1. TYPES OF BUSINESS ENTITIES, THEIR RESIDENCY AND BASIC TAX TREATMENT
1.1 Corporate structures and tax treatment
Businesses in Cyprus generally adopt a company form. The most common type of company is a private (or public) company limited by shares. A Cyprus company is fiscally opaque for tax purposes; therefore, it is taxed as a separate legal entity.
Under Cypriot law, a company is a legal person with separate legal personality, separate from its members and directors. Thus, its shareholders are not personally liable for the obligations of the company and the liability of the shareholders is limited to the share capital contributed. The existence of the society does not depend on the existence or continuation of its members.
Additionally, a Cypriot company may be limited by warranty. Usually, companies limited by guarantee are incorporated as non-profit organizations, for charitable purposes.
1.2 Transparent entities
Cypriot law permits the formation of general and limited partnerships. A partnership is not considered a separate taxable person. It is a transparent entity and the tax is imposed on the partners and not on the partnership. Partnerships are widely used in joint venture projects and in small (usually family) businesses.
1.3 Determining residency of incorporated businesses
The test used in Cyprus to determine the residency of incorporated businesses and transparent entities is the so-called management and control test.
Cyprus income tax legislation does not include a clear provision on how an entity becomes a Cypriot tax resident. General medicine looks at its management and control.
The minimum requirements for an entity to be considered a Cypriot tax resident are quite general and include:
- the place of residence of the majority of directors;
- the place where meetings of the Board of Directors are held; and
- the place where the general policy of the entity is formulated.
1.4 Tax rate
Tax rates paid by incorporated businesses
The corporation tax rate is 12.5%.
Business profits of tax resident companies in Cyprus, adjusted for allowances and exemptions, are subject to a flat tax rate of 12.5%.
Personal tax rate
Personal income is subject to progressive tax rates. The first EUR 19,500 is tax exempt, the next EUR 8,500 is taxed at 20%, the next EUR 8,300 is taxed at 25%, the next EUR 23,500 at 30% and any amount greater than EUR 60,000 at 35%. A number of personal deductions and allowances are available.
Businesses held directly by individuals are subject to individual tax rates; the same applies to companies held through transparent entities.
2. MAIN GENERAL CHARACTERISTICS OF THE TAX REGIME APPLICABLE TO INCORPORATED COMPANIES
2.1 Calculation of taxable profits
The trading profits of a Cypriot company, corrected for various denials and exemptions, are subject to a 12.5% tax. Cypriot tax residents are taxed on their worldwide income. Profits are taxed on an accrual basis and international financial reporting standards are followed.
As a general rule, expenses wholly and exclusively incurred by a corporation in the production of taxable income are deductible. Private expenses, expenses not linked to taxable income or not validated by appropriate supporting documents, provisions (depreciation, depreciation, obsolete stocks), expenses related to non-taxable assets and exchange differences are considered, among others, as non-deductible expenses. However, deductions for depreciation, the provision for balance calculated on the disposal of a non-current asset, the deduction of notional interest and the notional loss in transactions with related parties are also deductible.
2.2 Special incentives for technology investments
The current Cypriot intellectual property tax regime is applicable from 1 July 2016. This follows the nexus approach, whereby a direct link between qualifying income and own qualifying expenditure is essential for the intellectual property to qualify. The level of eligible profits is positively correlated to the extent to which research and development activities are carried out by the same entity.
Under the previous IP Box scheme which was applicable in Cyprus, an overall deduction of 80% on profits was granted. Under current intellectual property tax rules, 80% of the overall income from qualifying intangible assets is treated as a deductible expense.
An eligible intangible asset is defined as an asset that has been acquired, developed or used by a person in the exercise of his activity and which is the result of research and development activities.
These assets specifically include (i) patents, (ii) computer software and (iii) other intellectual property protected by law and including utility models, intellectual property assets that offer protection to plants and genetic material, orphan drug destinations and extensions of protection. for non-obvious, useful and novel patents or intellectual property assets (which are certified as such by a competent authority) when the person using them does not generate annual gross income exceeding 7.5 million euros from all intangible assets (or 50 million euros for groups).
Eligible intangible assets specifically exclude trademarks, trade names, branding rights and other intellectual property rights used in the marketing of products and services.
Persons eligible to benefit from the Cyprus intellectual property tax regime include Cypriot tax resident taxpayers, tax resident permanent establishments (PEs) of non tax resident persons and foreign PEs which are subject to tax in Cyprus.
2.3 Other special incentives
In Cyprus, there are a number of special incentives applicable generally as well as to particular industries (in addition to the Cyprus tax regime on intellectual property explained in 2.2 Special incentives for technology investments).
The Cypriot holding company
Cyprus is an attractive jurisdiction to set up a holding company. Namely, dividend income received by a Cypriot holding company is generally exempt from any income tax in Cyprus (subject to the hybrid instrument exception explained below) and special contribution for defense ( SDC) (subject to the passive dividend rule explained below). In addition, no withholding tax applies on any outgoing dividends or other distributions of profits or interest, regardless of the existence of a double tax treaty (DTA). In addition, profits from the sale of shares are tax exempt. In general, there are no restrictions on foreign ownership of shares; accordingly, a foreign investor is permitted to be the sole shareholder of a Cypriot company.
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Originally published by Chambers Global Guide
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.