Tax overview
Tax optimization with a Cyprus Limited.
A Cypriot Limited is a frequently underestimated instrument for legal tax optimization as well as for limitation of liability (minimum share capital 1.000,- EUR).
Most entrepreneurs choose a company operating in Cyprus or a Cypriot holding company. Both have in common an advantageous taxation with a maximum of 12.5%.
Cyprus compared to other jurisdictions:
The main advantage of Cyprus compared to other jurisdictions such as Switzerland or Malta is the high level of legal certainty. The tax rate has hardly changed in recent years. Whereas in Malta, for example, the entrepreneur is initially liable for 35% corporate income tax, only to hope for a 30% refund within the framework of an expensive holding structure, the tax rate of 2.5% or 12.5% (depending on the sector) in Cyprus is fixed and is granted “without discussion” by the tax office. No advance payments are required and losses can be carried forward indefinitely. No other tax system offers these advantages.
Tax incentives and advantages of a Cyprus Limited:
– No trade tax, no solidarity contribution, no IHK contributions
– Low wage and non-wage costs
– Europe’s lowest corporate income tax rates of only 2.5% and 12.5% respectively
– Dividend distributions to shareholders abroad are not taxed (no withholding tax)
– Interest income at Cypriot banks is tax-free
– EU Parent-Subsidiary Directive is applicable (dividend payments from the subsidiary to the parent company are tax-free)
– Profits and losses of companies in a group of companies are offset against each other (group taxation)
– Offshore companies of other countries are recognized as shareholders
– Double taxation agreements with more than 50 countries
– Consistent application of all relevant EU directives
– Fiduciary relationships are permitted and regulated by law
– strict banking secrecy
Under current legislation, Cyprus has the lowest tax regime in the European Union and has steadily expanded its role as an international financial center. Due to the extensive double taxation agreements, Cyprus is an ideal location for investments in and from Central and Eastern Europe, as well as for investments in and from the European Union.
Requirements for taxation in Cyprus:
– A company is considered “resident” if the management and control are directly run from Cyprus, i.e. the company has a director in Cyprus. The mere incorporation of a company in Cyprus is not sufficient to establish residency.
– Companies incorporated in Cyprus are taxed on their worldwide income, i.e. profits from business activities such as trade, manufacturing, industry, mining, agriculture, interest, rents of immovable property, royalties and profit from the sale of goodwill.
Foreign tax payments are credited against Cypriot taxes of the same income.
A uniform corporate income tax rate of 12.5% applies to all companies.
-exemptions from corporate income tax:
Dividend income received in Cyprus from foreign companies is exempt from tax.
Profits from a foreign permanent establishment are fully exempt from corporate income tax unless:
-more than 50% of the activities of the paying company result in investment income.
-the foreign tax is significantly lower (i.e. less than 5%) than the applicable tax rate in Cyprus.
-Profits from the sale of securities are tax-exempt for all taxable entities and individuals.
-100% of interest earned on other income outside the ordinary course of business (although other interest income is also subject to the defense tax, as discussed below).
Tax losses
Tax losses can be carried forward indefinitely and offset against subsequent profits.
Group taxation
The rule known as group taxation (intra-group loss transfer or group deduction) states that any company of a group may transfer its losses of the current year to another company of the same group so that the latter may deduct the losses from its taxable profits. There is even the possibility that the loss of a group member is arbitrarily divided and distributed among various other companies belonging to the group.
Group members are companies in which the parent company holds 75% of the shares. A shareholding requirement of at least 75% is met if the parent company directly or indirectly holds at least 75% of the shares with voting rights and the company is entitled to no less than 75% of the distributable profits and the hidden reserves.
The transfer of a loss between group members is only permitted if the two companies have belonged to the group for the entire tax year. Furthermore, the transfer of losses is reserved only for companies resident in Cyprus and permanent establishments of foreign companies that have applied to be taxed as tax residents.
Restructuring / Mergers
The tax legislation is based on the EU directives, which allows restructuring, mergers, acquisitions, without the possible tax implications.
Special contribution for defense
– On dividends
– 20% withholding tax on dividends to shareholders who are residents of Cyprus, profits to non-resident shareholders are not subject to this tax.
– A special defense contribution is levied on dividends paid from a company registered in Cyprus to another company four years after the end of the year in which the profits were distributed as dividends (20% thereafter).
15% tax levied on acquisition of interest from an individual or company domiciled in Cyprus.
There is no withholding tax on the payment of interest and royalties for non-resident individuals or companies.
3% withholding tax on income from rentals if resident in Cyprus (after deduction of 25%).
Capital gains tax
Capital gains from the sale of immovable assets outside Cyprus do not fall within the scope of capital gains tax. Capital gains tax is only applicable to immovable property in Cyprus.
Value added tax
The uniform tax rate is 19% (since 13 January 2014).
The reduced tax rates are 5% and 9%.
Taxation of employees
-A person is taxed if he is a resident of Cyprus.
-A person is considered a resident if he spends in Cyprus more than 183 days per fiscal year.
-Cyprus residents are taxed on their world income, as such:
*Employment income (including social benefits)
*Profits from an entrepreneurial activity
*Rentals of immovable property and royalties
*Pensions (pensions from abroad may be taxed at 5% for amounts over 3,417 euros).
*In case of granting a loan by a company to its shareholders or directors, who are individuals, 9% of the loan amount is taxable on a monthly basis. The tax is paid to the tax office monthly through the payroll tax system.
-Non-residents of Cyprus are taxed only on their income in Cyprus. Such revenues include:
-Employment income (including social benefits), in respect of services rendered in Cyprus.
-Profits from a business activity carried out through a permanent establishment in Cyprus
-Leases of immovable property in Cyprus
-Pension entitlement acquired through professional activity in Cyprus , with the exception of pensions from funds established by the government or local authorities.
Personal tax rates
ANNUAL INCOME TAX RATE TAXES PAYABLE
0€ – 19.500€ 0% tax free
19.501€ – 28.000€ 20% 1.700€
28.001€ – 36.300€ 25% 3.775€
36.301€ – 60.000€ 30% 10.885€
60.000€ and more 35%
-Taxation of foreigners
*For employment outside Cyprus – no taxation.
*For employment in Cyprus of 183 days or more, taxation occurs on all income from employment.
*In case of employment in Cyprus for less than 183 days, the taxation is only on the duration of the actual employment in Cyprus.
-The following types of income are exempt from tax:
*Dividends
*Interest received
*Gains from the sale of shares
*Employee services performed outside Cyprus by Cyprus residents (more than 90 days) for non-Cyprus resident employer or in a permanent establishment abroad for a Cyprus resident company.
-Special contribution for defense (withholding tax):
15% on interest earned in Cyprus or abroad
20% on dividends received from abroad or in Cyprus
3% on 75% of rental income from real estate regardless of location
For private sector employees, self-employed persons and pensioners, the following applies:
Gross monthly remuneration in euros %
up to 2.500 0
2.500-3.500 2.5
3.500 – 4.500 3
4.500 and over 3.5
-deductible expenses for individuals
*Social security contributions
*Life insurance premiums
*Contributions to approved provident funds, retirement systems, and medical arrangements.
*For an employee who was not a Cyprus resident and starts employment in Cyprus for the first time, a special exemption from income tax applies. For the first three years from January 1 following the year in which employment in Cyprus began, the tax exemption is 20% of the employee’s income up to a maximum annual amount of €8,550.
*Income from employment in Cyprus of persons who were not resident in Cyprus before taking up the activity. This exemption is valid for a period of 5 years, starting from the year of commencement of service. Under this exemption, 50% of the remuneration exceeding the amount of 100,000 € is exempt from income tax.
