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Income Tax in Cyprus


Personal income tax (PIT):

Cyprus PIT is imposed on the worldwide income of individuals who are tax residents in Cyprus. Individuals who are not tax residents of Cyprus are taxed only on certain types of income accrued or derived from sources in Cyprus.

The following table lists the PIT rates and bands currently applicable to individuals:

Chargeable income for the tax year (EUR)
Tax rate (%)
From
To

0
19,500
0
19,501
28,000
20
28,001
36,300
25
36,301
60,000
30
60,001
And above
35

Special Defence Contribution (SDC):

SDC is imposed only on dividend, interest (most types), and rental income earned by individuals who are both Cyprus tax resident and Cyprus domiciled for the purposes of the SDC.

For dividend (SDC rate of 17%) and (most types of) interest income (SDC rate of 30%), SDC applies instead of PIT. For rental income (SDC rate of 2.25%), SDC applies in addition to PIT.

Non-tax residents are exempt from SDC for all their income, whether earned from Cyprus or foreign sources. This exemption also applies to individuals who are Cyprus tax resident but not Cyprus domiciled for the purposes of SDC. Anti-abuse provisions apply.

An individual who does not have a 'Domicile of Origin' in Cyprus (as defined in the Wills and Succession Law) is only considered to be domiciled in Cyprus for SDC purposes when the individual has been a tax resident of Cyprus for a period of at least 17 years out of the last 20 years prior to the tax year in question. 'Domicile of Origin' is acquired at birth and, as a rule, is the same as the domicile of the father at the time of birth, and in exceptional cases of the mother. For those individuals with 'Domicile of Origin' in Cyprus, detailed rules are used to determine the individuals’ domicile status for SDC purposes.

Income determination:

Employment income:

Employees are taxed on all remuneration, including bonuses and benefits in kind, such as free accommodation. A number of important exemptions are available.

Employees are not taxed on reimbursements for business travel and business entertainment expenses.

Pensions received from abroad for services rendered outside Cyprus are taxable at the flat rate of 5% on amounts in excess of EUR 3,420 (the first EUR 3,420 is exempt). The taxpayer can, however, on an annual basis, elect to be taxed at the normal tax rates and bands set out in Personal income tax (PIT) in the Taxes on personal income section.

Self-employed income/Business income:

Profit arising from self-employment is generally subject to normal PIT bands as set out in Personal income tax (PIT).

For PIT purposes, generally, expenditure wholly and exclusively incurred for the generation of taxable income is deductible against the individual’s income. Such expenditure should be supported by invoices and relevant receipts or other supporting documents.

Profits from a permanent establishment (PE) abroad are exempt from PIT, subject to anti-avoidance rules set out below.

The foreign PE exemption is applicable, unless the below anti-avoidance rule applies:

·        more than 50% of the foreign PE’s activities directly or indirectly result in investment income, and
·     the foreign tax on the income of the foreign PE is significantly lower than the tax burden in Cyprus (i.e. an effective tax rate of less than 6.25%).

Losses from an ‘exempt foreign PE’ are eligible to be offset with other income subject to PIT. In such a case, future profits of an ‘exempt foreign PE’ become taxable in Cyprus up to the amount of losses previously allowed.

With effect from 1 July 2016, taxpayers may irrevocably elect to subject to PIT foreign PE profits (and utilise foreign PE losses). In such a case, credit in Cyprus will be available for foreign taxes paid on the foreign PE profits. Transitional rules may be applicable to such a credit where a foreign PE was previously exempt from taxation in Cyprus and subsequently a taxpayer elects to be subject to PIT on foreign PE profits.

Capital gains:

Capital gains, other than those relating to Cyprus-located immovable property, are generally not taxed in Cyprus. See Capital gains tax in the Other taxes section for more information.

Dividend and interest income:

Dividend and (most types of) interest income received by individuals are exempt from PIT but are subject to SDC, which is imposed at flat rates of 17% on dividend income and 30% on interest income.

We note that, as of 16 July 2015, individuals are subject to SDC only in those cases where they are both Cyprus tax resident and Cyprus domiciled for SDC purposes.

Rental income:

Gross rental income, less a deemed deduction of 20% for buildings (in lieu of actual building repairs and related maintenance expenses) and a deduction for capital allowances for buildings and interest expense for the acquisition of the building/land, is subject to PIT under the normal PIT bands.

Gross rental income (without deductions) is also subject to SDC at an effective rate of 2.25%.
We note that, as of 16 July 2015, individuals are subject to SDC only in those cases where they are both Cyprus tax resident and Cyprus domiciled for SDC purposes.

Exempt income:

The following types of income are exempt from tax in Cyprus:

·        As of 16 July 2015, individuals who are not domiciled in Cyprus for SDC purposes are exempt from SDC. Thus, dividend and (most types of) interest income for such individuals are exempt from all taxes in Cyprus.

·      A 50% exemption from PIT is provided, for a maximum period of ten years, on remuneration earned from an employment exercised in Cyprus where the remuneration for such is in excess of EUR 100,000 per annum. This applies for employments commencing as of 1 January 2012, provided that the individual was not a resident of Cyprus before the commencement of the employment. For employments commencing as of 1 January 2015, the exemption does not apply in case the said individual was Cyprus tax resident for three (or more) tax years out of the five tax years immediately prior to the tax year of commencement of the employment or Cyprus tax resident in the tax year preceding commencement of employment. Anti-abuse provisions apply.

·     A 20% exemption from PIT (up to a maximum exemption amount of EUR 8,550 annually) is provided on the remuneration earned from an employment exercised in Cyprus by an individual who was not a resident of Cyprus before the commencement of the employment. This applies for a maximum period of five years starting from 1 January in the year following the year of employment commencement. The exemption is being phased out and will not be available as of 2021. This exemption may not be claimed in addition to the immediately above mentioned 50% exemption for employment income.

·        A 100% exemption from PIT for remuneration earned from an employment exercised outside Cyprus for a period of more than 90 days (in aggregate) in a tax year for a non-Cyprus tax resident employer/foreign PE of a Cyprus tax resident employer.

·        Profits of a foreign PE are fully exempt from PIT under certain conditions.

·    Profits from disposals of corporate 'titles' are unconditionally exempt from PIT. 'Titles' is defined as shares, bonds, debentures, founders’ shares, and other titles of companies or other legal persons incorporated in Cyprus or abroad and options thereon. According to a circular issued by the Cyprus tax authorities (CTA), the term includes, inter alia, futures/forwards on titles, short positions on titles, swaps on titles, depositary receipts on titles, repos on titles, units in open or close collective investment schemes (CISs), international collective investment schemes (ICISs), undertakings for collective investment in transferable securities (UCITSs), investment trusts and funds, mutual funds, real estate investment trusts (REITs), and units in stock exchange indices on titles.

·        Social grants. The following three categories of grants are exempt from PIT:

o   A grant is provided to families for every child receiving full-time higher education in Cyprus or abroad (subject to family income criteria and certain restrictions).
o   An annual grant for each dependent child of a family resident in Cyprus (subject to family income criteria and certain restrictions).
o   An annual grant for blind persons.

·        A 20% exemption from PIT of the gross rental income for rental of buildings (i.e. not for land) in lieu of actual expenses for repairs and maintenance etc.

·        Lump sum received by way of retiring gratuity, commutation of pension, or compensation for death or injuries is fully exempt from PIT.

·        Capital sums accruing to individuals from any payment to approved funds (e.g. provident funds) are fully exempt from PIT.

Individual – Residence:

As of 2017, an individual is a tax resident of Cyprus if one satisfies either the '183 day rule' or the recently introduced '60 day rule' for the tax year. For earlier tax years only, the '183 day rule' is relevant for determining Cyprus tax residency.

The '183 day rule' for Cyprus tax residency is satisfied for individuals who spend more than 183 days in any one calendar year in Cyprus, without any further additional conditions/criteria being relevant.

The recently introduced '60 day rule' for Cyprus tax residency is satisfied for individuals who, cumulatively, in the relevant tax year:

·        do not reside in any other single state for a period exceeding 183 days in aggregate,
·        are not considered tax resident of any other state,
·        reside in Cyprus for at least 60 days, and
·        have other defined Cyprus ties.

To satisfy the fourth criteria, the individual must carry out any business in Cyprus and/or be employed in Cyprus and/or hold an office (director) of a company tax resident in Cyprus at any time in the tax year, provided that such is not terminated during the tax year. Further, the individual must maintain in the tax year a permanent residential property in Cyprus that is either owned or rented by the individual.

For the purposes of both the '183 day rule' and the '60 day rule', days in and out of Cyprus are calculated as follows:

·        the day of departure from Cyprus counts as a day of residence outside Cyprus
·        the day of arrival in Cyprus counts as a day of residence in Cyprus
·        arrival and departure from Cyprus in the same day counts as one day of residence in Cyprus, and
·        departure and arrival in Cyprus in the same day counts as one day of residence outside Cyprus.



Tax administration:

Taxable period:

In Cyprus, the tax year is the calendar year.

Tax returns:

Separate returns must be filed by each individual on a calendar-year basis. Submission deadlines vary depending on the individual taxpayer’s profile.

Payment of tax:

There is an obligation for PIT withholding on salaries under the pay-as-you-earn (PAYE) system. If a taxpayer has other income not subject to withholding tax (WHT), payments of estimated tax must be paid in two equal instalments on 31 July and 31 December within the same tax year.

Corporate - Taxes on corporate income:

All companies that are tax residents of Cyprus are taxed on their income accrued or derived from all sources in Cyprus and abroad. A non-Cyprus tax resident company is taxed on income accrued or derived from business activity that is carried out through a PE in Cyprus and on certain other income arising from sources in Cyprus.

The standard CIT rate in Cyprus is 12.5%.

The Cyprus CIT law explicitly provides for a number of exemptions for many and varied types of incomes, profits, and gains.

Special Defence Contribution (SDC):

SDC is imposed only on non-exempt dividend income, 'passive' interest income, and rental income earned by Cyprus tax residents. Non-tax residents of Cyprus are exempt from SDC.

Dividends generally are exempt from SDC, subject to certain rarely applicable limitations.

Interest received by close-ended or open-ended collective investment schemes (CISs) is never subject to SDC as it is considered as ‘active’ interest income. Such interest is only taxed under CIT (after deducting allowable expenses) at the standard CIT rate of 12.5%.

Interest received by companies in the ordinary course of their business, including interest closely connected to the ordinary course of business, is also considered as ‘active’ interest income and is only taxed under CIT (after deducting allowable expenses) at the standard CIT rate of 12.5%.

When companies receive interest that does not satisfy the conditions prescribed immediately above, the interest is considered to be ‘passive’ interest income, which is subject to SDC (without expense deduction) at the rate of 30%. Such ‘passive’ nature interest is, however, exempt from CIT.

Gross rental income reduced by 25% is also subject to SDC at the rate of 3% (i.e. effective rate of 2.25%) in addition to CIT (after deducting allowable expenses) of 12.5%.

Tonnage tax:

For ship-owning companies, the profits derived by the owner of a ship registered in the European Union or European Economic Area (EEA) (as well as other foreign jurisdictions, subject to conditions) from its operation/charter out are fully exempt from all direct taxes. The term 'owner' includes a bareboat charterer of a non-Cyprus flag vessel parallel registered in Cyprus. A similar exemption applies to charterers and ship managers.

Instead of CIT, ship owners, charterers, and managers pay tonnage tax on the net tonnage of the ships they own, charter, or manage. In addition, there is no tax on dividends paid at all levels of distribution by the above persons out of profits subject to tonnage tax and related capital gains on the sale of the ship and no capital gains tax (CGT) on the sale or transfer of a ship, share in a ship, or shares in a ship-owning company. The same legislation also provides for income tax exemption of the salaries and benefits of the captain, the officers, and the crew aboard a Cyprus flag vessel.

This treatment applies until 2020 and is compulsory for Cyprus flag ship owners, but optional for other ship owners, charterers, and ship managers.

Corporate residence:

Only companies managed and controlled in Cyprus are treated as tax residents of Cyprus.

Permanent establishment (PE):

Cyprus domestic income tax legislation explicitly provides for the determination of a taxable Cyprus PE of a non-Cyprus tax resident company. These specific legislative provisions are broadly in line with the relevant article of the 2014 OECD model DTT, with the addition of offshore activities relating to the exploration, extraction, or exploitation of the seabed, subsoil, and natural resources, as well as the installation and exploitation of pipelines and other installations on the seabed.



Income determination:

Inventory valuation:

Inventories generally are stated at the lower of cost and net realisable value. Last in first out (LIFO) is not permitted for taxation purposes. First in first out (FIFO) is permitted. Conformity between book and tax reporting is not required.

Capital gains:

Profits from disposals of corporate 'titles' are unconditionally exempt from CIT. 'Titles' is defined as shares, bonds, debentures, founders’ shares, and other titles of companies or other legal persons incorporated in Cyprus or abroad and options thereon. According to a circular issued by the CTA, the term includes, inter alia, futures/forwards on titles, short positions on titles, swaps on titles, depositary receipts on titles, repos on titles, units in open or close CISs, international collective investment schemes (ICISs), undertakings for collective investment in transferable securities (UCITSs), investment trusts and funds, mutual funds, real estate investment trusts (REITs), and units in stock exchange indices on titles.

Capital gains on Cyprus-situated immovable property (and on non-quoted shares directly or indirectly holding such Cyprus-situated immovable property) are taxed separately in Cyprus. See Capital gains tax in the Other taxes section for more information.

Dividend income:

Dividends received from other Cyprus tax resident companies are exempt from all taxes, subject to certain anti-avoidance provisions.

Dividends earned from foreign investments are exempt from CIT in Cyprus, with the exception of dividends that are deductible for tax purposes for the paying company. Such deductible foreign dividends are subject to CIT and are exempt from SDC. Other (i.e. non-deductible) foreign dividend income is also exempt (participation exemption) from SDC unless:

·        more than 50% of the foreign paying company’s activities directly or indirectly result in investment income, and
·        the foreign tax is significantly lower than the tax burden in Cyprus (i.e. an effective tax rate of less than 6.25%).

In those cases where the above-mentioned Cyprus participation exemption on foreign dividend income is not available, any foreign withholding tax (WHT) imposition on dividends paid to the Cyprus company will be credited against the Cyprus flat SDC rate of 17% on such dividends, without the need for a DTT to be in place with the paying jurisdiction. Furthermore, in some cases, a credit for underlying foreign tax (i.e. foreign tax on the paying company’s profits) is also available.

Stock dividends:

A Cyprus corporation can distribute tax-free dividends of common stock (bonus shares) proportionately to all common stock shareholders.

Interest income:

See Special Defence Contribution (SDC) in the Taxes on corporate income section for a description of the tax treatment of interest income.

Royalty income:

Royalty income is taxed under CIT, after deducting allowable expenses, at the rate of 12.5%.
In 2016, Cyprus introduced an intellectual property (IP) box fully aligned with the provisions of the OECD BEPS Action 5 report (modified) nexus approach as well as a grandfathered IP box.

Rental income:

See Special Defence Contribution (SDC) in the Taxes on corporate income section for a description of the tax treatment of rental income.

Foreign currency exchange (forex) differences:

Forex differences are tax neutral for CIT purposes (i.e. forex gains are not taxable and forex losses are not deductible). However, forex differences arising from trading in foreign currencies (and related derivatives) are subject to CIT.

Foreign income:

Resident corporations are subject to tax on their worldwide income. However, foreign PE income (see below), as well as most dividend and capital gains income from abroad (see Dividend income above), may be exempt from taxation in Cyprus.

Profits from a PE abroad are exempt from CIT, subject to anti-avoidance rules set out below.

The PE exemption is applicable, unless the below anti-avoidance rules apply:

·        more than 50% of the foreign PE’s activities directly or indirectly result in investment income, and
·     the foreign tax on the income of the foreign PE is significantly lower than the tax burden in Cyprus (i.e. an effective tax rate of less than 6.25%).

Losses from an exempt foreign PE are eligible to be offset with other profits of the Cyprus company in Cyprus. In such a case, future profits of an exempt PE abroad become taxable up to the amount of losses previously allowed.

With effect from 1 July 2016, taxpayers may irrevocably elect to subject to CIT foreign PE profits (and utilise foreign PE losses).

Where foreign income is taxed in Cyprus, double taxation is avoided through granting tax credits for the foreign taxes, without the need for a DTT to be in place with the foreign jurisdiction. Transitional rules apply in certain cases on the granting of foreign tax credits where a foreign PE was previously exempt from taxation and subsequently a taxpayer elects to be subject to CIT on foreign PE profits.


Tax administration:

Taxable period:

In Cyprus, the tax year is the calendar year.

Tax returns:

Business organisations are required to prepare audited accounts based on generally accepted auditing standards. Tax returns are completed based on these accounts on a calendar-year basis.

Electronic submission:

Companies should be registered online and submit their annual tax returns electronically. In this respect, the submission deadline of the 2017 corporate tax return is 31 March 2019.

Payment of tax:

Corporate entities must pay provisional tax on the current year’s income. Such provisional tax payment is made in two equal instalments on 31 July and 31 December of the tax year. A final balancing payment must be made on or before 1 August of the following year on a self-assessment basis to bring the total payments of tax to the total actually due according to the tax return.

Tax audit process:

The Cyprus tax process is one of self-assessment. Following the filing of a tax return, the CTA has six years from the end of the relevant tax year to raise an enquiry (12 years in cases of established fraud or wilful default). These can range from simple information requests to detailed technical challenges over treatments adopted in the tax return.

Any enquires are often conducted between the taxpayer and the CTA by exchange of information via correspondence and meetings. Where agreement cannot be reached, litigation may be necessary.

A taxpayer may also proactively request that the CTA review the company’s ‘open’ tax years if the taxpayer requires a tax clearance certificate (e.g. upon commencement of voluntary liquidation).

For companies in a tax-loss position per the self-assessment return, the CTA is not restricted to the above-mentioned six-year (or 12-year) period; however, outside of this period, any adjustments may only reduce or nullify a loss.



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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.



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This blog is Created by CA Anil Kumar Jain.