Why you should run your business from Cyprus

The Republic of Cyprus, a European Union (EU) island member state in the Eastern Mediterranean Sea, is located to the east of Greece, south of Turkey, west of Israel and Lebanon, and north of Egypt. A former British colony, Cyprus has been an independent state since 1960. The Republic has been a member state of the European Union since 1 May 2004. Cyprus adopted the euro (EUR) as its national currency on 1 January 2008. Nicosia is the capital city; other main cities include Limassol, Larnaca, and Paphos.

Cyprus has an open market economy with positive growth dominated by the services sector, mainly comprising financial services, tourism, and real estate..

Since its accession to the European Union in 2004, the tax legislation of Cyprus complies with EU requirements and with the OECD initiative against harmful tax practices.

The significant tax advantages offered by Cyprus to international companies with a Cyprus tax-resident base include:

• double tax treaties with over 65 countries

• favourable tax regime, including corporation tax of 12,5%, one of the lowest rates in the EU

• nil withholding taxes on dividends and on interest payable to non-Cyprus tax residents

• exemption from tax in most cases on dividends received

• exemption from tax of profits from operations of permanent establishments situated abroad exemption from tax of profits on disposal of shares, bonds and other securities (except in the case where the company issuing the shares owns immovable property directly or indirectly that is situated in Cyprus)

• exemption from capital gains tax on gains arising from the disposal of immovable property situated abroad. Cyprus Tax Facts 2021 6 International companies which choose to have a permanent establishment in Cyprus can enjoy additional benefits such as:

• strategic geographic location

• availability of free zone area

• excellent communications infrastructure

• efficient legal, accounting and banking services

• liberal foreign direct investment regime

• highly qualified, well-educated and multilingual labour force

• freedom of movement of foreign currency

• one of the lowest crime rates in Europe.

All the above factors combine to make Cyprus an ideal and effective location for EU inbound and outbound investments and a preferred jurisdiction of international tax planners.

Personal Taxation

Imposition of tax

Individuals who are Cyprus tax residents are subject to tax on their worldwide income, whether remitted to Cyprus or not. Individuals who are non-Cyprus tax residents are subject to tax only on their Cyprus source income.

Tax residence

For Cyprus tax purposes, “Cyprus tax resident” means an individual who, in the year of assessment (calendar year), stays in the Republic of Cyprus for a period or periods exceeding in aggregate 183 days.

As from 1st January 2017 the “60 days rule” for tax residency has been introduced. An individual will be considered as a tax resident of Cyprus if he/she satisfies either the existing “183 days rule” or the new “60 days rule” for the tax year.

The “60 days rule” applies to individuals who in the relevant tax year:

• do not reside in any other single state for a period exceeding 183 days in aggregate

• are not tax resident in any other state

• reside in Cyprus for at least 60 days

• have other defined Cyprus ties.

Days in and out of Cyprus are calculated as follows:

• the day of departure from Cyprus is taken as a day of residence outside Cyprus

• the day of arrival in Cyprus is taken as a day of residence in Cyprus

• arrival in and departure from Cyprus on the same day is taken as a day of residence in Cyprus

• departure from and arrival in Cyprus the same day is taken as a day of residence outside Cyprus.

Covid-19 impact

From 21st March 2020 up to 9th June 2020 the Tax Department accepted the period to be ignored for calculation purposes if a person was not able to travel due to the specific circumstances.

Income tax rates for 2021

Foreign pensions

Foreign pensions of a Cyprus resident individual which exceed the amount of €3.420 per annum are taxable at the rate of 5%. The recipient of such pension may elect, for each year of assessment, to be taxed at the normal rates.

Widow pensions

As from year 2014, widow pensions received are taxed separately (is not added to other income) at a rate of 20% for any amount that exceeds €19.500. However, the pensioner may choose to add the pension on the Cyprus Tax Facts 2021 9 total income and be taxed under the normal personal income tax rates.

Funds industry

Special rules for variable remuneration which is connected to the carried interest, for individuals employed in the funds industry - on Alternative Investment Fund (AIF) and Undertakings for Collective Investments in Transferable Securities (UCITS), is taxed at flat rate of 8% with a minimum tax liability of €10.000 per annum. Employees satisfying the conditions can elect on annual basis to be taxed under this regime for a period of 10 years or follow the normal provisions for personal tax assessment.

Benefit in kind Benefit

either in cash or otherwise, provided to employees and/or members of their families, is added to earnings/income and is subject to income tax. The Tax Department provided guidelines for calculation of benefits in three main categories of benefits i.e. cars/accommodation/other benefits.

Exempt income

Notes

1 “Titles” means ordinary shares, founder’s shares, preference shares, options on titles, debentures, bonds, short positions on titles, futures/forwards on titles, swaps on titles, depository receipts on titles like ADRs and GDRs, claim rights on bonds and debentures (excluding the rights on interest of such products), index participations (provided that they represent titles), repurchase agreements or Repos on titles, participations in companies like Russian OOO & ZAO, American LLCs (provided that they are not transparent entities), Romanian SAs & SRLs, Bulgarian ADs and OODs and units in open-ended or close-ended collective investment schemes that have been established and registered, and function, in accordance with the provisions of specific and relevant legislation in the country of the registration. Promissory notes and bills of exchange are not included under definition of titles.

2 The employer must either be a non-Cyprus tax resident or a Cyprus tax resident with a permanent establishment abroad. For the exemption to apply, the service abroad must be for a period or periods of more than 90 days in aggregate in any one year of assessment.

3 Such dividend income is subject to Special Defence Contribution for Cyprus tax residents. 4 The exemption does not apply if interest arises or is closely related to business activities, which will be treated as trading income.

5 The exemption starts from the year following the year of employment and it can be applied for employment starting from year 2012 onwards up to year 2025. The maximum period for which the exemption applies is 5 years.

6 The exemption starts from 1st January 2012. It applies from the year of employment in the Republic and can last for a maximum of 10 years. The exemption is not given to individuals who were residents in Cyprus in any 3 years from the last 5 years’ prior to employment. Also, the exemption is not given to individuals who were residents in the Republic in the year prior to employment. The exemption applies in any year of the 10 years’ period in which the earnings are higher than €100k, provided the individual is eligible to claim the exemption in the first year. If the income falls below €100k then the exemption will be granted only if the commissioner is satisfied on certain conditions.

7 In practice the tax authorities will allow only one out of the two claims (see note 5 & 6 above).

8 The exemption of 50% cannot exceed the 35% of the qualifying expenses approved by the relevant authority. Any restriction on the exemption can be carried forward for utilization in the next 5 years following same principles. The previous exemption does not apply when a cash refund is claimed back based on the provisions of the scheme.

Business taxation

Imposition of tax

Cyprus tax resident persons (individuals and companies) are subject to tax on their worldwide income whether remitted to Cyprus or not.

Non-Cyprus tax resident persons are subject to tax only on their Cyprus-source income.

A company is subject to tax in Cyprus if its management and control is exercised in Cyprus, irrespective of its place of registration.

“Company” has the meaning given to this term by the Companies Law and includes anybody with or without legal personality, or public corporate body, as well as every company, fraternity or society of persons, with or without legal personality, including any comparable company incorporated or registered outside the Republic and a company listed in the First Schedule but it does not include a partnership.

Partnerships are not taxable entities. The income of a partnership is attributed to the partners and is subject to income or corporation tax as the case may be.

Tax registration

As of 1st July 2011, a Company is obliged to register with the tax authorities within 60 days of its registration with the Companies Registrar.

Corporation tax rate

• 12,5% of taxable income

Notes

1 The definition of “titles” is stated in page 10 of the booklet.

2 Such dividend income is subject to Special Defence Contribution for Cyprus tax residents. 3 As from 1 January 2016 to comply with the Parent Subsidiary Directive provisions, dividends will only be exempt from Income tax provided that they were not tax-deductible by the paying company.

4 In case where the exemption does not apply, the income will not be considered as “dividend income” for Special Defence Contribution purposes i.e. it will only be taxable under income tax.

5 Unilateral tax credit relief - In case where the dividend income is subject to taxation in Cyprus (income tax) a tax credit relief will be provided assuming that the paying company is based in another member state. Such relief will not be made available if there is no valid commercial reason for the structure in place and its purpose is merely for tax purposes.

6 The exemption does not apply if interest arises or is closely related to the business activities of the entity. Note that exempt interest income is subject to 30% Special Defence Contribution from 29/4/2013 (see page 44)

7 The exemption does not apply if the permanent establishment engages directly or indirectly more than 50% in activities which result in investment income AND the foreign tax burden is significantly lower than the Cyprus tax burden.

8 Any foreign exchange differences arising from transactions (either realised or unrealised) which are not triggered as a result of trading in FX, must be reversed for tax purposes. Those trading in FX can elect irrevocably for any unrealized exchange differences to be adjusted. Such election is made through a special tax form. 9 The exemption of 50% cannot exceed the 35% of the qualifying expenses approved by the relevant authority. Any restriction on the exemption can be carried forward for utilization in the next 5 years following same principles. The previous exemption does not apply when a cash refund is claimed back based on the provisions of the scheme.

Notes

1 Wages and salaries for which the above-mentioned contributions have not been paid in the year in which they were due, will not be tax deductible for the calculation of taxable income. If the contributions (including any penalties and interest) are paid in full within two years from their due date, then such wages and salaries and their associated contributions will be tax deductible expense in the year that they are paid.

2 In case of a loss, any part of the loss up to the amount of the donation cannot be carried forward.

3 Depending on the covered area of the building:

4 Interest payable for acquiring a saloon car whether used in the business or not, or any other asset that is not used in the business, is not allowable for the first seven years.

5 Excludes interest and running expenses of saloon (passenger) cars as classified under the Motor Vehicles and Traffic Regulations.

6 New equity means any equity (fully paid up shares and share premium) introduced into the business on or after 01/01/2015. If the new funds are derived from loans on which a tax deduction for interest has been claimed, the amount of the NID is reduced by the amount of interest deduction claimed. In the event that the new funds are introduced in the form of assets in kind, their valuation for the purposes of calculating the NID cannot exceed their market value at the date of their introduction into the business. Also, no NID shall be granted if the market value of the assets is not documented to the satisfaction of the Tax Commissioner. In the case of reorganizations carried out without generating taxable profits in the transferring company, the NID is calculated as if no restructuring took place. The NID may be restricted by the Tax Commissioner if he is of the opinion that the arrangements have been put in place with the aim of benefitting from the NID, with no valid economic or commercial reason or in the case where there is an attempt to utilise the old equity as new equity through related party transactions and other arrangements.

7 Section 33 of the law gives the power to the Tax Commissioner to adjust the profits or the benefits of a Cyprus tax resident person, by imposing additional “deemed income” in cases where the conditions of a transaction between related parties are not the same as those that would have been agreed and applied between unrelated parties. The amendment of the law now grants the right to the other party to account for a “deemed expense”, equal to the increase in the profit or the benefits of the party for which the commissioner imposed deemed income. The “deemed expense” will also be subject to the normal interest restriction provisions based on Section 11 of the legislation.

Notes

1 For the following assets acquired through 2012-2018 (new/ used/ additions) an increased allowance on the acquisition cost of the assets is provided as follows:

• plant and machinery 20%

• furniture and fittings 20%

• industrial buildings 7%

• hotel buildings 7%.

2 Allowances start when the asset is used in the business. For assets acquired from related companies, within this period, Art. 33 may apply.

Losses

Tax losses incurred in any one year and which cannot be set off against other profits of the same year, can be carried forward and set off against future profits of the next five years.

This amendment in the income tax law applies from 1/1/2013 and acts retrospectively for losses carried forward from the year 2008.

Relief in respect of group trading losses is allowed among Cyprus tax resident companies which are members of the same group (with at least 75% control) for the whole year. Only current year group trading losses can be surrendered from one company of the group to another. As from 1/1/2012 companies incorporated by their parent company within the year (with at least 75% ownership), will qualify for group relief for the whole year.

As from 1 January 2015, a company established and tax resident in any member state of the EU, can transfer losses to a group company resident in Cyprus, provided that it has exhausted all other possibilities to use the said losses in its country of tax residence. The amendment also covers companies operating in jurisdictions outside EU with which Cyprus has signed bilateral or multilateral agreements for the avoidance of double taxation or for exchange of information.

Losses of a sole trader or a partnership business converted into a limited liability company can be set off against future profits of the company.

Losses of a permanent establishment abroad can be set off against the Cyprus profits of a business whether incorporated or unincorporated. However, future profits of the permanent establishment are liable to tax, to the extent of the losses allowed (loss recapture).

Company reorganisations

Transfers of assets and liabilities between companies in the course of a reorganisation (including provisions and reserves) can be effected without any tax consequences.

The term reorganization includes exchange of shares, transfer of commercial activities, mergers and demergers.

As from 1 January 2016, the new law provides that the Tax Commissioner can refuse to apply the tax relief on the reorganization provisions unless there are valid commercial and economic reasons that substantiate the reorganization application.

The Tax Commissioner may also provide the tax exemptions conditionally in respect to the number of shares to be issued and also for the time period that the shares should be kept by the recipient, which should not exceed 3 years.

Contact us for:

* Implementation of Tax methods.

* Preparation and Implementation of IP regime.

* Consultation for group structuring.

* Transfer pricing Implementation.

Yossi Elmaliah, Founder of FinPro, house of Finance.

www.finpro.com.cy

Ye@finpro.com.cy