Cyprus stands out as a premier business destination, attracting companies with its climate, lifestyle, its favorable tax policies and strategic location. But what exactly makes the corporate tax system in Cyprus so appealing? Let’s delve into the essentials of corporate taxation in Cyprus.

Tax Residency and Basis of Taxation

A company is considered a tax resident in Cyprus if it is managed and controlled from within the country. From 2023 onwards, any company incorporated in Cyprus is deemed a tax resident unless it is also considered a tax resident in another jurisdiction. Cyprus tax resident companies are taxed on their worldwide income, while non-resident companies are taxed only on income derived from Cyprus sources.

Corporate Tax Rate

The corporate tax rate in Cyprus is competitively set at 12.5%. This rate places Cyprus among the jurisdictions with the most attractive corporate tax rates, making it a preferred choice for businesses looking to optimize their tax liabilities.

Income Exemptions

Several types of income are exempt from corporate tax in Cyprus, including:

• Profits from the sale of securities.
• Dividends.
• Interest not arising from the ordinary activities of the company.
• Profits from foreign permanent establishments under certain conditions.
• Gains from foreign exchange profits or losses, except if they arise from trading in foreign currencies.

Allowable Deductions

• Cyprus allows a range of deductions for expenses incurred wholly and exclusively in earning taxable income:
• Expenses incurred wholly and exclusively for the purposes of earning the income.
• Interest expenses for acquiring 100% of a subsidiary’s share capital.
• Notional Interest Deduction (NID) on new equity introduced as paid-up share capital or share premium.
• Income from qualifying intangible assets under the Cyprus IP box regime.
• Tax amortization on capital expenditure for IP acquisition or development.
• Expenditure on scientific research and R&D.
• Wear and tear allowances for fixed assets used for the purposes of the business (excludes saloon/private motor vehicles)

Non-Allowable Expenses

Certain expenses cannot be deducted for corporate tax purposes:

• Private motor vehicle expenses.
• Interest on loans for acquiring private motor vehicles or other non-business assets.
• Entertaining expenses in excess of 1% of turnover
• Expenses not incurred wholly and exclusively for the purposes of earning the income.
• Incorporation expenses.
• Certain other expenses as provided in article 11 of the Income Tax Law.

Losses and Reorganizations

Tax losses can be carried forward for up to five years to offset future profits. Additionally, asset and liability transfers between companies can be executed tax neutrally under qualified reorganizations, allowing the receiving entity to carry forward tax losses.

Anti-Tax Avoidance Provisions

To comply with the EU Anti-Tax Avoidance Directives, Cyprus has implemented several provisions:

• Interest Limitation Rule: Limits interest deductions in certain cases.
• Controlled Foreign Company (CFC) Rule: Includes non-distributed CFC income in the tax base of the Cyprus controlling party.
• General Anti Avoidance Rule (GAAR): Targets non-genuine arrangements aimed at obtaining tax advantages.
• Exit Taxation: Imposes tax on asset transfers out of the Cyprus jurisdiction.
• Hybrid Mismatches: Neutralizes tax effects of hybrid arrangements between jurisdictions.

Tax Compliance and Deadlines

Staying compliant with tax regulations in Cyprus involves adhering to several key deadlines:

For employees, the employer is obliged to deduct the relevant proportion of income tax (PAYE) at the end of each month and make the payment by the end of the following month.

For company/business the following deadlines exist:

• 31 July: Submission of provisional income tax return
• 31 August: Payment of the first instalment of the year’s provisional tax.
• 31 December: Submission of any amendments to provisional tax
• 31 January of the following year: Payment of the second (last) instalment of the provisional tax for the previous year.
• 31 July of the following year - settlement of any residual tax arising from the final tax return.
• Company/business tax returns are normally filed 15 months after the end of the financial year, but the Tax Department may announce different deadlines in special cases.

Failure to meet these deadlines can result in penalties and interest charges.

In a Nutshell

Cyprus offers a robust and advantageous corporate tax framework that supports business growth and efficiency. By understanding the key aspects of corporate taxation in Cyprus, businesses can better navigate their tax obligations and leverage available benefits.

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