another Cyprus company provided both companies were members of the same group for the whole year of consideration. 
 
In order for two or more Cyprus Companies to be eligible for Group relief the following requirements must be met: 
 
-all companies must be Cyprus tax residents 
-be in the same group for the whole year under consideration
-one Company is a 75% subsidiary of the other   or 
-both Companies are 75% subsidiaries of a third company.
 
From 01 January 2012, in the case where a subsidiary Company was incorporated from its parent Company during the tax year it will be deemed that it was a member of the same group (75% participation) for the whole tax year for the purpose of the utilization and relief of the losses between the Companies of the Group. 
A company is deemed to be 75% subsidiary of the other where:
 
1. no less than 75% of its ordinary share capital with voting rights are owned directly or indirectly by the other company  and
 
2. the other company has a beneficial entitlement to not less than 75% of: 
 
a. any profits available for distribution, and
b. any assets of the subsidiary which would be available for distribution to the shareholders on its winding-up.
 
 
Transfer pricing
No formal Transfer Pricing rules exist in the Cyprus Income Tax Law. However, the Income Tax Law is specific that the arm’s length principal should be adhered at all times.
 
Withholding tax
Payment of dividends, interest and capital distributions made by a Cypriot company to non-resident shareholders are free from any withholding taxes.
 
Controlled Foreign Company rules (CFC rules)
There are no Controlled Foreign Company rules in Cyprus.
 
Thin capitalization rules 
No thin capitalization rules exist in Cyprus. However, the Income Tax Law is specific that the arm’s length principal should be adhered at all times.
 
Reorganizations
The Income Tax Law adopts the relevant EU directive whereby reorganizations, amalgamations, mergers and acquisitions can be effected without any tax implications.
 
 
 

INCOME TAX FILINGS AND PAYMENTS

The tax year for a Cyprus Company is the same as the calendar year.
 
Annual Tax Return (I.R 4)
 
The annual Income Tax return (I.R 4) is filed by 31 December following the tax year. For example, the Income Tax return for the year ended 20X1 will be filed by 31 December 20X2.
 
In case the submission is made electronically through Taxisnet an extension of three months is provided to the above mentioned deadline of 31 December 20X2. Therefore the submission of the tax return is due by 31 March 20X3.
 
Temporary Income Tax Returns (I.R 6)
 
Temporary Income Tax returns are due to be submitted by 1st August of the current tax year. For example the Temporary Income Tax Return for the year 20X1 must be filed by the 1st August 20X1.
 
Each Cyprus Company is required to estimate its taxable profit for the year and pay the projected tax liability arising in advance in three equal installments within the tax year. 
 
 Provisional tax payments must be made:
  1 August (first installment) 
  30 September (second installment) 
  31 December (third and final installment) 
 
If the income declared for provisional tax purposes is less than three-fourths (75%)  of the income as finally determined, the taxpayer must pay, in addition to the normal tax, an amount equal to one-tenth (10%) of the difference between the final and the provisional tax. 
 
The estimated income can be revised upwards without any tax implications anytime before 31st December, the date the last provisional payment is due.
 
A final payment must be made on 1st August of the following year of assessment, (for tax year 20X1 the payment must be made by August 1st, 20X2), as to bring the total installment payments to the level of the actual liability due according to the actual tax liability determined.
 
Failure to adhere to the above requirements will result to the imposition of interest and penalties.
 
As from 2013, the submission of the temporary Tax returns should be filed before 31 July (instead of 1st August). Additionally, the payment of taxes will now be made in two installments (instead of three), the first being due on 31st July and the second on 31st December.
 

INTEREST AND PENALTIES

Administrative Penalties
 
Administrative penalties amounting to €100 or €200 depending on the specific case, will be imposed for late submission of declarations or late submission of supporting documentation requested by the Commissioner. 
 
In the case of late payment of the tax due, an additional penalty at the rate of 5% will be imposed on the unpaid tax.
 
 
Interest on late payments 
4,75% interest per month on the due amount: 01 January 2013 – up to date
5% interest per month on the due amount: 01 December 2011 – 31 December 2012
5,35% interest per month on the due amount: 01 January 2010-31 December 2010
8% interest per month on the due amount: 01 January 2007-31 December 2009
9% interest per month on the due amount: up to 31 December 2006
 
 
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