12-12-2012

Taxation

Authors

  • Constantia Arkade, Attorney at law
    Partner -litigation department- at Marios Hartsiotis & Co LLC

What are the taxes imposed to natural and legal persons in Cyprus? 

The Cyprus taxation system provides for the lowest tax regime in the European Union. An overview of the Cyprus legislation is provided below:

I. PERSONAL TAX

An individual that is a Cyprus tax resident will be taxed on income (subject to certain exemptions) which is derived/accrued from all sources in Cyprus and abroad. An individual will be considered as a tax resident in Cyprus if he /she spends more than 183 days in any one calendar year in Cyprus.

If the individual is not considered a Cyprus tax resident then he /she will be taxed only on certain income which is derived/accrued from sources in Cyprus.

How are the days of residence in the republic of Cyprus calculated?

  • The day of departure from the Republic is considered to be a day out of the Republic
  • The day of arrival into the Republic is considered to be a day in the Republic
  • The arrival into the Republic and departure from the Republic on the same day is considered to be a day in the Republic
  • The departure from the Republic and return to the Republic on the same day is considered to be a day out of the Republic.

Foreign taxes paid can be credited against the individual’s income tax liability. When deriving the chargeable income certain deductions will be taken into account for instance contributions to trade unions or professional bodies, donations to approved charities, provident fund, medical fund and social insurance.

What are the personal tax rates in Cyprus?

Chargeable income is taxed on a tier basis between 0% to 35%. The following income tax rates apply to individuals:

Chargeable income Tax rate Accumulated tax
%
0 – 19.500 Nil Nil
19.501 – 28.000 20 1.700
28.001 – 36.300 25 3.775
36.301 – 60.000 30 10.885
over 60.001 35  

Are there any exemptions to income tax?

The following are some examples of exemptions from income tax:

  • Widows pension granted under the Social Insurance Laws or in accordance with any pension scheme approved under regulations (whole amount)
  • Lump sum received as retiring gratuity (whole amount)
  • Compensation for death or injury (whole amount)
  • Life Insurance schemes (whole amount)
  • Provident funds (whole amount)
  • Dividend income (whole amount)
  • Rent of preserved building (whole amount)

II. CORPORATE TAX

A Cyprus resident company is taxed in Cyprus. What constitutes a Cyprus resident company depends on whether it is managed and controlled in Cyprus. The incorporation of a company is not in itself sufficient to establish Cyprus residency. A Cyprus resident company will be taxed in Cyprus on its worldwide income, whereas a company which is non-resident will only be taxed on its profits arising from a permanent establishment in Cyprus. A 10% tax flat rate is applied for all companies. It is interesting to note that under the current legislation, Cyprus has the lowest tax status in Europe. This together with its strategic location makes it an attractive destination for many businesses wishing to take advantage to the direct access to markets in Europe, the Middle East and Africa. Cyprus has an extensive double - tax treaty network. If a company makes tax losses in one year this may be set off against other income or can be subject to conditions and set off against future profits with no time restriction. Special conditions apply to shipping companies, shipowners, shipmanagement and Insurance companies.

Are there any exemptions to corporate tax?

The following are some examples of exemptions from corporate tax:

  • Interest income (whole amount) - certain conditions apply
  • Dividend income (whole amount) - certain conditions apply
  • Profits from a permanent establishment outside Cyprus (whole amount)

Which company expenses are deductable?

Expenses which were incurred absolutely by earning the income of the Company which can be proved will be deducted. Such expenses include:

  • Donations to approved charities (100%)
  • Employer’s contributions to Social Insurance (100%)
  • Entertainment expenses for business purposes -certain conditions apply

III. VALUE ADDED TAX (VAT)

VAT is imposed on the supply of goods and provision services in Cyprus, as well as on the acquisition of goods from the European Union (EU) and the importation of goods into Cyprus ( some items are exempted). VAT on each person’s taxable supplies and/or services are known as ‘output VAT’and tax on goods and services they purchase is known as ‘Input VAT’. Any business with turnover in excess of €15,600 during the preceding 12 months or expected to have turnover in excess of €15,600 in the next 30 days must register with the VAT authorities.

It is also compulsory for businesses which make acquisition of goods from other EU Member States in excess of €10.251,61 during any calendar year to register for VAT. Each person will complete a VAT return and must be submitted to the VAT authorities every quarter and payments must be made by the 10th day of the second month that follows the month in which the tax period ends.

The penalty for late registration with the VAT authorities is €85 per month of delay and the penalty for late submission of VAT return is €51 for each return. A penalty of 10% is imposed on the due amount and also 5% interest per annum until full repayment.

On January 1st 2010, significant changes came into effect in the EU and Cyprus VAT legislation including the country of taxation of services provided between businesses established in two different EU member states, in taxation of services supplied to consumers and in the procedure for refund of VAT paid in another member state.

What are the VAT rates imposed according to Cyprus legislation?

The legislation provides the following tax rates:

  • Zero rate (0%)
  • Reduced rate of five percent (5%)
  • Reduced rate of eight percent  (8%)
  • Standard rate of seventeen percent (17%) as of 01 March 2012

Are there services or goods exempted from the imposition of VAT?

Certain goods or services are exempted from the imposition of VAT such as:

  • Hospital, medical and dental care services
  • Lottery tickets and betting coupons
  • Some educational and sports activities
  • Banking, financial and insurance services
  • Letting of immovable property

In any quarter if output VAT exceeds total input VAT, a payment has to be made to the VAT authorities, whereas if input VAT exceeds output VAT, the surplus is carried forward.

IV. SPECIAL CONTRIBUTION FOR DEFENCE

The Special Contribution for Defence Law was introduced in 1984 in an attempt to support the country’s economy. Special contribution for defence is imposed on certain income earned by Cyprus tax residents.  Non-tax residents are generally exempted.

As a general point every resident person receiving dividends from a company whether in Cyprus or abroad, is subject to special defence contribution at 20% (subject to exemptions). Interest is subject to special defence contribution at 15% whereas income from Cyprus government savings bonds and development bonds and all interest earned by a provident fund is subject to special contribution for defence at the rate 3%. Rental income is subject to defence contribution at the rate of 3%.

Deemed dividend distribution

If a Cyprus resident company does not distribute a dividend within two years from the end of the tax year then 70% of accounting profits (net of taxes) are deemed to have been distributed as dividends and are subject to 20% defence contribution thereon.

When the dividend is then actually paid, the special contribution for defence is imposed only on the dividend paid over and above the dividend that was previously deemed as distributed.

V. CAPITAL GAINS TAX

Capital Gains Tax is imposed (when the disposal is not subject to income tax) at the rate of 20% on gains from the disposal of immovable property and shares in companies which own such immovable property (subject to exemptions).

Are there any exemptions to Capital Gains Tax?

The following are examples where Capital Gains Tax is not imposed:

  • Transfers arising due to death
  • Gifts from parent to child
  • Gifts from spouse to spouse
  • Gifts between up to third degree relatives.
  • Gifts to Charities and the Government
  • Gifts to Companies where the shareholders are members of the donor’s family and they continue to be for five years after the day of transfer.

VI. IMMOVABLE PROPERTY TAX

Immovable Property Tax is imposed on the market value as of 1 January 1980 and applies to the immovable property owned by the taxpayer (subject to exemptions) on 1 January of each year. This tax is payable on 30 September each year.

Immovable property tax is applicable to natural and legal persons and is computed on a tier basis from 0% to 8%.

What are the Immovable Property Tax rates?

Chargeable income Tax rate Accumulated tax
%
Up to 120.000 - -
120.001 – 170.000 4 200
170.001 – 300.000 5 850
300.001 – 500.000 6 2.050
500.001 – 800.000 7 4.150
Over 800.000 8  

Is there any property that is not subject to Immovable Property Tax?

There are exemptions to the imposition of Immovable Property Tax. The following are some examples:

  • Government owned property
  • Public Cemeteries
  • Churches
  • Public Hospitals
  • Embassies
  • Public places
  • Property of Charitable Organisations

What are the obligations of a natural or legal person subject to the above mentioned taxes?

Every person (individual, company or partnership) deriving income subject to the above mentioned taxes is obliged every tax year to do the following:

  • To issue receipts and invoices in relation to transactions.
  • Invoices should be issued within 30 days from the date of the transaction. In the case where invoices are not issued within the said deadline, a penalty of €100 per month is imposed
  • A company should carry out a stock take during the year end and the results of the stock take should be available to the Commissioner in case requested.
  • Maintain accounting books and records and prepare accounts in accordance with acceptable accounting standards that are audited in accordance with acceptable auditing standards, by a person that is eligible to act as an auditor of a company in accordance with the Companies Law.
  • A person is obliged to update books and records within 4 months from the date of the transactions.
  • An individual is exempt from the obligation to maintain accounting books and records where the annual turnover does not exceed the amount of €70.000.
  • Books and records should be kept for a period of at least seven years.

Facts, rates and information provided above reflect the requirements of tax law and regulations valid at the time this article was compiled.

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