The Republic of Cyprus has a long-established reputation as an international business hub and has always been at the forefront of popular business destinations. The advantageous tax system, the highly educated professionals, the cost-efficient provision of services and the inherent strong business culture, justifiably render the small island of Cyprus as one of the most attractive investment centres in Europe and internationally.
Cyprus has been recognised as a centre of excellence by reputable research analysts worldwide. The World Bank’s Doing Business Report 2016 ranked Cyprus 53rd out of 190 countries for Ease of Doing Business whereas Forbes Magazine’s 2016, Best Countries for Doing Business report ranked Cyprus 32nd out of 139 countries.
Cyprus recently passed a set of laws intending to enhance investments in real estate such us laws protecting new buyers, certain exemptions from capital gains tax on the sale of property and reduced transfer fees on the transferring of property. Furthermore, amendments to the tax legislation were also recently implemented aiming at improving the competitiveness of Cyprus as a business hub and attracting foreign investment. The said amendments are the most drastic changes seen in recent years since the total reform of the tax system back in 2003, whereas the 12.5 per cent uniform corporate tax rate, perhaps the most competitive feature of Cyprus’ inward investment policy, was left unchanged.
Cyprus has also developed an extremely beneficial tax treatment of funds and of collective investment schemes, which are subject to tax like any other legal entity in Cyprus and benefit from the uniform corporate tax rate of 12.5 per cent. However, given the detailed legislation, the procedure of establishing such funds and schemes will not be analysed in this chapter.
Last but not least, the recent discovery of natural gas reserves in the Exclusive Economic Zone of Cyprus has opened a whole new world of opportunities and had an appeal to many multinational investors. Although this is a newly born industry for Cyprus, there is substantial activity in the sector, with exploration licences already granted to operators.
II COMMON FORMS OF BUSINESS ORGANISATION AND THEIR TAX TREATMENT
As an international business centre, Cyprus provides a variety of options to entrepreneurs seeking to establish a legal entity in Cyprus, always designed to meet their specific needs.
The forms of corporate entities include the limited liability company by shares, the limited liability company by guarantee with share capital or without share capital, the public company limited by shares and the European joint stock company (Societas Europaea). Corporate entities are subject to corporation tax at the rate of 12.5 per cent which is among the lowest tax rates in the European Union. Legal entities are subject to corporation tax in Cyprus provided that they are tax resident in the Republic of Cyprus and a legal entity is deemed to be a tax resident in Cyprus if its management and control is exercised in Cyprus.
The non-corporate legal forms include the sole proprietor, the limited partnership and the general partnership. Non-corporate entities are not subject to corporation tax but instead all income is treated as income of the sole proprietor and/or partner who then pays income tax according to the applicable rates in force.
The majority of business organisations in Cyprus are limited liability companies by shares. These companies have proven to be extremely attractive to foreign investors given their easy and fast registration procedure, the many tax advantages and exemptions they enjoy and because of the fact that these type of companies have their own separate legal personality which is distinct from the legal personality of their members.
A public company limited by shares can be the optimal vehicle for businesses wishing to increase their growth and to generate the capital needed in order to grow. Apart from the raising capital with ease benefit, public companies also have a distinct legal personality from the investors that participate in it. Public companies, however, have greater reporting obligations than limited liability companies, including a minimum share capital requirement of €25,650.
The main differences between a private limited liability company and a public limited company are the following:
- a The maximum number of shareholders that can participate in a private company is 50. There is no maximum number of shareholders for a public company limited by shares.
- b A public company must have at least two directors whereas a private company may only have just one.
- c The minimum number of shareholders in a public company is seven. In a limited liability company the minimum number is one.
- d A public company has a requirement of a minimum share capital of €25,650, whereas such a requirement does not exist for a private company where the share capital can be €100.
General and limited partnership
A partnership has been defined as the relation which subsists between persons carrying on a business in common with a view to profit and it is not a separate and distinct legal entity from the partners who compose it. A partner can be a physical or a legal person.
A partnership can be distinguished into a general partnership and a limited partnership and the main difference between the two types of partnerships is the extent of liability of the partners. Under a limited liability partnership, the liability can be limited for certain of the partners. Furthermore, in 2015 the Partnership Law was amended to introduce the concept of a limited liability partnership that is limited by shares. This means that the liability of the limited partners is limited up to the amount that remains unpaid, if any, for the shares that they hold in the limited partnership.
A limited partner shall not take part in the management of the partnership business and shall not have the power to bind the firm.
As a partnership is not a separate and distinct entity from the partners who compose it, the partnership itself is not liable to income tax. The common income taxation rules applying to individual taxpayers apply to each partner who is being assessed for tax purposes distinctly from the other partners. Each partner’s percentage of profit is assessed along with his total income from other sources and taxed accordingly.
Partnerships are preferred in cases where a simple straightforward structure is needed. Furthermore it can provide for a clear split-up of the duties and responsibilities between the partners, whereas it can be utilised as a great incentive for the employees of the partnership.
Moreover, under the Assessment and Collection of Taxes Law, if the annual income of each partner does not exceed €70,000 no audited accounts need to be produced. Additionally, forming a partnership can result to an advantageous tax outcome for each partner provided that each partner’s total income does not exceed €60,000 per year.
Doing business as a sole trader is the simplest form of doing business in Cyprus and a sole trader can commence doing business instantly, subject to special business licences required for certain professions.
A sole trader can easily adjust to changes in his sector, normally with no overbearing procedures and requirements and he or she has absolute control over his dealings and his book-keeping. On the other hand, he or she is solely liable for debts and liabilities of his business and he will be sued in his or her own name in case of any wrongdoing and consequently personal assets and the assets of the business can be the subject of a claim by an aggrieved creditor. A further consideration to be taken into account is whether it would be tax beneficial to set up as a sole trader provided that in Cyprus the following progressive rates apply for individuals:
Chargeable Income €
Rate of Tax (per cent)
Up to 19,500
19,501 – 28,000
28,001 – 36,300
36,301 – 60,000
Depending on the sole trader’s annual income, setting up as a sole trader can prove quite expensive, and in case of a high turnover the sole trader might consider establishing his or her own limited liability company and benefit from the 12.5 per cent corporate tax rate, and if not domiciled in Cyprus, he or she can also benefit from an exemption for a special defence contribution on dividends (where he or she also has a Cyprus company), interest and rents.
Individuals who are Cyprus tax resident are subject to tax in Cyprus on their worldwide income. An individual is tax resident in Cyprus, if he or she resides in Cyprus for more than 183 days in the relevant tax year. As from 1 January 2017, a second test will also apply, namely the ‘60 days rule’ test. Under the ‘60 days rule’ an individual will be considered as tax-resident if he or she (1) does not reside in any other single state for a period exceeding 183 days in aggregate; (2) is not tax resident in any other state; (3) resides in Cyprus for at least 60 days; and (4) has other defined Cyprus ties. To satisfy this condition 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.
III DIRECT TAXATION OF BUSINESSES
Companies tax resident in Cyprus are liable to tax on their accrued worldwide income at the corporate tax rate of 12.5 per cent. A company is a tax resident of the Republic of Cyprus if it is managed and controlled in the Republic of Cyprus.
i Tax on profits
Determination of taxable profit
A Cyprus tax-resident company is taxed in Cyprus on its income accrued or derived from sources in Cyprus and overseas (worldwide income). A company that is not tax-resident in Cyprus is taxed on income accrued or derived through a permanent establishment in Cyprus and on income sourced in Cyprus.
In computing their taxable profit, Cyprus companies use accrual accounting according to the International Financial Reporting Standards. Therefore, in order to arrive at a company’s taxable profit, several exemptions and deductions must first be taken into consideration. The standard rule states that expenses are allowable provided that they are (1) incurred wholly and exclusively for the production of income by the business, (2) specifically provided for in the Income Tax Law and (3) not specifically disallowed in the Income Tax Law.
Expenses which are not tax deductible mainly consist of the following:
- a business entertainment expenses in excess of 1 per cent of the gross income (the amount of the expense is limited up to €17,086);
- b immovable property tax;
- c professional tax;
- d any sum recoverable under an insurance or contract of indemnity;
- e contributions to the social cohesion fund; and
- f expenditure which is not supported by invoices or other supporting documentation.
The Income Tax Law provides for depreciation on all fixed assets (excluding land) enabling the business to write off the value of these assets over their useful economic life. Depreciation is not considered as an allowable expense; nevertheless capital allowances are permitted as per the rates stated in the law for each group of assets and are tax deductible. For the years 2012 to 2016 higher capital allowances were set for machinery and equipment (20 per cent) and for commercial buildings and hotels (7 per cent) that were acquired during those years. Furthermore, capital allowances on an intangible asset amount to 20 per cent of the acquisition cost and they can be deducted over a five-year period as from the year of acquisition.
Capital and income
Capital is not incorporated in the income of a company, but instead it is taxed independently under the Capital Gains Law at the fixed rate of 20 per cent. Capital gains tax is solely imposed on the sale of immovable property situated in the Republic of Cyprus and on the sale of shares in companies that mainly own immovable property in the Republic of Cyprus. Other than that, shares are generally exempted from capital gains taxation.
Losses can be carried forward subject to a five-year time limitation from the year in which the loss occurred. Nevertheless, if there is a substantial change in ownership or a substantial change in the nature of the business in the three years following the year in which the loss occurred, losses cannot be carried forward.
Group relief is also available for Cyprus companies that are members of the same group of companies. To qualify for the relief the companies must be tax resident in Cyprus and must be members of the same group, meaning that one of the companies holds 75 per cent in the share capital of the other company share capital or that a third company holds 75 per cent in the share capital of both of the Cyprus tax-resident companies. However, as from 1 of January 2015 interposition of a non-Cyprus tax-resident company does not affect the eligibility for group relief (subject to conditions), and a Cyprus tax-resident company can now claim the tax losses of a group company that is tax resident in another EU country (subject to conditions).
The carry-back of losses is not permitted.
Losses from a permanent establishment abroad can be set off against profits of the company in Cyprus. Subsequent profits of the permanent establishment abroad are taxable up to the amount of losses utilised in the past against profits arising in Cyprus.
The corporate tax rate for all Cyprus tax resident companies is 12.5 per cent.
Capital gains tax
The capital gains tax rate is a fixed rate of 20 per cent imposed only on the sale of immovable property and on the sale of shares in companies which mainly own immovable property in the Republic of Cyprus.
Special defence contribution tax
Tax residents of Cyprus are subject to special defence contribution in relation to dividends, interest and rental-income received at the following rates:
- a 17 per cent on dividends;
- b 30 per cent on interest;
- c 3 per cent on 75 per cent of the rental income; and
- d non-residents are not subject to special defence contribution.
On 16 July 2015, a ‘domicile’ concept was established under the Special Defence Contribution Law with the goal of exempting high-net worth non-domiciled individuals from paying such a contribution when they are tax residents of Cyprus. The said persons, when not considered as domiciled in Cyprus, can state the Republic of Cyprus as their taxable jurisdiction and will consequently receive an exemption from special defence contribution which applies on rents, interest and dividends and currently applies to persons domiciled in the Republic of Cyprus.
The Tax Department is the taxation authority of the Republic of Cyprus, which on 1 July 2014 merged with the VAT Service to form an integrated Tax Department with the aspiration of providing a high-quality service to the taxpayer, who will be able to manage all of his or her tax affairs by contacting a single department.
The tax year for a Cyprus company is the calendar year and therefore runs from 1 January to 31 December, unless declared otherwise. Upon registration the Cyprus Company needs to acquire a tax identification number by registering with the Tax Department within 60 days of its incorporation.
Cyprus has established a self-assessment system as regards corporation tax and the corporate income tax is payable within the same year in two instalments (31 July and 31 December). By 31 July a company will have to pay 50 per cent of the tax on the chargeable income that it declared as expected and then a second final instalment by 31 December. Where the tax payment is not paid by self-assessment an amount of 5 per cent is added to the tax due, irrespective of whether the tax return was filed in accordance with the statutory deadline.
If the income declared for the provisional tax is lower than 75 per cent of the income as at last established, an extra amount equal to 10 per cent of the difference between the final and provisional tax must be paid. All Cyprus companies are entitled to adjust their expected taxable income at any time before 31 December 2018 for the tax year 2018. Furthermore, electronic filing is compulsory for all Cyprus companies and the deadline for submitting the tax return electronically is 31 March of the year following the tax year.
The filing of consolidated tax returns is not permitted in the Republic of Cyprus. However, the filing of consolidated financial statements is obligatory for Cyprus companies that have subsidiaries. Small-sized groups are exempt from such an obligation provided that they fall within the definition of ‘small sized group’ as this has been defined in the Companies Law Cap. 113. As from September 2016, this exemption also applies to medium-sized groups (as this has been defined in the Companies Law Cap. 113), whereas groups of companies continue to be exempted from preparing consolidated financial statements if the ultimate parent or parent companies publish consolidated financial statements on the basis of generally accepted accounting principles.
ii Other relevant taxes
A person making taxable supplies exceeding the threshold of €15,600 is obliged to register with the VAT Authorities. VAT applies on the sale of goods, the provision of services and the import of goods from outside the EU.
The applicable VAT tax rates in Cyprus are the standard rate of 19 per cent, the first reduced rate of 9 per cent and the second reduced rate of 5 per cent and the rate of zero per cent which apply to certain goods and services.
Stamp duty is imposed on documents relating to property situated in Cyprus or to things or matters executed or performed in Cyprus, irrespective of the place of execution of the document capped at the maximum of €20,000. Transactions taking place outside of Cyprus or relating to property and generally to matters taking place outside of Cyprus are exempt from stamp duty. Preliminary tax rulings can be obtained as to whether stamp duty will be imposed upon a transaction.
Immovable property tax
Up until 2017, every registered owner was liable to immovable property tax, which was calculated in accordance with the market value of the property as at 1 January 1980; however, immovable property tax was abolished altogether in 2017. Property tax payable to communities and municipalities in Cyprus continues to apply and will continue to be calculated on the Land Registry’s assessment of the 1980 value of the property.
Furthermore, In November 2017, amendments to the VAT law were introduced in relation to the imposition of VAT at the standard rate of 19 per cent on:
- a certain transactions involving immovable property that are carried out for business purposes, that is, on the transfer of undeveloped buildable land that is intended for the construction of one or more structures in the course of carrying out a business activity (this provision is effective from 2 January 2018); and
- b the leasing of commercial immovable property to taxable persons for taxable business activities (i.e., other than the ones used as residences or private dwellings).
iii Taxes not applicable
The following taxes do not apply in Cyprus: capital acquisitions tax, inheritance/estate tax and net wealth/net worth tax.
IV TAX RESIDENCE AND FISCAL DOMICILE
i Corporate residence
A company is a tax resident of the Republic of Cyprus if it is managed and controlled in the Republic of Cyprus, although the term ‘management and control’ has not been defined in the law. Nevertheless, it has been interpreted by recent case law to mean the place where the company is actually managed. The residency of the directors, the place where the directors hold their meetings, whether the directors are actually putting their minds on decisions and whether key decisions and important transaction documentation is executed in Cyprus, are central factors in determining the tax residency of the company.
Companies that are tax resident in Cyprus are taxed in Cyprus on their worldwide income and can benefit from the 12.5 per cent corporation tax and the many tax exemptions, whereas companies not tax resident in Cyprus are taxed on a source-based system. Furthermore, companies that are not tax resident in Cyprus cannot take advantage of the double tax treaties that Cyprus has signed with other countries.
ii Branch or permanent establishment
The definition of a permanent establishment can be found in the Income Tax Law and is identical to the definition of Article 5 of the OECD Tax Treaty model.
Profits from activities of a permanent establishment situated outside of Cyprus are completely exempt from corporate taxation. The Cyprus company will not be able to qualify for this exemption if:
- a its foreign permanent establishment directly or indirectly engages in more than 50 per cent of its activities in producing investment income; and
- b the foreign tax burden is substantially lower than the tax in Cyprus (6.25 per cent and less is considered as a significantly lower tax burden).
V TAX INCENTIVES, SPECIAL REGIMES AND RELIEF THAT MAY ENCOURAGE INWARD INVESTMENT
i A fixed corporate tax rate of 12.5 per cent
The foundation of Cyprus’ attractive tax system is the standard corporate tax rate of 12.5 per cent, which is among the lowest in the European Union. Tax relief is also unilaterally granted by way of a tax credit.
The corporate tax rate can be further reduced following the recent provisions introduced into the Income Tax Law relating to new equity. In accordance with the latest amendments new equity used by a Cyprus Company or a permanent establishment in Cyprus for carrying out its activities will allow a notional interest reduction in the effective corporate tax rate as from 1 January 2015, thus encouraging new investment and fresh funding.
Notional interest will be calculated based on the effective interest earned on the 10-year government bonds of the country in which the new sum is invested plus 3 per cent with the minimum rate being the equivalent 10-year bond yield of Cyprus plus 3 per cent. The notional interest deduction cannot, however, exceed the 80 per cent of the taxable income of the company for the year before the deduction of the deemed interest expense.
ii Significant reductions and exemptions
Cyprus tax-resident companies enjoy numerous reductions and exemptions with the most significant allowable expenses and exemptions, which are considered highly attractive for foreign investors, being the following:
- a gains from the sale of securities: Any income/gain arising from the disposal of securities is entirely exempt from corporation tax whereas the term ‘securities’ was given a wide definition;
- b scientific research: Expenses incurred for the purposes of scientific research that have been incurred for the use and the benefit of the business shall be allowed as a deduction;
- c innovation companies: Expenditure incurred for the purchase of shares in an innovation company and all expenditure relating to research and development assumed by innovation companies is allowed as a deduction;
- d interest: Any interest payable on credit and financing facilities taken for acquiring assets to be used in the business is tax deductible; and
- e dividend income: Dividend income is wholly exempt from corporation tax.
iii IP regimes
Cyprus has over the years developed into a tax-beneficial IP jurisdiction and has become a signatory to all major IP treaties.
The tax benefits of incorporating an IP company in Cyprus are many, but most importantly:
- a Cyprus tax-resident companies generating income from qualifying IP2 are allowed to an 80 per cent exemption on their worldwide royalty income (net from any direct expenses) and then taxed at the corporate tax rate of 12.5 per cent giving an effective tax rate of 2.5 per cent; and
- b Cyprus tax-resident companies are allowed to claim a deduction for any qualifying expenditure3 of a capital nature for the acquisition or development of IP in the year which it was incurred and in the immediate four following years.
iv Shipping taxation
The Cyprus shipping industry has demonstrated remarkable development in the past years. A full exemption from all direct taxes applies for qualifying shipowners, charterers and ship managers, from the operation of qualifying community ships and for qualifying foreign ships and who are instead taxed under a favourable tonnage tax system.
What is more, the following also apply:
- a dividends received from a ship-owning corporation and profits from the operation of Cyprus-registered vessels are tax-free;
- b no capital gains apply on the sale of a vessel registered in Cyprus or on the sale of the shares of a ship-owning company; and
- c ship mortgage deeds and other collateral documentation are not subject to stamp duty.
v State aid
The Human Resource Development Authority of Cyprus offers grants to Cyprus companies to support a variety of their training necessities.
The Research Promotion Foundation provides governmental grants to Cyprus companies with the goal to encourage the advancement of scientific and technological research in Cyprus and promote the vital significance of research in the modern world.
What is more, the government of Cyprus offers funding (de minimis funding), which is provided for a variety of entrepreneurial activities.
The Ministry of Commerce, Industry and Tourism provides grants for the establishment of control laboratories, testing, analysis and calibration of machinery products.
The Cyprus Tourism Organisation offers grants aiming to draw investment for Sustainable Enrichment and Development of Tourism in Cyprus.
The Cyprus Institute of Energy provides grants for investments in the field of Energy Conservation and the advancement of the Renewable Energy Sources application.
The Republic of Cyprus has one of the most beneficial tax systems in the European Union, known for its simplicity and many advantages, and a robust legal regime which was built in accordance with the English Law principles and legislation. Furthermore, Cyprus has aligned its legislation with the European legislation enabling Cyprus companies to utilise EU tax directives and actively participates in many EU innovation and entrepreneurship programmes. Cyprus has been recorded on the ‘white list’ of the OECD as one of the countries that comply with the OECD’s principles on the elimination of harmful tax practices and has established anti-money laundering processes in conformity with international standards ensuring transparency and compliance with the international consensus.
Cyprus is also renowned for its ease in doing business, an inherent business culture and highly educated professionals with experience in serving international investors and expertise in key sectors of the economy.
VI WITHHOLDING AND TAXATION OF NON-LOCAL SOURCE INCOME STREAMS
i Withholding on outward-bound payments (domestic law)
Dividends and interest paid to non-resident shareholders are not subject to any withholding tax in Cyprus, irrespective of the existence of a double tax treaty with their country of residence. Also, no withholding tax applies to interest derived from Cyprus and paid to non-residents.
Payments of dividends and interest from Cyprus to non-Cyprus tax residents
No withholding tax is imposed on payments of dividends and interest by Cyprus companies to non-Cyprus tax residents notwithstanding whether a double tax treaty is in place or not, as Cyprus has implemented these zero per cent withholding tax provisions within its legislation. Royalties granted for use outside of Cyprus are also free from any withholding taxes.
Withholding taxes on intellectual property tights
A withholding tax rate of 10 per cent applies on the gross income of a person who is not residing in Cyprus resulting from intellectual property rights and from other exploitation rights arising from sources within Cyprus or granted for use within Cyprus unless a double tax treaty provides for a lower withholding tax rate.
Since Cyprus is a member of the European Union, Cyprus companies can take advantage of the Royalties Directive, and hence royalties received by an affiliated corporation registered in a European Union Member State are exempted from taxation (provided that certain conditions are fulfilled).
No withholding tax is imposed on rights granted for use outside Cyprus.
ii Domestic law exclusions or exemptions from withholding on outward-bound payments
No withholding taxes apply on the payment of dividends and interest to non-Cyprus residents as per the applicable legislation in Cyprus and intercompany dividends (from a Cyprus Company to another Cyprus Company) are exempt also from taxation. What is more, Cyprus has an appealing participation exemption system since there are no specific requirements as regards participation holding periods or participation holding thresholds.
Cyprus companies can also benefit from the Parent-Subsidiary Directive, which exempts dividends paid by a subsidiary company to its parent from any withholding taxes and prevents double taxation at the level of the parent company. It should be noted, however, that effective as from 1 January 2016, Cyprus implemented the EU amendments to the Directive to its own legislation. Anti-avoidance provisions have been introduced for hybrid instruments and artificial transactions for dividends. Namely, the dividend exemption will not be available where the dividend received by a Cypriot company is allowed as a tax deduction in the country of the foreign company and where the main purpose of the said arrangements was to obtain the relevant exemption and there is no other commercial rationale or economic reality behind the arrangements. If the dividend exemption is not available, the dividend will be subject to the corporation tax rate of 12.5 per cent.
iii Double tax treaties
Cyprus has an extensive and generous tax treaty network and has at the moment concluded double tax treaties with 58 countries which largely follow the OECD Model Tax Treaty. During its restructuring in 2014, the Ministry of Finance of Cyprus has established a Tax Policy Unit whose responsibility is to deal with international tax issues, whereas the Council of Ministers further approved an enhanced regulatory framework which will govern the administration and management of double taxation agreements.
Despite the extensive tax treaty network in place it should be noted that, irrespective of any tax treaty in place, Cyprus does not impose withholding taxation on dividends, interest and royalties. However, in cases where royalties are earned on rights used within Cyprus there is withholding tax of 10 per cent.
iv Taxation on receipt
Dividend income received from non-Cyprus resident companies is subject to special defence contribution at the rate of 17 per cent only if more than 50 per cent of the activities of the company paying the dividend result directly or indirectly from investment income and the foreign tax is significantly lower that the applicable tax rate in Cyprus (significantly lower has been interpreted to mean a tax rate below 6.25 per cent).
Cyprus has established a credit relief system in accordance with tax withheld in relation to income sourced abroad will be credited against the tax chargeable in respect of the same income in Cyprus. However, the amount of the credit shall not exceed the amount which would have been determined if the amount of the income was computed in accordance with the provisions of the Cypriot legislation.
VII TAXATION OF FUNDING STRUCTURES
Companies tax resident in Cyprus are commonly funded through either debt or equity or by a combination of the two.
i Thin capitalisation
There are no thin capitalisation rules presently in force in the Republic of Cyprus.
ii Deduction of finance costs
A Cyprus company making interest payments on loans/borrowings taken is allowed for a full tax deduction for the interest paid provided that the interest payable incurred solely for the purpose of producing income.
What is more, there is no withholding tax on interest payments made to non-residents.
iii Restrictions on payments
Under Cyprus common law principles, a Cyprus company can only make a distribution of dividends out of profit. The company’s profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses so far as not previously written off in a reduction or reorganisation of capital duty made.
iv Return of capital
The Cyprus Companies Law, Cap 113 allows a company, subject to confirmation by the court and if so authorised by its articles, by special resolution, reduce its share capital in any way.
Any amounts paid to the shareholders in excess of share capital which had actually been paid, will be treated as a deemed dividend distribution and be taxed accordingly. Non-Cyprus residents are exempt from the taxation of dividends.
The Cyprus Companies Law, Cap 113 further contains provisions that enable a company to issue redeemable preference shares provided that certain rigid requirements regarding the funds which can be used to redeem such shares are met. Effectively, shares can only be redeemed by the profits that would otherwise have been available for distribution as dividend or out of the proceeds of a fresh issue of shares made for the purposes of the redemption. It is clearly stated in the law that no such shares shall be redeemed unless they are fully paid. In general, redemption of shares is not treated as a distribution.
VIII ACQUISITION STRUCTURES, RESTRUCTURING AND EXIT CHARGES
A Cyprus acquisition can be planned in multiple ways. The simplest form of acquisition can be conducted by a purchase of the majority of the issued share capital in the target company provided that the Company is not listed on the Cyprus Stock Exchange. An acquisition in Cyprus is generally conducted by purchasing the shares of a company rather than purchasing its business and assets.
There is no capital gains tax imposed on the sale of the said shares, and such tax is solely imposed on the sale of immovable property situated in the Republic of Cyprus and on the sale of shares in companies which mainly own immovable property in the Republic of Cyprus. Consequently, this is the reason share acquisitions are more attractive than asset and property acquisitions, especially where there is immovable property involved.
The sale of shares is outside the scope of VAT. In the case of asset purchase, if the purchaser will purchase the business as a going concern, again this will fall outside the scope of VAT, so long as particular requirements are satisfied. Thus on a purchase of assets not qualifying to be considered as a transfer of a business as a going concern, the effective VAT rate of 19 per cent will be applicable.
If the company is listed, a public offer needs to be made for acquiring the company by way of purchase of shares. Furthermore, the Cyprus Company Law Cap 113 also provides for a merger and/or division of a company where two companies divide or unite through one company acquiring a controlling holding of shares in another.
Cyprus has fully adopted the EU Merger Directive and, thus, enables company reorganisations with a foreign and local component. Cyprus Companies Law, Cap 113 states the straightforward procedure to be followed for such reorganisations of companies, and the relevant provisions recognise mergers, divisions and partial divisions, transfers of assets and exchange of shares in two or more companies intending to merge together.
Reorganisations are generally intended to be tax-neutral. Profits from the transfer of assets because of a reorganisation do not generate a tax burden to the transferring company. What is more, VAT is not applicable to reorganisation and no stamp duty is imposed on the documentation relating to the reorganisation. Finally, in the process of reorganisation, immovable property is exempt from capital gains taxation and from mortgage fees.
A Cyprus company can alter its tax residency by moving its management and control outside of Cyprus. The Republic of Cyprus does not impose exit charges on companies that move their tax residency out of Cyprus. Furthermore, Cyprus allows for redomiciliation of companies in and out of Cyprus without any exit or entry charges being imposed and facilitates the uninterrupted carrying on of business without the necessity to liquidate the foreign company and to transfer all assets and liabilities to the newly incorporated company in Cyprus.
IX ANTI-AVOIDANCE AND OTHER RELEVANT LEGISLATION
i General anti-avoidance
Although Cyprus does not have a specific GAAR mechanism, it has implemented in its legislation general anti-avoidance rules and it has adopted the ‘substance over form’ and the ‘business purpose’ tests. Under the Assessment and Collection of Taxes Law, tax authorities may overlook sham or artificial transactions and structures whose sole purpose was the attainment of a tax benefit and where there is no economic reality or business purpose behind the said transaction or structure.
Furthermore, given the new non-domicile legislation which exempts non-domiciled persons who are tax residents in Cyprus from Special Defence Contribution in an effort to attract substance and high-net worth individuals to Cyprus, specific anti-avoidance rules were introduced to prevent abuse of the said new law.
The new law introduced an anti-avoidance rule limiting its application where domiciled tax residents transfer assets to related non-domiciled persons to benefit from the new tax provisions, allowing the tax authorities to disregard such transfers of assets.
The law further introduced a new anti-abuse rule allowing tax authorities to disregard the interposition of a company without any actual business or economic reason between an individual and a company, if this has been put in place with the sole aim of diminishing or deferring the payment of special defence contribution tax.
In order for Cyprus legislation to be aligned with the amended EU Parent-Subsidiary Directive, the formerly absolute exemption of dividend income from corporate income tax on dividends received by a Cyprus company is not available as of 1 January 2016. Such dividends will fall outside the scope of the exemption where the relevant dividend received by a Cyprus tax-resident company is allowed as a tax deduction in the jurisdiction of the foreign paying company.
The exemption will additionally not apply where a structure has been put in place solely in order to benefit from this exemption without any real economic substance or real business purpose to exist behind the structure.
Dividend income falling outside the scope of the exemption as described above will be treated as trading income and will be subject to 12.5 per cent income tax in Cyprus.
ii Controlled foreign corporations (CFCs)
There are no CFC rules in place in the Republic of Cyprus.
iii Transfer pricing
In Cyprus there is no explicit transfer pricing legislation. Nevertheless, the Republic of Cyprus follows the principles of the OECD Transfer Pricing Guidelines relating to transactions between connected parties and the arm’s-length principle. In accordance with Article 33 of the Income Tax Law the arm’s-length principle must be applied on all transactions between related parties and all transactions must carry the same terms and conditions as those that would have been carried out by independent parties in the open market.
In case that the arm’s-length principle is not applied on transactions between related parties, the Cyprus Tax Authorities can proceed and adjust the tax base of the company accordingly.
As from 1 January 2015, in case of transactions between Cyprus tax residence companies, when an adjustment is made to the income of one company a deduction will be granted to the other.
It should also be noted that as from July 2017, the practice (as this had been set by the Cyprus Tax Department) of accepting pre-agreed minimum set profit margins of 0.125 per cent – 0.35 per cent on intragroup and related party financing arrangements that were in the form of back-to-back loans was abolished, and as from July 2017 intragroup financing arrangements and their interest rates or profit spreads should be supported by a transfer pricing study, based on the relevant OECD guidelines.
iv Tax clearances and rulings
The Cyprus Tax Authorities provide tax clearance certificates for companies tax resident in Cyprus in accordance with their records.
Furthermore, on 1 October 2015, the Tax Department issued a formal procedure for obtaining advance tax rulings. Although the Tax Department had a long tradition of providing written replies with respect to tax queries, it now has a formal process of doing so.
The Tax Rulings Division of the tax department will on request by the taxpayer or his representative produce advance tax rulings with regard to transactions for the tax years for which the due date for filing a tax return has not yet passed or with regard to future transactions to be assumed by existing or new companies.
X YEAR IN REVIEW
The extensive recent tax changes in the Cypriot tax legislation demonstrate the government’s commitment in attracting inward direct investment and remaining in the forefront of economic development.
Substantial incentives were introduced, such as the notional deduction on new equity invested as well as the new non-domicile legislation intending to attract substance and new investments in Cyprus. Considerable exemptions from capital gains taxation also apply at the moment in relation to immovable property and protection schemes for hidden mortgages, aiming at boosting the real estate market.
Furthermore, the government reinstated the maintenance of the uniform 12.5 per cent corporate tax rate which is among the lowest in the European Union and forms the cornerstone of the Cypriot tax system.
The economy returned to growth, growth, which was achieved with systematic work and commitment by both the government and professional bodies. The significant tax reforms during the past year have once more given Cyprus a competitive edge, have rendered Cyprus even easier to do business with and have created a transparent and safe business environment attractive to foreign investments.
Taken everything into consideration, the competitive advantages of Cyprus as a financial centre of excellence remain and continue to develop constantly.
XI OUTLOOK AND CONCLUSIONS
Cyprus has proven to be a robust and competitive economy and continues to be considered as one of the most appealing jurisdictions for new operations and inward investment. Despite the economy’s expansion over the last two years, the government is still dedicated in seeking and promoting reforms that will further enhance Cyprus’s competitive edge.
The government is also committed in opening up closed professions to competition and to reform the civil service drastically by modernising it and remodelling it, to make it more effective and efficient for the attraction of foreign investment.
There are still challenges to overcome, such as non-performing loans (which have been significantly reduced as a result of new legislation that has been passed) and private debt complications. Cyprus justifiably has a well-known reputation as a financial centre and is regarded as an exceptional place for doing business with ease, with a commitment to continuous improvement and development focused on attracting foreign investment.
1 Georgia Papa is a senior associate at Pyrgou Vakis Law Firm.
2 A qualifying IP means an asset that was acquired, developed or exploited by a person in the course of his or her business and it is a result of research and development. It also includes assets for which only economic ownership exist.
3 Qualifying expenditure is defined as the total expenses for research and development carried out wholly and exclusively for the development, improvement or creation of a qualifying IP in any fiscal year. The above expenditure should be a direct expenditure.