Tax in Cyprus
Cyprus is very inviting indeed. From its beautiful beaches to its treasured culture, combining a rewarding standard of leaving in tune with Cypriot hospitality, Cyprus is a dynamic place to be. But, more importantly, Cyprus is a dynamic place to invest.
At the heart of this statement lies the country’s tax regime. Whether one is looking at corporate tax or personal income tax, the regime is equally intriguing.
Cyprus has the lowest corporate tax rate in the EU. A Cyprus tax resident company is subject to corporation tax on its world-wide income at the flat rate of 10% after the deduction of allowable expenses. A tax credit is granted for any taxes paid abroad on this income up to the amount of the effective Cyprus tax.
Dividend income and profit on sale of securities are exempt from corporation tax. Dividend income is also exempt from special defense contribution (SDC) (at the rate of 17%), if one of the following conditions is satisfied:
- at least 50% of the paying company’s income is (directly or indirectly) derived from trading activities of an active nature, or
- the tax burden imposed on the paying company is not substantially lower than the one imposed in Cyprus (an effective tax rate of at least 5% satisfies this condition).
Income earned by a foreign permanent establishment (PE) of a Cyprus tax resident company is completely exempt from taxation provided the same conditions as above are met by the PE.
There is no withholding tax on the payment by corporations of dividends, royalties or interest to non residents. Cyprus has no CFC and no thin capitalization rules.
The income tax rates in Cyprus for tax resident individuals are progressive and there is no tax liability imposed on annual income not exceeding €19.500. Expatriates living and working in Cyprus are also entitled, for a period of three years commencing in the year following the first year of their employment, to a tax free allowance of 20% on their employment income (capped at €8.550). With effect from 1 January 2012, 50% of the gross emoluments, provided they exceed €100.000, are given as a deduction from taxable income for individuals that are Cyprus tax residents for the first time. This deduction is granted for 5 years from the first year of employment.
The highest marginal income tax rate is 35% and applies for income exceeding €60.000, but with the 50% deduction mentioned above, the effective highest tax rate can be much lower (eg as low as 12,4% on income of €200.000 or 8% on income of €100.000).
Interest and dividend income are completely exempt from income tax although taxed at a flat rate of 15% and 17% respectively for SDC.
The profit on sale of securities is exempted from all taxation.
In relation to pensioners retiring in Cyprus, the first €3.417 of pension income is tax-free while the rest is only taxed at a flat rate of 5%. Pensioners, however, can annually elect to be taxed under the normal tax rates, in which case they could reduce their tax liability further or bring it down to nil if, for example, their pension is lower than the €19.500 tax free income.
Estate, wealth and property taxes
There is no estate (or inheritance) and no wealth tax in Cyprus. There is, however, a small annual tax on owning immovable property situated in Cyprus calculated on the basis of the property’s 1980 market value – which is significantly lower than today’s values. The rates are progressive with the highest rate being 8‰ for property value in excess of €800.000.
Cyprus only imposes capital gains tax on the sale of immoveable property situated in Cyprus, and taxes separately such gains (after allowing indexation of the acquisition price at the rate of inflation) at the rate of 20%, whether realized by a company or an individual. Immovable property includes shares in companies (other than shares in publicly listed companies) the assets of which include immovable property.
Double taxation treaties (DTTs)
Cyprus has developed a wide network of double tax treaties with 43 countries and is currently negotiating the conclusion or awaiting ratification of DTTs with several more countries.
Cyprus is also a highly reputable international shipping center, ranking among the leading maritime nations in the world. The long anticipated revision of the Cyprus Merchant Shipping Law received substantial interest from the international shipping community since its introduction in 2010. With low tonnage tax rates and the exemption from taxation of shipping/ship management income, dividends and gains on sales of vessels, now also available to eligible ship owners of non EU ships, charterers and ship managers, the tax structuring opportunities are endless. Furthermore, the certainty of this regime for the next decade is a great advantage compared to other EU jurisdictions whose regimes are subject to review and amendments in the near future.
Cyprus as a common law jurisdiction recognises the concept of a trust and the Trustees Law is based on the English Trustees Act of 1925. In addition, in 1992, Cyprus enacted the International Trusts Law dealing with the creation and management of international trusts.
Cyprus International Trusts are widely used as a vehicle for international tax planning offering significant tax advantages:
- Income and gains of a Cyprus International Trust derived from sources outside Cyprus are exempt from any tax imposed in Cyprus under certain conditions.
- Dividends, interest or other income received by a Trust from a Cyprus international business company are not subject to tax nor are they subject to withholding tax.
- No capital gains tax is charged on the disposal of assets of an international Trust.
- Under certain conditions, exemption from taxation in the case of a foreigner who creates an International Trust in Cyprus and retires in Cyprus.
Cyprus trusts can be used as a tool for managing and protecting personal wealth of individuals as well as for managing and distributing corporate profits at no tax. The availability DTTs between Cyprus and other countries, together with the favorable Cyprus tax regime, provide the international tax planner with a valuable tool and are often useful in minimizing the tax burden of a trust and its beneficiaries.
An EU member state at the crossroads of three continents, Cyprus is an ideal business hub connecting Europe with Africa, Asia and the Middle East. The very favorable tax regime combined with a range of DTTs, benefiting not only high net worth individuals but also corporations and funds, the transparent legal and regulatory framework that has evolved from English common law and that is harmonized with the EU legal framework, the availability of a well educated talent pool, the well developed banking sector catering to a wide variety of financial needs of both corporations and individuals, the excellent telecommunications and infrastructure, all make Cyprus a resilient market economy.
In these difficult times, businesses and individuals alike will continue to look for tax planning opportunities in order to improve their returns. Cyprus may just be the end of that look out journey, an ideal holiday destination yet a formidable environment to invest in.
Sylvia Loizides is a Board Member of KPMG Cyprus, in charge of international tax services of the firm’s Limassol office. The firm has six offices servicing the island and more than 750 personnel. It has specialist teams dedicated to the provision of tax planning and asset protection services working closely with its clients to identify opportunities for optimisation of tax and asset protection structures. By complementing its local expertise with its international network of expert professionals KPMG makes the broadest spectrum of opportunities available to its clients. Sylvia can be contacted on +357 25 869 000 or by email at email@example.com
This article is designed to give a very broad and general idea about the Cyprus tax environment and does not purport to give any tax advice.