The taxable income of companies, whether registered in Cyprus or not, which have their management and control in Cyprus will be liable to corporate tax at the rate of 12.5%, irrespective of whether the shareholders are Cyprus residents or not. Corporate tax will be charged on the following types of income: business profits, interest, rents from immovable property, royalties and profit from the sale of goodwill.
The profits of a Cyprus resident company, which are derived directly or indirectly from a permanent establishment outside Cyprus, are exempt from Cypriot tax. This exemption, however, is not granted if (a) more than 50% of the income of the permanent establishment results in investment income and (b) the foreign tax is significantly lower than the tax payable in Cyprus.
Where dividends are received from abroad, any overseas tax withheld is given as a tax credit against the tax resulting in Cyprus.
In accordance with section 8(20) of the Income Tax Law, dividend income accrued or arising to any person (company or individual) which is resident in Cyprus, whether the said income derives from sources in Cyprus or outside Cyprus is exempt from income tax.
Subject to certain exceptions/conditions, dividend income is subject to special contribution for the defence only if it is received or is deemed to be received by any resident individual. Thus it follows that no withholding tax applies to payments of dividends to non-residents, whether the recipient is a body corporate or an individual.
Interest income under the Cypriot Income tax legislation is generally exempt as provided by section 8(19) of the Cyprus Income Tax Law 118(I) 2002 as amended.
Interest income not accruing from ordinary business activities is subject to defence contribution if received by a Cyprus tax resident (both corporate and individual). Deduction will be at source if received from Cyprus, otherwise by assessment on the basis of returns; foreign tax credit will be given as above mentioned. If interest arises out of the ordinary activities of the company this is taxed as business profits. Non-residents are not subject to any tax on interest.
Rents received by resident companies or individuals, whether from Cyprus or abroad, are subject to income tax, while non-resident persons are taxed on their rents from Cyprus only. Resident companies or individuals are also liable to special defence contribution tax at 3% on 75% of the gross rent.
Taxation of royalties
Companies engaged in the development of intellectual property (IP) rights and the subsequent licensing of these rights and the collection of royalties must always consider which is the best investment structure which among other factors have the least tax leakage. Cyprus has positioned itself among the best tax planning
jurisdictions to establish a royalty company.
Tax resident companies are taxed on their worldwide income; thus profits derived by a Cyprus royalty company are subject to 12.5% corporate tax. The tax is imposed after deducting any royalty payments as well as any other expenses incurred wholly and exclusively for the production of the royalty income.
As from 2012, 80% of any income derived from IP, which is owned by a Cypriot resident company, will be exempt from tax. Additionally, 80% of any profit arising from the sale of such IP will be exempt from tax. Any capital expenditure incurred for the acquisition or development of IP will be written off over five (5) years i.e. 20% capital allowance is granted. For more information see article Cyprus Intellectual Property (IP) Regime
Capital gains tax
Any profits from the disposal/sale of securities (shares, bonds, debentures, founder’s shares and other company securities) are exempt from taxation (Income Tax or Capital Gains) apart from gains arising from the sale of shares of companies owning immovable property situated in Cyprus. In such case the resulting gain is subject to capital gains tax. Many of the Cypriot double taxation
treaties provide for taxation of capital gains only in the country of residence of the person (company or individual) disposing of a capital asset.
Companies which are members of a Group may assist each other to set off losses against profits. A company will be considered as a member of a group only if 75% or more of its ordinary share capital with voting rights is owned directly or indirectly by the other company and the other company is entitled to 75% or more of any profits available for distribution to the equity shareholders and of any assets of the subsidiary company which would be available for distribution to its equity holders on a winding up. A company will also be considered as a member of a Group if, together with others, it constitutes a 75% subsidiary of another company. In practice, the losses of a company which is a member of a Group in a specific fiscal year will be set off against the profits of the other companies which are members of the same group in the same year. However, the Group relief set out above can only be used where all the member companies are residents of Cyprus.