The essential Tax Law in Cyprus

These are the highlights if you want to know more about the essential Tax Law in Cyprus. This entry was drafted by Michael Damianos & Co LLC. Link to e-IURE Network.

This collaboration is a brief step-by-step guidance. In no case it can be considered as legal advice. If you want -or need – legal advice, ask for a lawyer or a law firm. In that case Michael Damianos & Co LLC is an excellent option in Cyprus.

Cyprus offers an attractive, efficient and transparent tax regime fully compliant with EU and OECD standards, complemented by and enhanced by an extensive network of over sixty double tax treaties, and is an ideal destination in terms of tax incentives and advantages for both legal and natural persons.

Individuals

An individual resident in Cyprus is liable to tax on his/her worldwide income, irrespective of whether it is remitted in Cyprus or not.  Non-resident individuals are liable to income tax in Cyprus only on income sourced in Cyprus, for example rental income.

An individual is considered to be resident in Cyprus for tax purposes if he is present in Cyprus for more than 183 days in the year under consideration.  This 183 days’ requirement can go down to at least 60 days if the relevant individual is not tax resident in any other jurisdiction in the world.

The tax rates for individuals are progressive starting from 20% and going up to 35% as provided in the table below:

There are various deductions in relation to the above tax rates such as payments to registered charities and payments into pension/insurance and social insurance plans

A non-resident who takes up employment in Cyprus and becomes resident is permitted a 20% tax free allowance with a maximum of €8.550 on his/her employment income for a period of three years, following the first year that he/she becomes a Cyprus resident.

A non-resident who takes up employment in Cyprus, earning an annual employment income exceeding €100.000 is allowed a 50% tax exemption on this income for a period of five years.

It, most importantly, should be noted that high-net worth individuals can benefit massively from the jurisdiction’s resident-non-domiciled regime.  Individuals who are considered to be non-domiciled in Cyprus, can benefit from no tax on certain categories of income such as interest, rents and dividends for a period of up to 17 years from the date that the relevant individual becomes a tax resident of Cyprus.  This has proved extremely beneficial for many high net worth individuals over the last few years, who have decided to take this opportunity for wealth management purposes.

Dividend income is taxed in Cyprus only against Cypriot tax residents (individuals) at a flat rate of 17 %.  Interest income is again only taxed in Cyprus against Cypriot tax residents (individuals and companies) at a flat rate of 30%.

Companies

A company resident in Cyprus is liable to tax on its worldwide income.

A company is considered as resident in cyprus if its management and control is in Cyprus.  Non-resident companies are liabile to corporation tax in Cyprus only on income sourced in Cyprus, for example rental income.  The same applies to branches of foreign companies in Cyprus, unless their management and control is in Cyprus.

The corporation tax rate is a flat rate of 12.5% which is one of the lowest in the EU and the lowest in the Eurozone, thus making Cyprus an ideal country for setting up a business.

Dividend income is exempted from corporation tax and only Cypriot resident individuals pay a contribution to the state in relation to that.

Profits from disposals of securities are exempted from corporation tax and so are profits from a permanent establishment abroad (subject to certain restrictions).

There are also group loss relief benefits and losses carried forward (for up to five years).

Withholding Taxes

No withholding taxes apply with respect to (a) dividends paid to non-residents, (b) interest paid from Cyprus to non-residents, (c) royalties paid from Cyprus to non-residents (with the exemption where the relevant intellectual property is used in Cyprus, in which case the withholding tax rate is at 10%), and (d) income on the liquidation of a Cypriot holding company.

Tonnage Tax System

An attractive tonnage tax system is in place and can be utilised, subject to certain conditions, by the shipping sector and covering three main international maritime activities, namely ship-owning, ship management and chartering.  Under the tonnage tax system, no tax is imposed on profits from shipping activities other than tonnage tax, no tax is imposed on profits from the sale of ships, and no tax is imposed on dividend paid from shipping profits.

Capital Gains Tax and Inheritance Tax

Capital gains tax is only imposed on gains from the disposal of real estate, provided that such real estate is situated in Cyprus.  The same goes to disposals of shares in limited companies whose main activity is the sale of real estate in Cyprus.  No capital gains is imposed on anything else under Cyprus law.

There is no inheritance tax in Cyprus.