Tax Law for Companies Operating in Cyprus

Cyprus is known for its favorable tax environment for businesses. Here’s a summary of key aspects of tax law for companies operating in Cyprus:

Corporate Tax Rate
- Standard Rate: The corporate tax rate in Cyprus is 12.5% on net profits, which is relatively low compared to many other EU countries.

Taxable Income
- General Principle: Taxable income includes all income derived from business activities, including trading profits, interest, and income from investments.
- Deductions: Companies can deduct business expenses that are incurred wholly and exclusively for the purpose of generating taxable income.

Dividend Taxation
- Dividends Paid to Non-Residents: Generally, dividends paid to non-residents are exempt from withholding tax.
- Dividends Paid to Residents: Dividends paid to Cyprus tax residents are subject to Special Defence Contribution (SDC) tax at a rate of 17%.

Special Defence Contribution (SDC)
- Interest Income: Interest income is subject to SDC at 30%, unless the interest is derived from the ordinary course of business.
- Rental Income: Rental income is also subject to SDC at 3%.

Value Added Tax (VAT)
- Standard Rate: The standard VAT rate is 19%.
- Reduced Rates: Reduced rates of 5% and 9% apply to certain goods and services.

Capital Gains Tax
- Exemptions: Capital gains arising from the disposal of immovable property situated outside Cyprus and gains from the sale of shares in companies not holding immovable property in Cyprus are exempt.

Intellectual Property (IP) Regime
- IP Income: Cyprus offers an attractive IP regime where 80% of income from IP rights is exempt from tax, making the effective tax rate on IP income 2.5%.

Losses
- Carry Forward: Losses can be carried forward for up to 5 years to offset future profits.

Transfer Pricing
- Arm's Length Principle: Cyprus adheres to the arm's length principle for transactions between related parties, as outlined by OECD guidelines.

Double Tax Treaties
- Network: Cyprus has an extensive network of double tax treaties with over 60 countries, which helps prevent double taxation and can reduce withholding tax rates on dividends, interest, and royalties.

Tax Compliance
- Filing: Companies must file annual tax returns and pay taxes by specific deadlines.
- Audit: Companies are required to prepare audited financial statements, and these must be filed with the Cyprus Registrar of Companies.

Recent Developments
- Economic Substance: There are increasing requirements for economic substance, meaning companies must demonstrate real economic activity in Cyprus to benefit from its tax advantages.

Cyprus offers various tax incentives designed to attract investment and support economic growth. Here are some key tax incentives available for businesses operating in Cyprus:

1. IP Box Regime
- Tax Rate: Under the Cyprus IP Box regime, 80% of the income derived from intellectual property (IP) rights is exempt from tax, making the effective tax rate on IP income 2.5%.
- Qualifying IP: The regime applies to patents, software copyrights, and other IP that contributes to research and development.

2. Research and Development (R&D) Incentives
- Enhanced Deduction: Expenses on R&D activities are eligible for enhanced deductions. This includes salaries of R&D staff, cost of materials, and other related expenses.
- Grants and Funding: Companies involved in R&D may also benefit from various government grants and funding schemes.

3. Investment in Plant and Machinery
- Depreciation Allowances: Companies investing in new plant and machinery can benefit from accelerated depreciation allowances. This helps reduce taxable income in the year the investment is made.

4. Corporate Tax Rate
- Standard Rate: The corporate tax rate is 12.5%, which is among the lowest in the EU, making Cyprus an attractive location for businesses.

5. Double Tax Treaties
- Network: Cyprus has an extensive network of double tax treaties with over 60 countries, which can reduce withholding tax rates on dividends, interest, and royalties. This helps mitigate the risk of double taxation and enhances the profitability of cross-border investments.

6. Capital Gains Tax Exemptions
- Gains from Sale of Shares: Capital gains from the sale of shares in companies that do not own immovable property in Cyprus are exempt from capital gains tax.
- Immovable Property: Capital gains from the sale of immovable property located outside Cyprus are also exempt.

7. Investment in Startups and Innovation
- Grants and Subsidies: The government offers various grants and subsidies to support startups and innovative companies. These can include financial support for new ventures and tax breaks.

8. Alternative Investment Funds (AIFs)
- Tax Benefits: AIFs, including Venture Capital Funds and Real Estate Funds, benefit from favorable tax treatment, such as exemptions from withholding taxes on income and gains derived from investments.

9. International Business and Shipping
- Shipping Companies: Cyprus provides an attractive tonnage tax system for shipping companies, which is based on the net tonnage of the vessel and not on the profits of the company.
- International Business Companies (IBCs): There are additional incentives for international business companies, including access to the extensive double tax treaty network.

10. Employment Incentives
- Special Tax Regime for Expatriates: Individuals moving to Cyprus for work may benefit from a special tax regime that offers a 50% tax exemption on their income for up to 17 years, provided their annual income exceeds €100,000.

11. Green Investment Incentives
- Environmental Incentives: Companies investing in renewable energy projects or implementing environmentally friendly practices may be eligible for various incentives, including grants and tax reductions.

These incentives are designed to promote Cyprus as a hub for business, technology, and investment. Working with our experts can help streamline this process, providing valuable insights and tailored strategies to ensure successful outcome. Don’t hesitate any longer. Apply to become a client today to work with our experts on legal strategies to overcome barriers.

Indotco International

Tax Law for Companies Operating in Cyprus