5. Taxation

a. Introduction and developments

Direct taxation is principally based upon residency and charged on a resident’s worldwide income. Individuals are resident if they spend more than 183 days in Cyprus in a calendar year. Any company is resident if it is managed and controlled in Cyprus. A Cypriot company is not subject to Cypriot income tax on its worldwide income if it is managed and controlled outside Cyprus. These residency rules are superannuated and replaced where there is a governing tax treaty. Trustees must account for tax if a beneficiary of a trust is resident in Cyprus. All legal persons are liable for tax on income arising in Cyprus, subject to relief provided through tax treaties or law.

As a full member of the EU, Cyprus has implemented laws relaxing bank confidentiality in order to facilitate the automatic exchange of information about bank interest paid to individuals who are resident in other member states of the EU.

b. Tax system

i. General concepts of tax liability

There are no estate, inheritance or gift taxes in Cyprus. Capital gains tax applies only to immovable property that is situated in Cyprus. Stamp duty on transactions is generally applicable. There is an annual immovable property tax based on property values of 1980. Cyprus law provides for a value added tax (VAT). Also, a ‘defence tax’, similar to a second income tax, is payable by residents.

ii. Rates and exemptions

Income tax is calculated after the deduction of expenses incurred wholly and exclusively for the purposes of a trade, occupation or profession.

Capital gains tax, at a rate of 20 per cent, is limited to chargeable gains in connection with immovable property situated in Cyprus. The property is taxable irrespective of whether it is owned directly or indirectly. Exemptions apply to transfers on death and transactions between relatives up to the third degree.

VAT has cash flow implications for commercial enterprises, and is levied at 15 per cent of an invoice’s value. With some exceptions, this tax is usually fully offset or reclaimed by registered enterprises so as to have no effect on profits.

Income tax on companies is levied at 10 per cent of taxable profits. If foreign income tax has already been paid, it may be offset against Cypriot income tax. In many cases, there will be no further income tax to pay.

For individuals who are resident in Cyprus, taxable income is taxed at incremental rates that reach 30 per cent when taxable income moves above EUR36,300. Although dividends and interest are exempt from income tax, Cypriot residents must pay defence tax on this income at a rate of 15 and 10 per cent respectively (see (d) below).

Companies managing ships may opt for a special tonnage tax if it is more beneficial than income tax.

iii. Taxable period and filing requirements

The fiscal year is the calendar year. Individuals must file tax returns by the following 30 April. Companies are required to pay in the year of assessment itself (1 August, 30 September and 31 December) based on estimates. When liability is finalised, penalties and interest may be payable.

c. International

i. Non-residents shareholders and trusts for non-residents

Shareholders (including persons owning shares through nominees) and trust beneficiaries who are not resident in Cyprus are not liable for Cypriot taxes.

ii. Non-resident withholding taxes

Withholding taxes of between 5 per cent and 10 per cent are payable by non-residents on Cypriot income derived from intellectual property rights, film royalties or entertainment and sporting activities.

iii. Tax treaties

Cyprus has 43 tax treaty partners.

d. Other taxes

The defence tax applies only to residents on certain kinds of passive income. Cypriot companies that are resident in Cyprus are liable at rates of 15 per cent and 10 per cent on dividends and interest respectively. Where a Cypriot company qualifies for an ‘international participation exemption’, the defence tax on dividends is eliminated. Moreover, if the taxpayer can show that foreign income taxes have already been paid on the foreign income, a foreign tax credit would apply.

e. Other relevant matters

Reorganisation of corporate structures may be structured to utilise exemptions from capital gains tax and stamp duty. Unutilised losses may be transferred advantageously into the surviving company.

Pensions that are pursuant to contracts of service performed abroad and are payable to individuals who are residents of Cyprus are taxed at five per cent for amounts exceeding EUR3,417.

© 2012 Society of Trust & Estate Practitioners