- Tax resident companies
A company is considered resident in Cyprus for tax purposes if themanagement and control of the company take place in Cyprus. From this point of view, then, a company which is registered inCyprus will not be resident in Cyprus for tax purposes if the management takes place outside Cyprus.
At the same time, the management and control criteria also apply to companies not registered in Cyprus; that is, if the management and control of a company take place in Cyprus, then the company is considered resident in Cyprus for tax purposes, even if the company itself wasn’t registered there.
The question of the tax residency test has taken on even greater significance following accession to the European Union on May 1st 2004. On the one hand, whether or not a company is considered resident for tax purposes is extremely important from the point of view of Cyprus taxation, as this will decide whether or not the company can be taxed in Cyprus. On the other hand, it is important because this will decide whether or not the company is able to benefit from the advantages offered by the agreements signed by Cyprus for the avoidance of double taxation. As these agreements only apply to companies resident for tax purposes, only these companies can take advantage of the international treaties, and receive the so-called Certificate of Tax Residence issued by the Taxation Department of the Foreign Ministry.
Cyprus has been a full member of the European Union since May 1st 2004. Membership, however, has not changed the applicability of the agreements entered into over a number of decades. These are still valid, and the lower rates of tax stipulated can still be applied. What has changed, however, is the communication between the tax authorities of the EU member states. In particular,verification and control between the tax authorities of the individual members has become much more direct and commonplace in certain matters, thanks to the uniform EU VAT regulations.
All revenue arising from entrepreneurial activities (trading, services, manufacturing, processing, agriculture, mining etc.) counts as income, wherever it arises geographically, be it in Cyprus or elsewhere (the tax system in Cyprus generally allows for the taxation of world-wide income). At the same time, thefollowing items do not count as income:
– Revenue from the sale and purchase of stocks and shares, irrespective of whether they relate to companies in Cyprus or abroad. Except disposal of shares of companies which own immovable property in Cyprus.
– Amounts received as dividends.
– 50% of the revenue arising from interest received on the re-payment of loans.
– Profit arising from the operation of foreign premises
- Tax rates
The general rate of profit tax in Cyprus is 12,5%. This means that for these companies the following benefits do not apply:
– The Cyprus Royalty Collector Company – Maximum effectivetax rate of 2%
– That dividends do not count as taxable income. Dividends received by a Cyprus resident company are exempt from the Special Contribution for Defence (SCD) unless the divident are paid out of profits that are more than four years old.
– That amounts arising gains derived from the sales of stocks and shares are tax exempt. Capital gains tax at ta rate 20% is imposed on gains derived from the disposal of immovable property situated in Cyprus and on gains from the disposal of shares in an unlisted company that owns immovable property situated in Cyprus. Tax losses maybe carried forward for 5 years for set off against future taxable profit. The carryback of losses is not permitted.
Generally, any outlay, either in Cyprus or abroad, arising in relation to the real and concrete business activities of the company can be deducted as expenses.
In addition, the following items may also be deducted as expenses:
– The full amount of charitable donations.
– Social security contributions due on employees’ salaries.
– Representation expenses, up to an amount equal to 1% of the total income, with a maximum of 10 000 EUR.
The following items may not be deducted as expenses:
– Amounts used for the running of cars and motorbikes. Losses made by a Cyprus company, which can not be deducted from the income of the company for the given financial year, maybe carried forward and deducted from the following year’s income.
Determination of the level of losses within a group of companies is also possible, as long as one of the companies is the holder of either at least 75% of the shares or 75% of the voting rights in the other company.
Fees arising from the profitability of rights held in Cyprus are taxable in Cyprus. 5% on a film royalties and 10% on other royalties. There is no withholding tax on the payment of royalties by a resident company to another resident company.
Dividends paid to a non resident are not subject to withholding tax. Dividends paid to a resident individual subject to SCD at the rate of 20% applied as a withholding tax.
No payable withholding tax on interest paid to a nonresident.
Interets paid to a resident subject to SCD 30%.