In our recent blog posts, we’ve been sharing about the tax benefits of different countries including Malta and Estonia. In this article we’ll be looking at how the eastern Mediterranean country of Cyprus has become a sought-after destination for entrepreneurs and businesses. Cyprus has a strategic location, well-developed infrastructure and competitive tax policies. This makes the country an attractive hub for international commerce!
We’ll share with you some of the intricacies of Cyprus’s tax regulations, specifically corporate income tax (CIT), value added tax (VAT), special defence contributions (SDC), the unique tonnage tax regime and other useful tax information that you might need to be aware of when doing business in Cyprus.
Why understanding Cyprus tax regulations matters
Cyprus offers quite a few distinct advantages when it comes to doing business there. These include a low CIT rate and VAT exemptions. However, you’ll need to know specific information about these and how to stay compliant with the country’s tax laws.
We’ll share this information with you below and break down Cyprus’s tax structure, as well as give you the latest updates as of June 2023. All of these details will help you, whether you’re a new business owner or seasoned entrepreneur, to make informed decisions about your tax strategies when doing business in Cyprus.
Corporate income tax (CIT)
As with any country, corporate income tax (CIT) plays a fundamental role with regards to business taxation. This tax applies to all companies that are tax residents of Cyprus, whether their income is made locally or internationally. Below we share all the different aspects you need to take into account:
1. Standard CIT rate
As of June 2023, the standard CIT rate in Cyprus is still highly competitive at just 12.5%. This low rate has made Cyprus an appealing place for businesses that want to minimise their tax liability and enjoy a favourable business environment.
2. Controlled Foreign Company (CFC) rules
From January 1, 2019, Cyprus introduced Controlled Foreign Company (CFC) rules. These rules impact on non-distributed profits of CFCs that are directly or indirectly controlled by a Cyprus tax resident company. Under these rules, such profits may become subject to tax in Cyprus, with certain exceptions and conditions.
3. Exemptions under CIT law
Cyprus CIT law offers a few different exemptions for various types of incomes, profits and gains. These exemptions are there to attract businesses and investments to Cyprus. An example is participation exemption. This is when dividend income is exempt from CIT if it meets specific participation exemption criteria. This encourages investment in foreign subsidiaries. When you’re doing business in Cyprus it’s important to be aware of what other exemptions might be available to your business.
Value Added Tax (VAT)
Value Added Tax (VAT) is also a super important tax for businesses operating in Cyprus. It is a consumption tax levied on the value added to goods and services at each stage of production or distribution. Here’s everything you need to know about VAT to make sure your business is tax compliant in Cyprus:
1. VAT registration
If your business operates in Cyprus and meets certain criteria, you may be required to register for VAT. Usually if your business has an annual turnover above a specific amount you will need to register for VAT. Voluntary registration is sometimes also an option if your business doesn’t have to register but wants to reclaim VAT on your expenses.
2. VAT rates and exemptions
There are different VAT rates applied to various goods and services in Cyprus. As of June 2023, the standard VAT rate in Cyprus is 19%. There are also reduced rates of 9% and 5% that apply to specific categories of goods and services like food, hospitality, and some cultural events.
Some specific goods and services are exempt from VAT. These exemptions include financial services, healthcare and education. Those exempt do not incur VAT, but also cannot recover VAT on related expenses.
3. VAT reverse charge mechanism
A distinct feature of Cyprus's VAT system is the reverse charge mechanism. This is when the responsibility for reporting and paying VAT shifts from the supplier to the recipient of the goods or services. The reverse charge applies to various transactions, like the importation of goods, real estate, and specified services. Businesses should be aware of when and how to apply the reverse charge mechanism to avoid compliance issues.
4. VAT refunds
If your business is registered for VAT in Cyprus you can reclaim VAT incurred on your expenses if they’re related to taxable activities. To be able to do this you will have to make sure that you keep accurate records and submit your VAT returns on time. As with any other tax laws, non-compliance can lead to penalties.
Special Defence Contribution (SDC)
There is a tax framework in Cyprus called the Special Defence Contribution (SDC). This impacts specific income for businesses and individuals. SDC is imposed on some income categories and it’s important for businesses to understand the implications. Let’s take a close look at SDC in Cyprus:
1. Applicability of SDC
SDC is levied on specific income types earned by Cyprus tax resident companies and Cyprus Permanent Establishments (PEs) of non-Cyprus tax resident companies. The following categories are included:
Non-exempt dividend income: Dividend income may be subject to SDC unless it qualifies for exemption under participation exemption criteria.
'Passive' interest income: Interest income that does not fall within specific conditions is considered 'passive' and is subject to SDC at a rate of 30%. This interest income is not subject to CIT.
Rental income: Gross rental income, after a 25% reduction, is subject to SDC at a rate of 3%, effectively resulting in a 2.25% rate, in addition to CIT at 12.5%.
2. Reduced SDC rates for certain bonds
There have been some changes to the SDC rates for ‘passive’ interest income since June 2022. This includes: 'Passive' interest income earned from Cyprus government bonds, Cyprus and foreign corporate bonds listed on a recognised stock exchange, and bonds issued by Cyprus state organisations or foreign local authorities listed on a recognised stock exchange are subject to a reduced SDC rate of 3%.
Additionally, certain entities, including Cyprus state organisations and local authorities, pension funds, provident funds, and the Cyprus Social Insurance Fund, will also be subject to the reduced SDC rate of 3% on all interest income they earn.
3. Exceptions for Collective Investment Schemes (CISs)
Interest income received by close-ended or open-ended collective investment schemes (CISs) is exempt from SDC. CISs are considered to generate 'active' interest income, and this income is subject to CIT but not SDC.
Tonnage Tax Regime
Cyprus's Tonnage Tax Regime is a particular tax that benefits ship-owning companies a lot. If your business is involved in the shipping industry, it’s important to understand this regime to make the most of your taxes. Here's a detailed look at the Tonnage Tax Regime in Cyprus:
1. Eligibility for the tonnage tax regime
The tonnage tax regime applies to the following:
Owners of EU/EEA-registered ships: Profits derived from operating or chartering out ships registered in the European Union or European Economic Area (EEA) are fully exempt from all direct taxes. This includes Cyprus flag vessels and those registered in other foreign jurisdictions, subject to certain conditions.
Charterers and ship managers: The same tax exemptions apply to charterers and ship managers who meet the eligibility criteria.
Bareboat charter out agreements: Bareboat charter out agreements remain eligible for tonnage tax, with specific restrictions for bareboat charter agreements to third parties.
Grandfathering provisions: Companies that were already taxed under the Cyprus tonnage tax system as qualifying owners (under a bareboat agreement) as of December 31, 2019, can benefit from grandfathering provisions.
2. Tax calculation under tonnage tax
Under the tonnage tax regime, ship owners, charterers and managers do not pay corporate income tax (CIT) on their profits. Instead, they pay tonnage tax based on the net tonnage of the ships they own, charter, or manage. Additionally:
No tax on dividends: There is no tax on dividends paid at any level of distribution by the above-mentioned persons out of profits subject to tonnage tax.
No tax on ship sales or transfers: The tonnage tax regime also means that there is a tax exemption on the sale or transfer of a ship, share in a ship, or shares in a ship-owning company and their distributions.
Crew benefits: The legislation extends to income tax exemption for the salaries and benefits of the captain, officers, and crew aboard Cyprus and EU/EEA qualifying flag vessels engaged in qualifying activities.
3. Applicability and duration
This favourable tax treatment is in place until December 31, 2029. It is compulsory for Cyprus flag ship owners but optional for other ship owners, charterers and ship managers.
Local income taxes
Another very appealing aspect of doing business in Cyprus is that there are no local income taxes. Unlike many other countries where local governments impose additional income taxes on individuals and businesses, Cyprus maintains a straightforward and tax-friendly approach. Here's what you need to know:
No local government taxes on income
Cyprus is different from a lot of countries in that it doesn't burden individuals or businesses with local income taxes. This means that along with the competitive national tax rates, there aren’t any other taxes imposed at a local level. The simplicity of Cyprus’s tax structure is appealing for businesses and allows them to focus on their operations instead of having to figure out a complex tax landscape.
A key advantage for businesses
With no local income taxes there are a lot of advantages to businesses operating in Cyprus. Some of them include the following:
Cost-efficiency: Businesses can use more resources for growth, investment and development seeing as there aren’t local income taxes imposed on them.
Administrative simplicity: The simplified tax compliance process means less paperwork and admin, meaning businesses can operate more efficiently.
Competitive edge: Cyprus's business-friendly tax environment, with low corporate income tax rates and no local income taxes, is an attractive destination for both established corporations and startups.
Other relevant taxes for businesses
While Cyprus offers a favourable tax environment with its low corporate income tax rate and absence of local income taxes, businesses should be aware of other taxes and levies that may apply in specific situations. Here are some other taxes and levies that might be relevant to your business operations in Cyprus:
1. Capital gains tax
Cyprus imposes Capital Gains Tax (CGT) on the profit arising from the disposal of immovable property located in Cyprus. Businesses working with real estate transactions will need to consider the CGT implications.
2. Property taxes
Property taxes in Cyprus include the Immovable Property Tax, which is levied on the value of immovable property owned by individuals and legal entities, and the Municipalities Tax, collected by local municipalities. The taxation of immovable property can impact businesses that own or lease properties.
3. Stamp duty
Stamp duty may apply to various documents, including contracts, agreements, and loan arrangements. The rates and applicability of stamp duty can vary depending on the document's nature and value.
4. Social insurance contributions
Businesses have to make social insurance contributions for their employees in Cyprus. These contributions go towards different social insurance benefits, including healthcare and pensions.
5. Other potential taxes and levies
Depending on the specific nature of a business and its activities, there may be other taxes or levies to consider. It’s useful to consult tax professionals to make sure your business is always compliant with tax laws in Cyprus.
Although there are these additional taxes and levies in Cyprus, it's important to note that the overall tax burden is still quite low compared to many other countries. Cyprus continues to be an attractive destination for businesses looking for a tax-efficient and business-friendly environment.
Your gateway to tax-efficient business
If you’re doing business in Cyprus already, or are looking to start something, we hope this article has been helpful for you. Cyprus is a tax-friendly environment with a low corporate income tax (CIT) rate, no local income taxes, and unique provisions like the tonnage tax regime for the shipping industry.
If you understand these tax regulations your company will have a competitive advantage. As the global business landscape evolves, Cyprus remains a reliable partner for entrepreneurs, startups, and corporations alike.