Cyprus Scope of Corporation Tax

Cyprus imposes corporation tax on 'companies': this term includes all companies incorporated or registered under any Cyprus law, and any foreign company which carries on business or has an office or place of business (permanent establishment) in Cyprus.

"Permanent establishment" has the same meaning as defined in the OECD Model Tax Convention on Income and on Capital with the exemption of "a building site or construction or installation project", which constitutes a permanent establishment only if it lasts more than three months.

Tax Rates

In July, 2002, as part of the Income Tax Act No. 118(I) of 2002, Parliament approved a uniform 10% corporate tax rate, to apply to both onshore and offshore companies, plus a 2% levy on wage bills (meant to subsidise pensioners), and a 'Special Contribution' related to defence which in effect applies the 10% corporate tax rate to inter-company dividend and interest payments. However, the rules are complex. The tax rules were improved for collective investment schemes in 2009 (see below).

The 10% corporate tax gives Cyprus one of the the lowest rates in the EU, alongside Ireland (12.5%), with the exception of the Isle of Man, Jersey and Guernsey, which have all introduced a nil rate for non-financial services firms (and 10% for financial services firms) - but these islands are not in the EU anyway for most purposes.

An additional tax of 5% was imposed on company profits exceeding CYP1m for the years 2003 and 2004.

In June 2010, a proposal was considered by the Cypriot parliament for a temporary 1% increase in the rate of corporate tax for the tax years 2010 and 2011, but was rejected in the following month.

As from 2003, Cyprus applied a residence-based taxation regime: "Resident in the Republic", when applied to a company, means a company whose management and control is exercised in the Republic; and "non-resident or resident outside the Republic" will be construed accordingly.

However, profits from activities of a permanent establishment situated outside Cyprus are completely exempt. This exemption will not apply to a Cyprus company if: (i) its foreign permanent establishment directly or indirectly engages in more than fifty per cent (50%) of its activities in producing investment income, and (ii) the foreign tax burden is substantially lower than that in Cyprus.

Dividends are exempted from tax; however, provisions have been introduced under the Special Contribution for the Defence of the Republic Law, 2002 ("Special Contribution").

Collective Investment Schemes

In 2009, the The Cyprus Income Tax Law N.118(I)/2002 was amended to clarify that interest income earned by a collective investment scheme (CIS) is subject only to income tax (less any allowable expenses) and exempt from the Special Defence Contribution. This amendment was made in a bid to attract more investments schemes to set up and operate from Cyprus and to improve taxation for companies holding interests in Cypriot and non-Cypriot CISs.

In addition, the changes mean that the redemption of a unitholding in a collective investment scheme will not be considered as a reduction in capital under the Special Defence Law, therefore there will be no tax obligations on the distribution arising from the redemption.

Furthermore, the Special Contribution for Defence Law was amended in order to abolish the minimum participation requirement of 1% when it relates to dividends received from abroad by a Cyprus tax resident company. This makes it easier for portfolio investors to benefit from the dividend participation exemption.

The result of the amendment is that interest earned by a Cypriot company is now reduced to a maximum rate of 10% in all cases, whereas prior to the change, interest income could be taxed at 15%. The amendment was approved by parliament on October 22, 2009 and came into immediate force. It is enforceable from January 1, 2009.

See Law of Offshore for a fuller description of Cypriot investment law.

EU Savings Tax Directive

After the EU finally agreed its Tax Directive in June, 2003, the Commission said it intended to give the ten states acceding at that time, of which Cyprus was one, until 2007 to implement the Directive, which included a 'Code of Conduct' on 'harmful tax practices' and rules to avoid the double taxation of royalty and interest payments.

However, a statement released by the Cypriot Ministry of Finance said that Cyprus would adopt the new code in full from 2005. The royalties and company interest directive was in place from January 2004, according to the ministry, which pointed out that it was already compliant with the Code of Conduct rules as a result of its recent tax reforms.

Along with other member states of the EU, Cyprus introduced an exchange of information regime applying to the returns on savings under the Savings Tax Directive as from 1st July 2005.

Cyprus was rated by a recent KPMG poll as the most attractive tax regime in Europe (with the net attractiveness score of 90%), followed by Ireland, Switzerland and Malta.

Special Levy on Banks

On April 14, 2011, legislation was enacted to introduce a special bank levy in Cyprus under which financial institutions operating in Cyprus will be required to pay 0.095% on the total amount of deposits held at the end of each calendar year, up to a maximum of 20% of banks' total taxable profits. Interbank deposits and deposits held by foreign financial institutions are excluded from the levy. However, subsidiaries and branches of foreign banks are included within the law.

About half of the revenues raised by the levy for the years 2011 and 2012 will be transferred to a special 'stability fund' to help underpin the future stability of the island's financial system. The rest will be treated as general government revenue, but from 2013 all money raised by the levy will be transferred to the stability fund.

Financial institutions will be required to declare their taxable deposits by March 31 each year and pay the levy on a quarterly basis on the last day of March, June, September and December. Banks which are found to have passed the cost of the levy on to their customers face paying a EUR100,000 fine.

The levy is not deductible for income tax purposes, but reduces the amount of profits subject to deemed distribution.

The levy is effective from the date that the law is published in the Cypriot government's official gazette and regulations regarding the operation of the stability fund must be published within six months, beyond which banks will be entitled to claim compensation from the government.

Recent Developments

Other recent developments in Cyprus tax law include the following:

• As from April 1, 2011, all tax returns submitted by companies and self-employed individuals with an annual turnover of more than EUR70,000 must be accompanied by a Tax Confirmation that is prepared and signed by an independent tax advisor or auditor. This requirement follows the issue by the Commissioner of Income Taxes of Circular 2011/1 on February 15, 2011. In addition, all tax returns submitted by companies and self-employed individuals with a turnover exceeding EUR70,000 for the 2010 and subsequent tax years must submit their tax returns electronically.
• In April 2010, the Cypriot government announced a fiscal stability plan designed to put government finances back on a sustainable path, and gear the economy towards recovery. The plan increases the value-added tax rate on previously zero-rated goods, namely pharmaceuticals and certain food items, to 5% in 2011. The standard rate of VAT in Cyprus is 15%. The fiscal plan will also step up the fight against tax evasion.
• As part of new austerity measures approved by parliament in late August 2011, companies will be required to pay a new annual fee of EUR350. However, proposals to increase the rate of VAT to 17% were dropped from the package of measures, which are designed to narrow the budget deficit.

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Cyprus Branch or Subsidiary?

Corporation tax rates are the same, but the calculation of the taxable base is different:

• Head-office expenses are allowable in both cases
• Transfer-pricing rules may be applied differently in the two cases
• Branch profits may be remitted to head office free of withholding tax; corporate dividends are also now exempt from withholding tax
• Interest on intercompany loans is generally deductible for a company, but not for a branch.

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Cyprus Calculation of Taxable Base

Allowable expenditure needs to be incurred 'wholly and exclusively' for the business; however, mixed private/company expenses can often be apportioned. Among others, the following expenses are allowable:

• Repairs, but not improvements, alterations or additions
• Contributions to an approved fund
• Bad debts and provisions for them
• Non-capital scientific research expenditure
• Expenditure on patents or patent rights
• Various types of charitable expenditure
• Interest on loans, other than for those used to acquire shares
• Rental payments
• Salaries and other compensation costs for employees and directors
• Inventories are valued using FIFO
• Wear and tear allowances on prescribed scales which replace depreciation in the tax calculation
• Investment allowances which are available for certain activities

There are some restrictions on the use of losses from one trade to offset profits from another. Unrelieved losses can normally be carried forward to offset future profits, but from 1996 they have only a 5-year life. Group relief is available but with limitations.

50% of income from interest derived by a company is exempt from corporate tax but the whole interest received or credited will be subject to the new provisions of the Special Contribution. Interest derived from ordinary trading activities will only be subject to the Income Tax Law provisions without any exceptions.

The Group Relief rules, now enacted, provide for group relief of tax losses among companies of the same group. A company will be considered as member of a group if:

• A company is at least 75% subsidiary of the other, or
• Both companies are at least 75% subsidiaries of a third company.

A company will be considered to be 75% subsidiary of another company if and so long as not less than 75% of its ordinary share capital with voting rights are owned directly or indirectly by that other company and that other company is entitled to not less than 75 per cent of:

• Any profits available for distribution to the equity shareholders, and
• Any assets of the subsidiary company which would be available for distribution to its equity holders on a winding up.

Group tax losses may be set off as long as both companies are Cypriot tax residents and are members of the same group during the whole year of assessment.

Only the loss of any year of assessment of a company can be set off against the other company's profits of the corresponding year of assessment. Losses brought forward will not be available for Group Relief.

Any payment for acquiring the tax losses will not be taken into account in the tax computation nor will it be considered to be a dividend or an allowable expense.

Profits from the sale of shares, bonds, debentures and other titles of companies established anywhere in the world are exempt from tax.

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Cyprus Filing Requirements and Payment of Tax

Company tax returns must be filed in respect of each fiscal (calendar) year by 31st December in the year following the fiscal year, together with balance sheet and profit and loss account, auditor's report, income tax and Defence Tax computation and additional information report.

Self-assessment operates, and corporation tax payments have to be made on 1st August, 30th September and 31st December of the year of assessment. Fines apply to late or materially faulty self-assessments.

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Cyprus Withholding Tax

Dividends, royalties arising from the use of an asset outside Cyprus and interest payments to non-residents are now exempt from withholding tax. Other types of payment to non-residents are subject to withholding tax at 10%, although if the payment is in respect of a right outside Cyprus, there is no withholding. The rate of withholding for film royalties earned by a non-resident is 5%.

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