With a broad range of double taxation treaties, one of the lowest corporation tax rates in the E.U, a strategic geographic location, and a reliable and stable legal system, Cyprus is increasing becoming an attractive place to live, work and establish or run a business.
From 2015 onward Cyprus has sought to make personal and corporate tax rates even more attractive to international investors. The introduction of generous tax exemptions and incentives with its non-domicile regime appeals to high-net-worth individuals and corporations willing to relocate key personnel to perform duties from Cyprus.
Below we provide a brief overview of the Cyprus tax system with particular focus on how it can benefit the international investor:-
1. Personal income tax
A Cyprus tax resident irrespective of domicile is subject to income tax on his or her worldwide income. (Exemptions apply).
The Tax Department of Cyprus grants unilateral tax credits (to natural and legal persons) on any tax paid to any other country, even in instances where Cyprus has not concluded a Double Tax Treaty with that particular country.
Income tax liability is based on an individual's residence in Cyprus for an aggregate of 183 days or more per tax year (Jan-Dec). If one is considered a tax resident in Cyprus in that particular tax year then the individual is taxed in Cyprus on his or her worldwide income.
There is a second basis upon which an individual can be considered a tax resident of Cyprus and that is in accordance to the 60-day rule introduced in 2017 (conditions apply).
Current income tax rates for individuals are the following:
- the first €19,500.00 is not taxed,
- from €19,501.00-€28,000.00@20%,
- from €28,001.00-€36,300.00@25%,
- from €36,301.00-€60,000.00@30%,
- Over €60,000.00@35%.
Tax deductions such as social insurance contributions, medical, pension, provident fund payments, donations to approved charities may be deducted and this leads to a reduced total amount subject to income tax.
As further incentives particularly aimed at businessmen and foreign nationals, there are exemptions to income tax, such as dividend income, and an exemption of 20% or 50% (in the latter case, where the annual remuneration exceeds €100,000.00) of remuneration from any employment exercised in Cyprus by an individual who was not a resident of Cyprus before commencement of the employment.
2. Special contribution for defence tax (SCDT)
If an individual is a Cyprus tax resident for income tax purposes but is not domiciled in Cyprus, he or she will not be considered a Cyprus tax resident for Special contribution for defence tax purposes and therefore not be subject to SCDT.
In 2015 the above exemption was introduced for individuals who are Cyprus tax residents but who are not domiciled in Cyprus. This is an incentive introduced by the Cypriot government to attract and encourage foreign nationals to use Cyprus as a base for their investments.
The 17-year rule regarding SCDT is as follows: an individual who has been a tax resident of Cyprus for less than 17 of the last 20 years before the current tax year is not considered to have his domicile in Cyprus and so is not subject to SCDT. This in essence means that certain income such as passive interest and dividends, which are exempt from income tax but subject to SCDT, are tax free for non-domiciled tax residents of Cyprus. Non-domiciled Cyprus tax resident individuals also benefit from not being subject to SCDT on rental income.
* Domicile is a legal concept and for it to be determined one has to consider not merely nationality and current place of residence but where one was born and is habitually resident. An individual born to a non-Cypriot domiciled father is considered to be a non-domicile of Cyprus. Alternatively, if an individual has been a Cyprus tax resident for at least 17 out of the last 20 years prior to the last tax year.
3. Tax Residency
An individual who spends more than 183 days in Cyprus can be regarded as a tax resident of the Republic of Cyprus.
The Cyprus Government through the modernization of its tax legislation and the opening of its doors to foreign investment, in all economic sectors, has made Cyprus a worthy competitor to other business hubs. New residents for example can take advantage of generous tax incentives. According to the income tax law of 2017 (effective from 1st July 2017) a person is deemed to be a Cyprus tax resident if during the tax year an individual maintains a permanent residence in Cyprus, establishes or operates a business and takes up employment and is in Cyprus for 60 days in the year. To qualify, the investor must:
- not be a tax resident of any other country;
- spend at least 60 days in Cyprus;
- maintain a permanent residence in Cyprus;
- not spend more than 183 days in the year in any other country;
- is employed in Cyprus or carries on a business or holds a position in a Cyprus tax resident corporation then the individual concerned may be regarded as a Cyprus tax resident. Certain conditions apply.
A Cyprus tax resident who is not domiciled in Cyprus is exempt from tax on dividend income and interest income. However a non-Cypriot tax resident is subject to income tax on income generated or accruing from income derived in Cyprus and is exempt from tax on dividends and interest income.
4. Employment in Cyprus and income tax exemptions
Non Cypriot individuals who relocate to Cyprus for employment purposes irrespective of tax residency or domicile are entitled to certain tax deductions on employment income as follows:
50% of employment income derived in Cyprus by an individual who was a resident outside Cyprus before commencing employment in Cyprus is tax free. This exemption applies for 10 years from the first year of employment provided that the annual remuneration exceeds €100,000.00. In certain cases it is possible to claim this exemption where the income falls below €100,000.00. This exemption does not apply where the individual was a Cyprus tax resident for 3 or more tax years out of the 5 previous tax years immediately prior to the employment nor in the preceding tax year.
Alternatively, for employment commencing on or after 2012 then 20% of the remuneration is not taxed with a maximum amount of €8,550 annually. This applies for a period of 5 years starting from the tax year following the commencement of employment with the last eligible year being 2020.
5. Social insurance/security contributions
Employers and employees are subject to social insurance contributions at the rates of 9.5% and 7.8% respectively on the employee's gross income. Cyprus social insurance contribution rates are regarded as some of the lowest rates in the European Union.
6. Capital gains tax (CGT)
The sale or disposal of real estate owned abroad by a Cyprus company is not subject to capital gains tax in Cyprus.
The rate is 20% on the gains, after deducting the lifetime exemption and other permitted deductions, from the sale of immovable property situated in Cyprus. CGT is also imposed on gains made from the disposal of shares in companies which directly or indirectly own immovable property situated in Cyprus.
7. Estate duty
Estate Duty has been abolished since 1st January 2000.
8. Transfer fees payable at the Land Registry
Transfer fees are payable to the Land Registry Office at the time of transfer of ownership of immovable property from one person to another.
Transfer fees are paid by the purchaser of the immovable property, calculated on the following rates:
- The first €85,000.00 is charged at 3%,
- From €85,001.00-€170,000.00 the charge is at 5%
- Over €170,000.00 the charge is at 8%
If for example one purchases immovable property for the amount of €300,000.00 (excluding VAT), the standard transfer fees would amount to a total of €17,200.00 (being the sum of €2,550.00; €4,250.00 and €10,400.00 according to the different rates) but currently to encourage transactions only 50% of the standard transfer fees are payable apart for in instances where the transaction was subject to VAT. In instances where the sale was subject to VAT then there are no transfer fees payable for the transfer of the title deed.
9. Value added tax (VAT)
The standard rate in Cyprus as from the 13th of January 2014 is 19%.
One of the two reduced rates, that of 5% is applicable to contracts for the purchase or construction of immovable property to be used as the primary and permanent place of residence in Cyprus by an individual irrespective of nationality. The reduced rate is applicable to the first 200 square meters of a residence, the remainder is charged at 19%.
10. Capital duty
Capital duty is paid on the authorized share capital of a company at the time of incorporation, to the Registrar of Companies, at €105.00 plus 0.6% on the nominal value of the authorized share capital and not on any share premium.
11. Corporation tax
The corporation tax rate is one of the lowest in Europe, set at 12,5% per annum on the worldwide net profits of Cyprus resident companies and on certain income arising from sources within Cyprus of non-resident Cyprus registered companies.
*A company is considered to be a Cyprus resident company if it is managed and controlled in Cyprus.
With respect to financing companies, interest income is taxed as corporation tax at 12.5% on resulting net profits.
Intellectual property companies can take advantage of the favourable IP regime where 80% of 'Royalty Profit' is exempt from corporation tax leading to a maximum effective tax rate of 2.5%.
Where a Cyprus company is acting as a holding company, its dividend income is exempt from corporation tax in Cyprus.
The profits made on the sale of titles such as shares, bonds and debentures, of a Cyprus holding company are exempt from corporation tax.
Tax losses incurred during a tax year can be carried forward provided the conditions are met.
12. Withholding tax
Cyprus has an extensive Double-Tax Treaty network by concluding such treaties with approximately 60 countries, facilitating international tax planning.
There are no withholding taxes imposed on the payment of dividends from a Cyprus company to a non-resident shareholder in that company. The same applies to interest and royalties apart from royalties earned on rights used within Cyprus, which are subject to a WHT of 10%.
Cyprus companies' law allows for the transfer of the registered office of a foreign company to Cyprus subject to the conditions stipulated in the said law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.