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Legal Entities

Tax Basis

A company is tax resident of Cyprus if its management and control is exercised in Cyprus. Some of the most important factors used for deciding the place where the management and control of a company is exercised are the following:

 

  • the place where the board meetings are held
  • the place where the majority of the board of directors lives
  • the place where the company has its central offices, from where the strategic decisions are taken
  • the place from where the company’s bank accounts are maintaine

 

Cyprus Tax Residents

Companies tax residents of Cyprus are taxed on their whole income accrued or derived from all sources in Cyprus and abroad.

 

Non – Cyprus Tax Residents

Companies which are not tax residents of Cyprus are taxed on their income accrued or derived from business activities which are carried out through a permanent establishment in Cyprus and/or any other certain type of income arising from sources in Cyprus.

 

 

Corporation Tax Rate

The tax rate for companies is 12.5%.

 

Tax Exemptions   

Type of income Exemption limit
Interest income 100%

 

Provided that the interest income arises from activities other than the ordinary activities of the company or closely related to the ordinary activities of the company.

The interest income of Collective Investment Schemes is considered to be arising from the ordinary activities of the Scheme.

Dividends   100%
Profits from the sale of securities 100%
Profits of a permanent establishment abroad, under certain circumstances 100%

 

Tax Deductions

All expenses incurred wholly and exclusively for the generation of the company’s income are tax deductibles (Note 1) including:

 

 

Type of expenditure Deduction limit
Interest related to the acquiring of assets used for business purposes 100%
Expenses incurred for the maintenance of a building in respect of which there is a Preservation Order Up to €700, €1.100 or €1.200 per square meter (depending on the size of the building)
Donations to approved charities (with receipts) 100%
Employer’s contributions to social insurance and approved funds on employees’ salaries, provided they are paid in the year in which they are due (if paid within two years after the last due date, will be tax deductible in the year in which they are paid) 100%

 

Note:

  1. Any wages and salaries relating to services offered within the tax year on which contributions to the Social Insurance Fund, Human Resource Development Fund, Social Cohesion Fund, Pension Fund and Provident Fund have not been paid in the year in which they were due will not be tax deductible for the calculation of taxable income.In case the above contributions (including penalties and interest) are paid in full within two years after the last due date, such wages and salaries will be tax deductible in the tax year during which they were paid.

 

Non Deductible Expenses

The following expenses are non tax deductible:

 

 

Type of expenditure Limit not deducted
Entertainment expenses for business purposes Excess of 1% of the company’s gross income or €17.086 (any of the two is the lower)
Expenses of a private motor vehicle 100%
Professional tax 100%
Immovable property tax 100%
Interest related to the cost of acquiring a private motor vehicle irrespective of its use in the business and to the cost of acquiring any other asset not used in the business 100% (for 7 years following the acquisition year)

 

Losses carried forward

Any tax loss incurred during a tax year is carried forward over the next five years from the end of the tax year in which they were incurred and set off against future profits. The restriction enters into force from year 2012 (profits of year 2007 onwards).

 

Set off of losses between Group Companies

The current year losses between a company are permitted to be netted off against the profits of another company provided the companies are Cyprus tax residents belonging to the same Group for the whole tax year.  In cases where a company has been set up by its parent company during the year, this company will be deemed to be member of the group for the whole year for group relief (at least 75% shareholding must exist). Group is defined as:

 

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

 

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

 

Losses from a permanent establishment abroad

Losses from a permanent establishment abroad can be set off with profits of the company in Cyprus. However, any subsequent profits of the permanent establishment abroad are taxable in Cyprus up to the amount of losses previously allowed.

 

Tax paid abroad

Any tax paid abroad in respect of income taxed in Cyprus under corporation tax will be allowed as credit against the tax payable on such income irrespective of the existence of a Double Tax Treaty between the countries.

 

 

Special Types of Companies

Shipping companies

As from 24 March 2010, the EU approved the new Tonnage Tax System for Cyprus. The new Tonnage Tax System as introduced by the Merchant Shipping Law 44(I) of 2010 was permitted for retrospective application as from 1 January 2010.

 

The new Tonnage Tax System covers the ship owning activities as well as the ship management and chartering activities.

  • No income tax is charged on the profits earned or dividends paid by a Cyprus shipping company which owns ships under the Cyprus flag and operates in international waters (including the chartering of vessels). No income tax is also paid on the salaries of crews and officers of such ships.
  • No income tax is charged on the profits earned or dividends paid by bare boat charterers of vessels flying the Cyprus flag under parallel registration.
  • Profits arising from shipping operations of a qualifying ship owner/ship charterer/ship manager (including either local or international ship management or crew management) are exempted from corporation tax and is subject to net tonnage tax.  
  • Profits arising from shipping operations of a non-qualifying ship owner/ship charterer/ship manager are subject to corporation tax at the rate of 12.5%.

Notes:

  1. the tonnage tax for a qualifying ship manager will equal to 25% of the rates used to calculate tonnage tax for a qualifying ship owner/charterer.
  2. qualifying ship owners, charterers and ship managers electing to be taxed under the new Tonnage Tax System must remain in the system for 10 years. Early withdrawal will result in penalties. 

 

 

Insurance companies

Profits of insurance companies of the general and life business are taxed in the same way as all other companies. However, in the case of life business insurance companies where there is no tax payable or the tax payable on taxable profits is less than the 1,5% of the gross amount of the insurance premiums then the difference is paid as additional corporation tax.