Cyprus’ Tax Efficient Framework Further Enhanced by Recent Tax Law Amendments

28 April 2016

Marios Andreou, Partner, Tax Advisory, PwC Cyprus
 
Corporate taxpayers  
Cyprus has an efficient corporate tax framework with resident companies subject to corporate income tax (CIT) on their worldwide taxable profits at the headline flat rate of 12.5 percent. 
 
Other main direct taxes include Special Defence Contribution (SDC) and Capital Gains tax (CCT).  These are limited in their scope of application however. 
 
Cyprus tax resident companies may benefit from Cyprus’ extensive double taxation treaty network with over 50 countries worldwide as well as access to EU directives.
 
Highlights for corporate taxpayers 
-  Full exemption for dividend income, subject to specific anti-avoidance provisions
-  Full exemption for gains earned on disposals of qualifying securities (such as shares) provided that the disposed-of company does not hold immovable property located in Cyprus
- Full exemption for profits earned by foreign permanent establishments, subject to specific anti-avoidance provisions
- A notional interest deduction (NID) on qualifying equity finance (refer below)
- An Intellectual Property (IP) Box achieving an effective CIT rate of a maximum 2.5 percent  for qualifying IP incomes
-  Qualifying shipping profits may by election be taxed only under the Tonnage Tax System
-  Double tax relief is available unilaterally for foreign sourced income
-  No withholding taxes on payments out of Cyprus, with certain limited exceptions
 
Recent corporate tax developments
A notable enhancement to Cyprus’ corporate tax efficiency is the introduction of a notional interest deduction (NID) on qualifying equity finance.
 
Paid-up share capital or share premium introduced as from 1 January 2015 (qualifying equity) are eligible for an annual NID.  The annual NID is calculated as an interest rate on qualifying equity. 
The applicable interest rate is the yield for 10 year government bonds of the country where the funds are employed plus a 3 percent premium (subject to a minimum rate of the yield for 10 year Cyprus government bonds plus 3 percent).

The NID is a deductible expense for CIT in a similar manner as actual interest expense, subject to an annual cap of 80 percent of taxable profits (as calculated prior to the NID).  Certain anti-avoidance rules apply.

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Personal taxpayers
Cyprus has a favourable personal tax system providing many incentives to investors and highly paid employees. The Cyprus personal income tax (PIT) rates are progressive and reach a competitive top marginal tax rate of 35 percent (for taxable income over EUR 60.000).
 
Other main direct taxes include SDC and CGT which are again limited in their scope of application. 
 
Highlights for personal taxpayers
- Full exemption for dividend and ‘passive’ interest income for resident but non-domiciled individuals (refer below)
- Full exemption for gains earned from disposals of qualifying titles (such as shares) provided that the disposed-of company does not hold immovable property located in Cyprus.
- 50 percent exemption for remuneration earned from any employment exercised in Cyprus by an individual who was not previously a resident of Cyprus. It is available for a period of five years provided annual remuneration exceeds EUR 100.000. 
- Pensions from services outside Cyprus are taxed the flat rate of 5 percent unless the taxpayer elects for normal PIT.
 
Recent personal tax developments 
Due to a recent tax law amendment individuals not domiciled in Cyprus (non-doms) are exempt from tax on local and foreign sourced dividend and ‘passive’ interest income. 

Individuals whose domicile-of-origin is outside Cyprus (as per the Wills and Succession Law, WSL) are considered non-doms for tax purposes for at least the first 17 years of their Cyprus residence.  Domicile-of-origin is acquired at birth and is the father’s domicile at that time (exceptionally it is the mother’s domicile).   Individuals whose domicile-of-origin is Cyprus may also qualify as non-doms for tax purposes, subject to conditions.

The combination of Cyprus’ favourable PIT law and the non-doms regime make Cyprus a tax efficient place to invest, live and thus manage one’s global business.
 
 
 
This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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