Tax

Our firm is able to offer fully integrated tax services by helping our clients evaluate, improve and monitor their tax related operations. We assess and manage possible risks with the ultimate goal to safeguard our clients and their relationships with the tax authorities.

In the recent years, tax has become the flagship for both legal entities and individuals. The current attention on tax is evidently prominent and its development will continue to grow intensely in order to reflect the rapid transformation in global markets. The whole corporate community is and will continue to be affected. A new era of global tax transparency has already commenced and Cyprus definitely stands tall.

Cyprus has rapidly been established itself as one of the most prominent financial centres in the European Union and worldwide, due to its favourable tax regime. A company regarded as a tax resident of Cyprus enjoys the corporate tax at 12,5%, a percentage that is considered as one of the lowest within the European Union. With Cyprus being a European Union member, a company registered in Cyprus enjoys all the advantages of operating in an E.U. country. Therefore, Cyprus does not carry any disadvantages that other tax friendly jurisdictions have as,it complies completely with the E.U legislation. Furthermore, Cyprus has joined the Organisation for Economic Co-operation and Development (OECD) white list where all jurisdictions which have implemented the internationally agreed tax standard are encompassed.

Apart from the low corporate tax rate, there is a 0% tax on interest income, dividend income, and profits from disposal of shares, bonds, debentures or other securities. No tax is paid for corporate re-organisations, such as divisions, transfer of assets and exchanges of shares with the exception of capital gains related to immovable property in Cyprus. The same applies for profits earned from subsidiaries abroad, subject to certain restrictions. There are more tax incentives through the legislation of Cyprus. For instance, royalties paid from Cyprus to non-resident companies are not taxed. Furthermore, as for all EU members, imports from and exports to other EU countries are completed without VAT.

Additionally, companies registered in Cyprus benefit from the double taxation avoidance treaties that have been established between Cyprus and around 60 other countries. There are double tax treaties in effect with multiple European countries (in and outside the EU) and a number of Middle Eastern countries including Lebanon and, in their majority, the treaties follow the OECD model. As a result, foreign investors do not have to pay additional tax in their home country. The most important advantage of the double tax treaties, is that Cyprus companies benefit from the provisions of the EU parent subsidiary directive which provides that the Cyprus companies can benefit from passing outgoing dividends to its EU parent companies without any withholding tax being payable in their country.

It is important to note that there is no restriction in relation to the residence and the nationality of the owner, in a sense that the owner of the company does not have to be a resident in Cyprus, whilst the company does not have to limit its operations to Cyprus.

  • One of the lowest corporate tax rates in the EU at 12.5% and standard VAT rate of 19%
  • An attractive Double Tax Treaty network covering more than 60 countries across the globe.
  • Access to all EU Tax Directives
  • Exemptions from tax:
    • Dividend income received (under easily met conditions).
    • Profits of foreign branches of Cyprus companies (under easily met conditions).
    • Profits from the disposal of securities (including shares, bonds and debentures).
    • Profits from the exploitation and/or disposal of intellectual property rights (80% exempt).
    • No tax on capital gains from sale of property located outside Cyprus.
    • No succession or inheritance taxes.
    • No immovable property taxes.
  • No withholding tax on:
    • Dividends paid to non-resident shareholders.
    • Interest and most royalties paid from Cyprus.
  • The Cyprus tax legislation is stable and comprehensible.
  • An attractive personal tax regime for international professionals and non-domiciled individuals.
  • Relations between the business community and tax authorities are excellent and ensure the efficient taxation of the commercial and financial sector.

VAT is a complex tax which affects most businesses and organisations. Our firm’s experience and expertise in VAT compliance, consultancy and planning, can offer effective advice and assistance in the matter and our highly experienced team can assist businesses in order to avoid any downsides that may occur by VAT and other indirect taxes. We can offer a complete VAT service to both national and international businesses and organisations.

For each time money is transferred in Cyprus, a transaction can exist which may be subject to VAT. The type of the transaction will determine if VAT has to be charged.

An obligation to register with the Tax Department for VAT arises only in specific instances and if certain conditions are met. A physical or a legal person established in Cyprus and whose taxable transactions value of the provided services and/or goods that were carried out over the 12 preceding months period, or which will be carried out within the next 30 days, has exceeded or will exceed the amount of €15,600, has a legal obligation to register with VAT.

Also, a physical or legal person who makes acquisitions from other EU Member States in the Republic of Cyprus, has an obligation to register with VAT if, at the end of any one month, the total value of its acquisitions over the period of one year, starting from the 1st of January, exceeds the threshold of €10,251.61 and/or whenever there are reasonable grounds to believe that the value of this person's acquisitions over the next 30 days will exceed the threshold of €10,251.61.

Our firm offers taxation services to both individuals and companies and we undertake to complete all the requisite procedures of the tax authorities in Cyprus by assisting with both the application for obtaining a tax number and for the application for the VAT registration.

VAT Rates in Cyprus at a glance:

  • 19% VAT: The standard rate of VAT in Cyprus is 19%. All goods and services that don’t fall in any of the other 4 categories are taxed at 19%.
  • 9% VAT: Hotel accommodation, catering services, and other.
  • 5% VAT: Books, magazines and newspapers, theatre and cinema tickets, use of sporting facilities, and other.
  • 0% VAT: Services relating to imports, exports, and other.
  • Exempt from VAT: Supplies in the public interest (ambulance, postal services, non-for-profit organizations etc.) and insurance, financial and management of mutual funds.

It should be noted that for products or services provided under the 0% category, you can claim back VAT on expenses paid to make and/or produce the services and/or products whilst, if the product is exempt from VAT, you cannot reclaim the already paid VAT.

The European Union has enforced new rules designed to further combat tax avoidance across the European Union. 

The provisions of the Anti-Tax Avoidance Directive are effective from 1 January 2019 and refer to the following areas:

  1. Controlled Foreign Company (CFC)
  2. Limitations of interest deductibility (LoID)
  3. General anti-abuse rule (GAAR)

 

  1. Controlled Foreign Company (CFC)

The particular provisions of the law impact Cyprus tax resident companies and permanent establishments of non-Cyprus tax resident companies.

For starters, the first measure contained in the new Directive is refers to the Controlled Foreign Company (CFC) rule aiming to deter profit shifting to no or low tax countries. Due to the fact that parent companies in a high tax country control their subsidiaries in low or no tax country in order to reduce the Group’s tax liability. The CFC rule should discourage them from doing so, in order to ensure that the member state where the parent company is located will tax certain profits that the company registered in a no or low tax country. The CFC rule will be triggered if the tax paid in the third country is less than half of that which would have been paid in the Member State in question. The company will be given a tax credit for any taxes that it did pay abroad. This will ensure that profits are effectively taxed, at the tax rate of the Member State in which they were generated.

When a non-Cyprus tax resident company (or an exempt foreign Permanent Establishment (PE) meets the definition criteria of CFC, the Cyprus CIT taxpayer must include in its taxable profit the non-distributed income (including interest, royalties and dividends) of the CFC to the extent that such income arises from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage.

Failure to comply with the EU directive:

If a member state fails to comply with EU directive, the European Commission may open an infringement procedure, and if necessary, it may bring the case before the Court of Justice of the European Union.

  1. Interest Limitation Rule

Interest payments are generally tax deductible in the EU. Some companies arrange their inter-company loans so that their debt is based in one of the group’s companies in a high-tax country where interest payments can be deducted. Meanwhile, the interest on the debt is paid to the group’s “lender” company which is based in a low tax country where interest is taxed at a low rate. In this way, the Group reduces its overall tax burden.

Directive Proposal

The Directive proposes to limit the amount of net interest that a company can deduct from its taxable income, based on a fixed ratio of its earnings. This should make it less attractive for companies to artificially shift debt in order to minimise their taxes.

In Cyprus, the interest limitation rule limits the otherwise deductible exceeding borrowing costs (hereinafter “EBCs”) of the Cyprus CIT taxpayer/Cyprus group up to 30% of adjusted taxable profit (taxable EBITDA) with the aim to discourage group of companies from providing financing facilities to companies based in high-tax jurisdictions through subsidiaries based in low-tax jurisdictions.

The interest limitation rule contains an annual €3.000.000 safe-harbour threshold. This means that EBCs up to and including €3.000.000 is in any case not restricted by this rule (the €3.000.000 threshold would apply in cases where ‘30% of taxable EBIDTA’ results to an amount below €3.000.000). In the case of a Cyprus group the €3.000.000 applies for the aggregate EBCs of the Cyprus group and not per taxpayer.

3. General Anti-Abuse Rule (GAAR)

The Directive sets out a General Anti-Abuse Rule, which will tackle abusive tax arrangements if there is no other anti-avoidance rule that specifically covers such an arrangement. The GAAR acts as a safety net in cases where other anti-abuse provisions cannot be applied. It will allow tax authorities to ignore abusive tax arrangements and tax on the basis of the real economic substance.

The Cyprus Income Tax Law has been amended introducing the ATAD GAAR in the Cyprus tax legislation under which Cyprus shall ignore an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, are not genuine (i.e. are not put into place for valid commercial reasons which reflect economic reality) having regard to all relevant facts and circumstances. The GAAR will therefore target all non-genuine transactions performed in a domestic or a cross-border situation.

The draft law adds a new Article 33(6) to the Income Tax Law which reproduces the provisions of Article 6 of ATAD, allowing the tax department to disregard artificial arrangements whose main purposes include obtaining a tax advantage that defeats the object or purpose of the tax laws.

On the 14th day of July 2017, the Cyprus Parliament passed a bill, amended the Cyprus tax law (119(I)/2017) and introduced a second tax residency test, namely the “60-day rule”, for the purposes of determining Cyprus tax residency for individuals.

Besides the “183-day rule”, by which individuals are considered as tax residents of Cyprus if they remain in Cyprus for more than 183 days in the tax year, the “60-day rule” applies to individuals who in the relevant tax year meet all of the below criteria:

  • Reside in Cyprus for at least 60 days and;
  • Do not reside in any other state for one or more period of times which exceed 183 days in aggregate and;
  • Are not tax residents in any other state and;
  • Carry out any business in Cyprus and/or are employed in Cyprus and/or hold an official position in a Cypriot company, which is a tax resident in Cyprus, at any time in the tax year, provided that such is not terminated during the tax year and;
  • Maintain in the tax year a permanent residential property in Cyprus (either owned or rented).

It should be noted that individuals who are already deemed as tax residents under the “183-day rule” and not effected by the “60-day rule”.

Calculating days of residency in Cyprus:

The tax residency in Cyprus, for the purpose of both the “183-day rule” and the “60-day rule”, is calculated as follows:

  • The day of departure from Cyprus counts as one day outside Cyprus;
  • The day of arrival in Cyprus counts as one day in Cyprus;
  • Arrival in Cyprus and departure from Cyprus within the same day counts as one day in Cyprus; and
  • Departure from Cyprus and arrival to Cyprus within the same day counts as one day outside Cyprus.

Our firm and our legal consultants are always able to assist with the requisite procedures of obtaining a tax residence.

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