In a previous article we looked at how Cyprus has become a business-friendly tax haven. We shared information about all the kinds of taxes relevant to doing business in Cyprus. In this article we’ll take a closer look at the intricacies of corporate income taxes and how you can use them strategically for your business. As we’ve previously mentioned, Cyprus has earned the reputation of being a great place for corporations looking for tax efficiency, it has a convenient geographic location and is an attractive hub for all sorts of international business activities.
This article will give you insights into the world of corporate income taxes in Cyprus, including tax rates, exemptions, and deductions available. Whether you're considering establishing a presence in Cyprus or simply looking to broaden your understanding of international taxation, this blog post will give you everything you need to know about corporate income taxes in Cyprus.
Cyprus tax system overview
Cyprus is conveniently located at the crossroads of Europe, Asia and Africa and has been a prime destination for businesses wanting to optimise their tax structures for a long time. In order for these benefits to work for you, you’ll need to understand Cyprus’s tax system. Below we’ll share an overview to get you started.
Cyprus's tax regime in a nutshell
At the heart of Cyprus's appeal is its corporate income tax system. Unlike many countries, Cyprus has a remarkably low corporate tax rate, currently standing at just 12.5%. This competitive rate is one of the main reasons Cyprus is so popular for businesses of all sizes and from various industries.
International business hub
Cyprus's tax system is designed to attract international business activities. As mentioned, its strategic location along with a well-established legal framework and a number of double taxation treaties make it a perfect place for companies working in cross-border trade and investment. These treaties ensure that income is not taxed twice—once in Cyprus and again in the country of residence.
Exemptions and deductions
There are a range of exemptions and deductions available to businesses in Cyprus that can significantly reduce your tax liability. For example, dividends received by a Cypriot company from another Cypriot or foreign company may be exempt from taxation under certain conditions. Also, profits from the sale of shares are often exempt from capital gains tax.
Tax benefits for Intellectual Property
Cyprus also provides favourable tax treatment for intellectual property (IP) income. In order to promote innovation and research and development activities, income from IP rights can be eligible for an 80% deduction on qualifying profits, resulting in an effective tax rate of just 2.5%.
The importance of substance
We’d like to emphasise the importance of establishing genuine economic substance in Cyprus. Worldwide tax authorities are scrutinising businesses to check that they have real operations in jurisdictions where they claim tax benefits and that they’re not merely there for the attractive tax incentives. Cyprus is no exception here, and having proper substance is key when benefiting from the tax advantages.
Next we’ll take a closer look at Cyprus's corporate income tax rates, how taxable income is calculated, and the role of double taxation treaties in reducing tax liabilities.
Corporate income tax rates
One of the main reasons so many businesses decide to operate from Cyprus is because of its attractive corporate income tax rates. Below we look at some of the specifics of these rates and how you can benefit from them.
Standard corporate income tax rate
Cyprus has one of the lowest corporate income tax rates in the European Union and globally, with a standard rate of just 12.5%. This is significantly lower than the average corporate tax rates in most countries and makes Cyprus a very appealing destination for businesses that want to minimise their tax burdens.
Special tax rates for specific activities
Along with the low standard corporate tax rate, Cyprus also has a variety of special tax rates for specific activities. Some examples are included below as well as in our previous article here.
Shipping companies: Cyprus offers a tonnage tax system for qualifying shipping companies. This system calculates tax based on the net tonnage of the vessels, providing favourable tax treatment for the shipping industry. There is more information on this in our previous article here.
Investment income: Dividends, interest and rental income received by a Cypriot company are generally subject to a 17% special defence contribution tax. However, there are exemptions and reduced rates for certain types of income.
Group financing activities: Interest income earned from group financing activities can benefit from the notional interest deduction (NID) regime, effectively reducing the tax liability on this income.
Deductions and exemptions
The tax system in Cyprus also allows for different deductions and exemptions that can reduce your company’s taxable income. These include:
- Exemptions for profits from the sale of securities and dividends received from other companies under certain conditions.
- Deductions for expenses related to the production of income, such as interest paid on loans used for the production of taxable income.
- Deductions for qualifying IP income, as mentioned earlier in this article.
Tax planning opportunities
Your business will have numerous opportunities for effective tax planning within Cyprus’s flexible tax system. You can strategically structure operations to take full advantage of the favourable tax rates and deductions.
While the low corporate income tax rate in Cyprus is undoubtedly attractive, it’s important for businesses to carefully plan and always comply with local and international tax laws. Proper legal and financial advice is also important to make sure your business gets the best tax benefits possible while remaining compliant with Cyprus’s tax regulations.
Taxable income calculation
Let’s look at the specifics of how to calculate your taxable income and what the differences are between accounting profit and taxable income.
Taxable income vs. accounting profit
It's important to note that taxable income in Cyprus is not necessarily the same as the accounting profit reported in a company's financial statements. While accounting profit is a fundamental financial measure used for internal and external reporting, taxable income is the basis on which a company's corporate income tax liability is determined.
Adjustments to accounting profit
To arrive at taxable income, certain adjustments are made to the accounting profit. These adjustments may include:
Additions: Some income items that are included in accounting profit may be subject to taxation. For example, interest income, rental income and gains from the disposal of assets are typically included in taxable income.
Deductions: Certain expenses that are deductible for tax purposes but may not be fully recognized in accounting profit. This includes allowable deductions like interest expenses, depreciation, and other business-related expenses.
Exemptions: Profits or income that are exempt from taxation, such as dividends received from other Cypriot companies, are excluded from taxable income.
Notional Interest Deduction (NID)
One of the unique features of Cyprus's tax system is the Notional Interest Deduction (NID) regime. Under NID, a deduction is allowed on new equity capital introduced into the company. This effectively reduces the taxable income and the corresponding corporate tax liability.
Importance of proper record keeping
Knowing that it is super important to determine your taxable income correctly, it’s also crucial to keep proper financial records. Your business should make sure that your financial statements align with the tax regulations in Cyprus to avoid discrepancies and potential issues with tax authorities.
Tax treaties and double taxation avoidance
One of the most appealing features for businesses operating internationally from Cyprus is the extensive network of double taxation treaties (DTTs). These treaties play an important role in preventing double taxation on income and also provide a strong incentive for corporations to choose Cyprus as a base for their global operations.
What are double taxation treaties (DTTs)?
Double taxation treaties are agreements between two countries where they aim to remove or reduce the double taxation of income that happens when a company or person is subject to tax in both the country where the income is earned (source country) and the country where the taxpayer resides (resident country). Cyprus has an impressive network of more than 60 DTTs with countries across the globe.
Benefits of double taxation treaties
Some of the main benefits of Cyprus’s couple taxation treaties include the following:
Reduced withholding taxes: DTTs often reduce or eliminate withholding taxes on dividends, interest and royalties paid between treaty countries. This means quite significant tax savings for cross-border transactions.
Tax credits and exemptions: DTTs usually provide mechanisms for taxpayers to claim tax credits or exemptions to avoid double taxation. This is to make sure that the same income isn’t taxed twice (in Cyprus the country of residence).
Stability and predictability: DTTs provide legal certainty and predictability for businesses, as they establish clear rules for the taxation of different types of income. This stability is especially useful for multinational corporations.
Promotion of cross-border investment: DTTs encourage cross-border investment by reducing tax obstacles. This fosters economic cooperation and trade between treaty countries.
Cyprus as a holding company location: Cyprus's DTTs make the country an attractive location for holding companies. Income from subsidiaries in treaty countries can flow into Cyprus with reduced or zero withholding taxes.
Anti-abuse provisions: DTTs usually contain anti-abuse provisions to prevent treaty shopping and ensure that the benefits are enjoyed by genuine residents. Cyprus has taken steps to comply with international standards and prevent the misuse of its treaty network.
Capital gains tax in Cyprus
Capital gains tax rates: Cyprus imposes a capital gains tax on the disposal of various assets, including real estate, securities and other capital assets. The capital gains tax rate is quite low compared to other countries. This makes Cyprus an appealing place for investors and businesses who profit from the sale of these assets.
Exemptions and reliefs: Gains from the sale of shares in Cypriot companies are generally exempt from capital gains tax. This is of course if certain conditions are met.
Recent tax reforms in Cyprus
Cyprus, like many countries, periodically reviews and updates its tax laws to adapt to changing economic landscapes and international standards. Make sure you keep on top of any recent tax reforms in order for your business to stay compliant and make informed decisions. Below are some of the recent tax reforms in Cyprus and how they might impact your business or decisions.
Anti-tax avoidance directive (ATAD): Cyprus has implemented measures to comply with the EU's ATAD, which addresses various tax avoidance practices. This includes rules on controlled foreign companies (CFCs) and the interest limitation rule, which may limit the deductibility of interest expenses.
Economic substance rules: In line with international efforts to combat tax avoidance, Cyprus has introduced economic substance rules. These rules require certain businesses to demonstrate substantial activities and presence within Cyprus to access tax benefits.
Beneficial ownership register: Cyprus has established a beneficial ownership register to enhance transparency and combat money laundering and tax evasion. Businesses should ensure their ownership information is accurately reported.
Unlocking the benefits of Cyprus's tax regime
As we’ve pointed out in this article and on our blog before, Cyprus is an attractive place for businesses looking for a tax-efficient jurisdiction. Its low corporate income tax rates, extensive network of double taxation treaties and favourable capital gains tax treatment make it a competitive choice for international business activities.
As with anywhere, it’s important for your business to carefully approach tax planning in Cyprus to make sure you’re compliant with local and international tax laws. Proper record-keeping, adherence to transfer pricing rules and compliance with recent tax reforms are all necessary measures to take.
Thank you for joining us on this journey into corporate income taxes in Cyprus. If you have any questions or need personalised guidance, feel free to reach out to us.