Cyprus resident companies are taxed on their international income at a taxation rate of 12.5%, which is considered as one of the lowest in the EU. The types of income that are subject to tax for Cyprus companies are:
- Business profits;
- Interest and discounts (dividends are listed but exempt);
- Rents, royalties, remunerations or other profits from property and net consideration in respect of trade goodwill.
Double Tax treaties
Cyprus tax resident companies can benefit for the double tax treaty agreements that have been signed by Cyprus Government and more than 60 countries. Tax Treaties are a useful tax-planning tool to protect businesses against double taxation of income earned in other countries.
Earnings from activities of a permanent establishment (PE) situated outside Cyprus are not calculated as Income Tax provided that:
i. passive income is lower than 50%; and
ii. The foreign tax burden is not significantly lower than that in Cyprus.
|Category of income
|Profit from the sale of securities
|Interest not arising from the ordinary activities or closely related to the ordinary activities of the company
|Profits of a permanent establishment abroad, under certain conditions, (see section above)
Explanation of securities
As defined by the Inland Revenue, security includes ordinary shares, founder's shares, preference shares, options on titles, debentures, bonds and other securities of companies or other legal persons, incorporated in Cyprus or abroad and options thereon. Also the term securities include Short positions on titles futures/ forwards on titles, swaps on titles, depositary receipts on titles such as ADRs and GDRs, participation in foreign entities which are considered as Securities. (specific rules apply).
It should be noted that the taxpayer can retroactively apply the above definition to 01/01/03 if an annual tax return (IR4) has not been previously submitted.
Transfers of assets and liabilities between companies can be effected without being subject to tax within the framework of a reorganisation and tax losses can be carried forward by the receiving entity.
Corporate reorganization provisions were introduced in the Income Tax Law of 2003. Furthermore the EU Merger Directive (90/434/EEC) on the common system of taxation has been fully incorporated.
As a result, reorganizations, under certain conditions, can be effected without tax consequences, irrespective of including resident and/or non-resident companies.
- Partial divisions
- Transfer of assets
- Exchange of shares
- Transfer of registered office
Since 1997 tax losses can be carried forward without any limitations.
Tax losses incurred from business carried abroad will be allowed as a deduction from profits accumulated in Cyprus during the same year only.
Any loss is set off against income from other sources for the same year if a corresponding positive amount would be a taxable profit or gain under the Income Tax Law. Insofar as a loss exceeds the income of that year, the loss is carried forward and set off against the income of subsequent years without any time limit. If any change of ownership arises in the shares of a company and a substantial change in the business of the company within any 3-year period then the right to carry forward losses is not allowable. The same applies, when a company's activities have diminished and, before any substantial improvement, there is a change in the ownership of shares.
Group Loss Relief
If Cyprus tax companies are part of a group then the current year loss of one company can be set off against the profit of another.
A group is described as:
- One company holding at least 75% of the shares of the other company;
- At least 75% of the voting shares of the companies are held by another company;
A partnership or a sole trader transferring business into a company can carry forward tax losses into the company for future utilization. Losses from a permanent establishment abroad can be set off with profits of the company in Cyprus.