A company, which is managed and controlled in Cyprus, is considered tax resident in Cyprus and is liable to tax on income arising from both sources within and outside Cyprus. A company which is not tax resident in Cyprus is liable to tax on income arising from sources within Cyprus only.
Cypriot tax residency is achieved, in practice, by having a majority of Cypriot resident directors and ensuring that the major decision – making is taken in Cyprus. This is usually achieved by having meetings of the Board of Directors take place in Cyprus and signing contracts, agreements and other relevant company documents relating to the management, control and administrative functions in Cyprus. Furthermore the accounting records of the company are prepared and kept in Cyprus and the bank accounts are operated from Cyprus, even if the accounts are maintained with banks established outside Cyprus.
A uniform tax rate of 12.5% on net profits is applied to all companies either operating locally or internationally. The rate of 12.5% applies to net profits after deducting all expenses incurred wholly and exclusively for the production of income. Foreign taxes paid are deducted from the tax liability payable in Cyprus.
The following income is tax free:
- Dividends received
- Profits from the disposal of shares and other securities
- Profits from a permanent establishment situated outside Cyprus
- Interest income not arising from the ordinary activities of the company. Such interest is subject to special contribution for defense. All the interest income of collective investment schemes is considered to be arising from the ordinary activities of the scheme.
- Gains relating to foreign exchange differences with the exception of foreign exchange gains arising from trading and in foreign exchange from the ordinary activities of the company
Relief for taxes paid abroad is granted in the form of a tax credit against tax payable in Cyprus. The relief is given unilaterally irrespective of the existence of a double tax treaty.
Corporate Tax Deductions
- All expenses incurred wholly and exclusively for the business and the production of income, but not including expenses of a private motor vehicle.
- Interest expense incurred for the purchase of a 100% subsidiary provided that the subsidiary does not own any assets not used for the business.
- Notional interest (NID) on new equity (in the form of paid up share capital) introduced in a company.
- 80% of net qualifying profits derived from intellectual property qualifying assets using the modified nexus fraction.
- Expenditure for the maintenance of a building under Preservation Order
- Entertainment expenses for business purposes, the lower of €17,086 or 1% of the gross income of the business.
- Tax losses can be carried forward and set off against the profits for the next five years
- Annual wear and tear allowances (capital allowances) on qualifying fixed assets, based on a percentage of the cost of acquisition are deductible from the net profits of the company
- Donations to approved charities
- Employer’s contributions to social insurance funds
- Group losses available