The following are important taxation highlights of a Cyprus company:
Taxable income is taxed at the rate of 12,5%, one of the lowest tax rates in Europe.
A Cyprus tax resident holding company is exempt from tax when receiving dividends from another Cyprus tax resident company, provided the dividend is not indirectly received after the expiry of a four year period, from the end of the year to which the profits giving rise to the dividend relate.
Dividends received from abroad
Dividends received from abroad by a Cyprus tax resident holding company are exempt from corporate income tax, provided they are not allowed as a tax deduction in the jurisdiction of the foreign paying company. Dividends received from abroad are also exempt from Special Contribution for Defense (SDC), if one of the following conditions is satisfied:
1.The company paying the dividend does not engage more than 50% directly or indirectly in activities which lead to passive income
2. The foreign tax burden on the income of the company paying the dividend is not substantially lower than the tax burden in Cyprus.
If neither of the above conditions is satisfied, then dividends received from abroad are taxed at the SDC level at the rate of 17%.
Active interest income (interest income effectively connected with the carrying on of a trade or business) is subject to the corporate income tax rate of 12,5%, as any other income. Passive interest income, (income not connected to a trade or business), is exempt from corporate income tax and instead it is taxed separately at the Special Contribution for Defence (SDC ) at the rate of 30% on a gross basis.
If the intangible property right is granted to a Cyprus company for use outside Cyprus, then there is no withholding tax and the corporate tax rate (12,5%) is applied only on the royalty income left in the Cyprus Company. Gross amounts of royalties from sources within Cyprus by a company which is not a tax resident of Cyprus are liable to 5% withholding tax on film royalties and 10% withholding tax on any other royalties, unless a lower rate applies under a DTA (for income received from qualifying IP assets, see below)
Intellectual property rights (IPR)
Cyprus is an attractive location to establish a company developing and/or holding IP rights. The new IP regime is fully aligned with the Base Erosion and Profits Shifting (BEPS) initiative Action 5 and the Nexus principle. Profits from qualifying intangible assets are entitled to an 80% deduction, calculated as per the statutory formula set in line with the Nexus principle. The resulting effective tax rate will always be 2,5% or less
Trading in securities
Any income arising from trading in “securities” is completely exempt from tax. The term securities includes but is not limited to: ordinary and preference shares, founder’s shares, options on titles, debentures, bonds, short positions on titles, futures/ forwards on titles, swaps on titles, depositary receipts on titles, rights of claims on bonds and debentures, index participations (only if they result in titles), repurchase agreements or Repos on titles, participations in companies, units in open-end or closed-end collective investment schemes such as Mutual Funds, International Collective Investment Schemes (ICIS) and Undertakings for Collective Investments in Transferable Securities (UCITS).
FOREX (FX) gains or losses
Foreign exchange (FX) gains or losses will be tax exempt/not tax deductible irrespective of whether they are realised or unrealised. The exemption will not apply to companies that are trading in currencies and currency derivatives. Such companies irrevocably elect for unrealised gains/ losses not to be taxed/tax deducted accordingly
Tax credit availability
A tax credit will be afforded, according to the Double Taxation Agreements (DTAs) concluded by Cyprus. In the absence of a DTA, Cyprus unilaterally affords a credit for the foreign tax, paid up to the amount of tax that would have been payable in Cyprus on the same income. For dividends received from EU Member States, the underlying tax credit is also available.
Payments of dividends, interest, and royalties granted for use outside of Cyprus, by Cyprus tax residents to non Cyprus tax residents are exempt from withholding tax in Cyprus according to the Cyprus tax legislation.
As from 1 January 2023, the above payments will be subject to withholding tax in Cyprus at the standard rates provided in the Cyprus tax legislation, if they are made to persons which are:
- a) tax resident in jurisdictions included in the EU list of non-cooperative jurisdictions (‘EU Blacklist’), or
b) incorporated/registered in a jurisdiction included in the EU Blacklist and are not tax resident in any other jurisdiction that is not included in the EU Blacklist
Group relief is allowed for at least seventy-five percent (75%) group holdings and is applicable only on current year’s results, assuming claimants are Cyprus tax resident companies and members of the same group for the whole tax year. Losses that cannot be utilised in the current year are carried forward for a period of five (5) years, commencing from the end of the year to which the losses relate.