A Guide to Understanding Corporate Tax in Cyprus

Cyprus is considered to have the most favorable tax system for corporate businesses. With a corporate tax of only 12.5%, it has now the lowest rate in the EU. It is then not shocking how Cyprus Corporate Tax advantages have helped businesspeople beyond saving money; they have become a global solution for financial competitiveness.

All companies, whether large corporate or small and medium enterprises (SMEs), that are under Cyprus are taxed on the income accruing or deriving from sources found within and outside the country. On the other hand, those companies which are not residents in Cyprus are taxed on the income accruing or deriving from sources within the country only. If you’re planning to build a corporate that falls on one of the two categories, it’s best that you know Cyprus tax law. Here is a quick guide around it.

Tax Exemptions

The Cyprus Income Tax law clearly provides a number of exemptions, but it mostly depends on the calculation of insurance companies and companies that have engagement abroad. It includes dividend, income formed for promoting education and charity, interest income, Foreign Exchange (FX) gains, gains from Securities and loan restructuring, and profits from establishments outside the country.

The interest you earn, other than those related to business activities, is not subject to the corporate income tax. It is, however, subject to Special Defence Contribution (SDC).

7

Special Defence Contribution

Those with non-exempt income, rental income, or passive interest income earned as a Cyprus tax resident is subject to SDC. When companies receive an interest that is not in line with the normal course of business, it is immediately considered a passive interest income and is subject to the rate of 30%. Gross rental income that is reduced to 25% is also subject to 3% SDC plus 12.5% CIT.

The deemed dividend provisions under SDC provide a neutral ground between profits that are distributed and not distributed. For example, if a resident of Cyprus does not distribute a dividend in two years, a deemed dividend distribution is calculated. SDC tax is charged in proportion to the deemed dividend distribution applicable to shareholders.

Local Income Tax

Local taxes are those assessed and levied by the local government and collected in the form of property taxes. However, Cyprus does not issue local government taxes, thus exempting corporate businesses in the Republic in the kind of payment which they are otherwise subjected to in other countries.

Tonnage Tax System

Companies that revolve around shipping are subject to Tonnage Tax System (TTS). Profits gained by the EU or EEA-registered ship’s owner are exempted from any direct tax. Other exemptions include the following:

  • Income of qualifying charterer from an operation under qualifying Cyprus ship
  • Income of qualifying ship operator or manager from the ship management’s provision
  • Salaries paid to the crew, officers, and masters of the qualifying Cyprus ship.

The amount of tax will depend on the net tonnage of the ships a corporate manages, charters, or owns. Any ship manager, charterer or owner must remain under the system for 10 years. Otherwise, he’ll be subject to a penalty.