A company is tax resident in the Republic if it is effectively managed and controlled from the Republic.
Basis of assessment
A Cyprus tax resident company is taxed on income accruing or arising from sources both within and outside the Republic
A non – Cyprus tax resident company that has activities in the Republic is taxed on income accruing or arising from sources within the Republic.
Incomes exempt from corporation tax
- Profit from the sale of securities
- Profit from isolated transactions
- Interest income (unless arising in the ordinary course of business or closely connected with trading activities)
- Foreign exchange gains (not applicable to companies dealing with currencies)
- Dividend Incomes (unless classified as hybrid instruments)
- Profit from the sale of securities
- Profit of Permanent Establishment situated outside the Republic (note 1)
- Rent from a preserved building
- Fair Value gains
Note 1: Profits of foreign Permanent Establishment can be subject to Cyprus Corporation tax if:
- a) it is subject to tax substantially lower the Cyprus corporation tax rate (less than 6.25%) AND
- b) More than 50% of its activities are of a passive nature
- Interest relating to the acquisition of assets used in the business
- Expenditure for the maintenance of preserved buildings
- Donations to approved charitable organisations
- Donations to political parties (up to €50.000)
- Wear and tear allowances (appendix 1)
- Notional interest deduction (NID) on new equity – Up to 80% of the taxable profit generated from the new equity
- Intellectual property related deductions
- Expenses not incurred wholly and exclusively for the generation of income or not supported by relevant documentation
- Business entertainment expenses if more than 1% of gross income or more than €17.086 (whichever is lower)
- Private motor vehicle expenses
- Expenses linked to assets not generating taxable income
- Annual Levy
- Fair Value losses
- Wages and salaries relating to services offered within the tax year on which social insurance and other contributions have not been paid in the year in which they were due
- Interest payable or deemed to be payable in relation to the acquisition of non -taxable assets (i.e. private motor vehicles, titles, private assets) irrespective of whether it is used in the business or not. This restriction applies for 7 years from the date of acquisition of the relevant asset.
- From 1 January 2012 and onwards Interest expense incurred for the acquisition of shares in a wholly owned (direct or indirect) subsidiary shall be deductible for income tax purposes provided that this subsidiary engages in trading activities. If this subsidiary does own (directly or indirectly) assets that are not used in the business, the restriction applies accordingly.
Companies may carry forward tax losses incurred during a tax year over the next five years to be offset against taxable income
Then only cases were losses are not carried forward are when
- There is a change in ownership and activities
- There is change in ownership when activities are diminishing
Losses of a permanent establishment outside the Republic
Tax losses arising from a permanent establishment outside the Republic may be offset against taxable profits of the company arising in the Republic in the same year and recaptured when the permanent establishment becomes profitable.
Group relief is available between Cyprus tax resident companies that form part of a tax group and a group company can surrender its losses to another group company.
A group company which is tax resident in another EU country may also surrender current year tax losses to a Cyprus tax resident company, provided such company has exhausted all means of utilising or surrendering its tax losses in its country of residence.
Group relief is available if both companies are members of the same group for the entire tax year. The only exception for holding period rules is the incorporation () of a 100% wholly owned Cyprus tax resident subsidiary provided the holding maintains as at the end of the tax year.
Two companies are considered to be part of a group for group
relief purposes if:
- one is at least a 75% subsidiary of the other, or
- both are at least 75% subsidiaries of a third company.
The interception of companies established in either an EU country or in a country with which Cyprus has signed a tax treaty or an exchange of information treaty allows for the calculation of an indirect holding and does not affect the eligibility for group relief
Tax credit for foreign tax paid
Foreign tax paid on income subject to income tax in Cyprus may be
credited against income tax payable on such income, irrespective
of the existence of a tax treaty.
Anti-Tax Avoidance Provisions
The following anti-tax avoidance provisions have been introduced
in the Income Tax Law as a result of the adoption of the EU Council
Directive 2016/1164 of 12 July 2016 laying down rules against
tax avoidance practices that directly affect the functioning of the
Application date: 1 January 2019
Interest limitation rule
Excess Borrowing Cost (EBC) more than 30% of taxable earnings before interest, tax, deductions and additions in respect of fixed and intangible assets used in the business (EBITDA) is not deductible. It is noted that the 30% of Tax adjusted EBITDA applies if EBC exceed €3.000.000 per fiscal year, per company or Cypriot group.
EBCs not deductible in a tax year due to the restriction may be carried forward for up to 5 years.
Unused interest capacity may carried forward for use for the next 5 years.
Note that other exceptions may also apply.
Controlled Foreign Company (CFC) rule
The non-distributable income of a Controlled Foreign Company (CFC) or of a foreign permanent establishment to the extent that such income arises from non-genuine arrangements which are controlled by a company or companies tax resident in the Republic, is added to the taxable income of the controlling company resident in the Republic.
Control means holding more than 50% of voting rights.
Any foreign tax paid on the income of the CFC is credited against income tax payable in the Republic.
Note that exceptions may also apply.
General Anti-Abuse rule (GAAR)
The GAAR requires (for the purposes of calculating the Cyprus corporate income tax liability of the Cyprus CIT taxpayer) an arrangement or a series of arrangements which are non-genuine to be ignored where these, 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 having regard to all relevant facts and circumstances. An arrangement or a series thereof shall be regarded as non-genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.
Application date: 1 January 2020
Apply when a taxpayer moves its tax residence out of the Republic or assets then the taxpayer shall be subject to tax on an amount equal to the market value of the
transferred assets, at the time of exit, less their tax written value.
Note that the taxpayer has the right to pay any tax that may arise over five years.
Hybrid mismatches rules have been put in place to ensure that deductions or credits are only taken in one jurisdiction and that there are no situations of deductions of a payment in one country without taxation of the corresponding income in the other country concerned.
Hybrid mismatches rules apply only to the extent they give rise to a mismatch outcome, meaning either a double deduction, a deduction or non-taxation without inclusion or a double tax credit.
Appendix 1: Annual Wear and Tear Allowances
Annual wear and tear allowances are calculated as a
percentage on the cost of acquisition of the asset used in
the business and are deductible from the taxable income.
|Plant and machinery (note 1)||10%|
|Furniture and fittings||10%|
|Equipment (note 1)||10%|
|Machinery and tools used in agricultural business||15%|
|Industrial buildings (note 2)||4%|
|Metallic greenhouse structures||10%|
|Wooden greenhouse structures||33.3%|
|Commercial motor vehicles||20%|
|Excavators, tractors, bulldozers, self-propelled loaders||25%|
|Armored motor vehicles||20%|
|Steamers, tugs and fishing boats||6%|
|Ship motor launches||12.5%|
|New cargo vessels||8%|
|New passenger vessels||6%|
|Television and videos||10%|
|Computer hardware and operating systems||20%|
|Application software costing more than Euro 1.709||33 1/3%|
|Application software costing less than Euro 1.709||100%|
|Wind power generators||10%|
|Private motor vehicles (e.g saloon cars)||Nil|
|Private used non-current assets||Nil|
Note 1: If acquired between years 2012-2018 a accelerated rate of 20% annual wear and tear is granted
Note 2: If acquired between years 2012-2018 a accelerated rate of 7% annual wear and tear is granted