Corporation Tax

Basis of taxation

All  Cyprus tax resident companies are taxed on their income accrued or derived from all chargeable sources in Cyprus and abroad. A non-Cyprus tax resident company is taxed on income accrued or derived from a business activity which is carried out through a permanent establishment in Cyprus and on certain income arising from sources in Cyprus.

A company is a resident of Cyprus if it is managed and controlled in Cyprus. Foreign taxes paid can be credited against corporation tax liability.

Corporate tax rate

Exemptions

Type of income	Exemption limit
Profit from the sale of securities1	The whole amount
Dividends	The whole amount2
Interest not arising from the ordinary activities or closely related to the ordinary activities of the company3	The whole amount4
Profits of a permanent establishment abroad, under certain conditions	The whole amount

(1) The term 'Securities' is defined as shares, bonds, debentures, founders' shares and other securities of companies or other legal persons, incorporated in Cyprus or abroad and options thereon. A circular issued by the Tax Authorities in 2008 further clarifies what is included in the term Securities, e.g. futures/forwards on Securities, swaps on Securities, depositary receipts, repurchase agreements, units in open-end or close-end collective investment schemes etc.

(2) Such dividend income may be subject to Special Defence Contribution.

(3) All the interest income of Collective Investment Schemes is considered to be arising from the ordinary activities or closely related to the ordinary activities of the Scheme.

(4) Such interest income is subject to Special Defence Contribution.

Losses Carried Forward

Tax losses incurred during a tax year and which cannot be set off against other income, is carried forward and set off against future profits of the next 5 years. This provision is applicable for all losses incurred from tax year 1997 onwards.

The current year loss of one company can be set off against the profit of another provided the companies are Cyprus tax resident companies of a group. Group is defined as:

• One company holding at least 75% of the voting shares of the other company
• At least 75% of the voting shares of both companies are held by another third company

A partnership or a sole trader transferring business into a company can carry forward tax losses into the company for future utilisation.

Losses from a permanent establishment abroad can be set off with profits of the company in Cyprus. Subsequent profits of an exempt permanent establishment abroad are taxable up to the amount of losses allowed.

Reorganisations

Transfers of assets and liabilities between companies can be effected without tax consequences within the framework of a reorganisation and tax losses can be carried forward by the receiving entity. 

Reorganisations include:

•  mergers
•  demergers
•  transfer of assets
•  partial divisions
•  exchange of shares
•  transfer of registered office

Special Defence Contribution

Special contribution for defence is imposed on dividend income, 'passive' interest income and 'passive' rental income earned by Cyprus tax residemts. Non-tax residents are generally exempt from special contribution for defence. It is charged at the rates shown in the table below:

	Individuals %	Legal entities %
Dividend income from Cyprus resident companies	17	Nil
Dividend income from non-Cyprus resident companies	17	Nil1
Interest income arising from the ordinary activities or closely related to the ordinary activities of the business	Nil	Nil
Other interest income	302	302
Rental income (reduced by 25%)	3	3

Notes

1. Dividend income from abroad is exempt from defence fund contribution.

This exemption does not apply if:

• more than 50% of the paying company's activities result directly or indirectly in investment income and
• the foreign tax is significantly lower than the tax burden in Cyprus. The tax authorities have clarified through a circular that "significantly lower" means an effective tax rate below 6,25%.

When the exemption does not apply, the dividend income is subject to special contribution for defence at the rate of 17%.

2. Interest income from Cyprus government savings bonds and development bonds and all interest earned by a provident fund is subject to special contribution for defence at the rate 3% (instead of 30%).

In the case where the total income of an individual (including interest) does not exceed €12.000 in a tax year, then the rate is reduced to 3% (instead of 30%).

Deemed Dividend Distribution

If a Cyprus resident company does not distribute a dividend within two years from the end of the tax year then:

• 70% of the accounting profits (after some adjustments) are deemed to have been distributed
• 17% special defence contribution is imposed on the deemed dividend distribution applicable to shareholders who are residents of Cyprus (3% on deemed dividend distribution of Collective Investment Schemes).
• Deemed distribution is reduced with payments of actual dividends which have already been paid during the two years from the profits of the relevant year.

When an actual dividend is paid after the deemed dividend distribution, then special contribution for defence is imposed only on the additional dividend paid not previously subject to deemed dividend distribution.

In case of two tier structures of Cyprus companies (parent with subsidiary) owned by non-resident shareholders, defence contribution paid by the subsidiary on deemed distribution may be claimed back by the non-resident shareholder upon receipt of an actual dividend.

 Capital Gains Tax

Capital Gains Tax is imposed at the rate of 20% on gains from the disposal of immovable property situated in Cyprus including gains from the disposal of shares in companies which own such immovable property excluding shares listed in any recognised stock exchange.

Exemptions

The following disposals of immovable property are not subject to Capital Gains Tax:

• Transfers arising on death.
• Gifts made from parent to child or between husband and wife or between up to third degree relatives.
• Gifts to a company where the company's shareholders continue to be members of the donor's family and the shareholders continue to be members of the family for five years after the day of the transfer.
• Gifts by a family company to its shareholders, provided such property was originally acquired by the company by way of donation. The property must be kept by the donee for at least three years. For gifts that were made from the company to its shareholders and took place before 28 May 1999, the exemption applies irrespective of how the immovable property was originally acquired by the company.
• Gifts to charities and the Government.
• Transfers as a result of reorganisations.
• Exchange or disposal of immovable property under the Agricultural Land (Consolidation) Laws.
• Expropriations.
• Exchange of properties, provided that the whole of the gain made on the exchange has been used to acquire the other property. The gain that is not taxable is deducted from the cost of the new property, i.e. the payment of tax is deferred until the disposal of the new property.

Stamp Duty

On certain types of documents, there may be stamp duty payable at the rates shown in the table below:

Nature of documents	Rate
- the first €5.000	0%
- between €5.001 - €170.000	0,15%
- above €170.000	0,2% *
Contracts without fixed sum	€35

 * Capped at a maximum of €20.000 as from 1 March 2013.

International Cyprus Trust

A trust may be defined as an obligation of a person (the 'Trustee') to whom property is transferred by the owner of the property and the creator of the trust (the 'Settlor'), to hold and manage such property for a defined period according to the wishes of the settlor, oral or written as expressed in a Deed of Trust or a Will, in favour of a specified person or persons (the 'Beneficiaries'). A trust is not a separate legal entity. Cyprus International Trust is a trust in respect of which:

a) The Settlor is not a tax resident in Cyprus during the calendar year which precedes the year of creation of the trust;

b) At least one of the Trustees from time to time is a tax resident in Cyprus during the trust period;

c) None of the Beneficiaries are tax residents in Cyprus during the calendar year which precedes the year of creation of the trust.

Provisions of the applicable Law state that:

• Where the beneficiary is resident in Cyprus, the income and profits of a Cyprus International Trust which are earned or deemed to be earned from sources within and outside of Cyprus, are subject to every form of taxation imposed in Cyprus.
• Where the beneficiary is not a resident in Cyprus, the income and profits of a Cyprus International Trust which are earned or deemed to be earned from sources within Cyprus, are subject to every form of taxation imposed in Cyprus.

Shipping Companies

• The Merchant Shipping Legislation fully approved by the EU provides for exemption from all direct taxes and taxation under tonnage tax regime of qualifying shipowners, charterers and shipmanagers, from the operation of qualifying community ships (ships flying a flag of an EU member state or of a country in the European Economic Area) and foreign (non-community) ships under certiain conditions in qualifying activities.
• Exemption is also given in realtion to the salaries of officers and crew of such ships.
• The exemption also applies to the bare boat charterer of a vessel flying the Cyprus flag under parallel registration.
• The application of the tonnage tax system is compulsory for owners of Cyprus flag ships and optional for owners of non-Cyprus flag ships, charterers and shipmanagers. Those who choose to enter the Tonnage Tax regime must remain in the system for at least 10 years.

Double Taxation Treaties

Cyprus has a network of 45 Double Taxation Treaties with countries across the globe. In the case where tax is paid in the treaty partner’s country, this is allowed as a credit against the tax payable in Cyprus for the same income (For details refer to Double Tax Treaties).

Value Added Tax

VAT is imposed on the provision of goods and services in Cyprus, as well as on the acquisition of goods from the European Union (EU) and the importation of goods into Cyprus.

Taxable persons charge VAT on their taxable supplies (output tax) and are charged with VAT on goods or services which they receive (input tax).

If output tax in a VAT period exceeds total input tax, a payment has to be made to the state. If input tax exceeds output tax the excess input tax is carried forward as a credit and set off against future output VAT.

Immediate refund of excess input VAT can be obtained in the following cases:

• a period of 3 years has elapsed from the date the VAT became refundable (reduced to 2 years as from 1 January 2014, 1 year as from 1 January 2015 and 8 months as from 1 January 2016)
• input VAT which cannot be set off against output VAT until the last VAT period of the year which follows the year in which the VAT period in which the credit was created falls
• the input VAT relates to zero rated transactions
• the input VAT relates to the purchase of capital assets of the company
• the input VAT relates to transactions which are outside the scope of VAT but would have been subject to VAT had they been carried out within Cyprus
• the input VAT relates to exempt financial and insurance services provided to non-EU resident clients (services for which the right to recover the related input VAT is granted).

For intra-Community acquisition of goods (except goods subject to excise duty) the trader does not pay VAT on receipt of the goods in Cyprus but instead accounts for VAT using the acquisition accounting method. This involves a simple accounting entry in the books of the business whereby it self-charges VAT and at the same time claims it back, provided it relates to taxable supplies thereby creating no cost to the business.

In cases where the acquisition relates to an exempt transaction, the trader must pay the VAT that corresponds to the acquisition.

As from 1 January 2010 significant changes come into effect in the EU and Cyprus VAT legislation in the following areas:

• Changes in the country of taxation of services provided between businesses established in two different EU Member States (B2B)
• Changes in the country of taxation of services, supplied to consumers (B2C)
• Changes in the time of supply of services for which VAT is due by the recipient
• Procedure for refund of VAT paid in another Member State (MS)
• Additional compliance obligation for electronic submission of the monthly VIES return for services subject to VAT in another EU Member State through the reverse charge provisions.

As from 1 January 2010 Cyprus resident businesses supplying services to businesses established in another EU MS are required to complete and submit a VIES declaration for services which are taxed by the recipient under the reverse charge provisions. The VIES declaration needs to be submitted on a monthly basis. In addition as from 1 January 2010 the VIES declaration for intra-Community supplies of goods must also be submitted on a monthly basis [instead of a quarterly basis]. Submission of the VIES return is only possible electronically.

VAT rates

The legislation provides for the following four tax rates:

• Zero rate (0%)
• Reduced rate of five per cent (5%)
• Reduced rate of eight per cent (8% up to 12 January 2014 and 9% as from 13 January 2014)
• Standard rate of fifteen per cent (15% up to 29 February 2012, 17% as from March 2012 up to 13 January 2013, 18% as from 14 January 2013 up to 12 January 2014 and 19% as from 13 January 2014)

Exemptions

Certain goods or services are exempt from VAT. They include:

• the letting of immovable property (the letting of immovable property with the right of purchase is not exempt);
• most banking and financial services and insurance services;
• most hospital, medical and dental care services;
• certain cultural educational and sports activities;
• supplies of real estate (except supply of new buildings before their first use) including supplies of land and of second-hand buildings;
• postal services provided by the national postal authority;
• lottery tickets and betting coupons for football and horse racing;
• management services provided to mutual funds.

Difference between zero rate and exempt supplies

The difference between zero rate and exempt supplies is that businesses that make exempt supplies are not entitled to recover the VAT charged on their purchases, expenses or imports.

Irrecoverable input VAT

As an exception to the general rule, input VAT cannot be recovered in a number of cases which include the following:

• acquisitions used for making exempt supplies;
• purchase, import or hire of saloon cars;
• entertainment and hospitality expenses (except those relating to employee and directors);
• housing expenses of directors.

Registration

Registration is compulsory for businesses with (a) turnover in excess of €15.600 during the 12 preceding months or (b) an expected turnover in excess of €15.600 within the next 30 days. Businesses with turnover of less than €15.600 or with supplies that are outside the scope of VAT but for which the right to claim the amount of the related input VAT is granted, have the option to register on a voluntary basis.

An obligation for registration also arises for businesses which make acquisition of goods from other EU Member States in excess of €10.251,61 during any calendar year. In addition as from 1 January 2010 an obligation for VAT registration arises for businesses engaged in the supply of intra-Community services for which the recipient must account for VAT under the reverse charge provisions. Furthermore an obligation for VAT registration arises for businesses carrying out economic activities from the receipt of services from abroad for which an obligation to account for Cyprus VAT under the reverse charge provision exists. No registration threshold exists for either intra-Community supply of services or from receipt of services from abroad.

Exempted products and services, and disposals of items of capital nature are not taken into account for determining annual turnover for registration purposes. Registration is effected by completing the appropriate application form.

VAT declaration - Payment/return of VAT

VAT returns must be submitted quarterly and the payment of the VAT must be made by the 10th day of the second month that follows the month in which the tax period ends.

VAT registered persons have the right to request for a different filing period. Approval of the VAT authorities is required. The VAT Commissioner also has the right to request from a taxable person to file his VAT returns for a different period.

Where in a quarter input tax is higher than output tax, the difference is refunded or is transferred to the next VAT quarters.

 Immovable Property Tax

Immovable Property Tax is imposed on the market value as at 1 January 1980 and applies to the immovable property owned by the taxpayer on 1 January of each year. This tax is payable on 30 September each year.

As from 1 January 2013, the bands and rates for Immovable Property Tax for properties situated in Cyprus have been revised as per table shown below, which apply per owner, not per property.

Physical and legal persons are both liable to Immovable Property Tax.