Tax Framework

 

In this section we provide a brief description of the tax environment applicable in Cyprus, with particular emphasis (highlights) on provisions that are of interest to financial services providers. This section is not intended to be a comprehensive review of Cyprus Tax Provisions.

Taxation in Cyprus is administered under a number of directives, depending on how income is derived. The idea behind this is that a specific income is taxed only once, under the directive that it is classified under.

The Different Tax Categories (directives) are summarized in the following table:

 

Number

Directive

1. Income tax (both Corporate and personal  Income Tax fall under this directive)
2. Special Defense Contribution Tax (S.D.C)
3. Capital Gains Tax
4. Immovable Property Ownership Tax
5. Inheritance Tax
6. Stamp Duty Tax

 

In Addition to the above direct taxes on income, there is also an indirect Tax on consumption, V.A.T. (Value Added Tax).

It is important to realize that the above taxes are government taxes. Local authorities (municipalities) also have the right to impose taxes on residence. An example of a municipal tax will be sewage tax or garbage tax. The important thing about municipal taxes is that for companies they are tax-deductible for calculating the company's income tax burden. In order for a company to be taxed in Cyprus, under corporate income tax, it must be a tax resident of the Republic. To establish this, the company should successfully demonstrate that Management and Control is Exercised in the Republic. Under Cyprus Company's law, however, there is no clear cut definition as to how this is achieved.

The general guidelines are the following:

 

Number

Guideline

1. The Majority of the Members of the Board of Directors Reside in Cyprus
2. The Place where the Majority of the Board Meetings take Place and Subsequent Significant Decisions are taken is Cyprus

 

Once a company is established as a tax resident of the Republic, its worldwide Income is taxed in Cyprus. The following table summarizes a few highlights that are of particular interest to investment firms.

 

Number

Highlight

1. Losses / Gains from Accounting Foreign Exchange Differences [either realized or unrealized] are excluded [are exempt] from Corporate income Tax computations
2.

Income derived from the Trading of Securities is exempt from income Tax because it is taxed i under the capital gains directive [at 0%].


All Financial Products, example Shares in ETFs {Exchange Traded Funds], Commodities, Futures and Forward Contracts, Foreign Exchange Trading lFX Trading], options contacts and other derivatives, are considered securities. Profits from Short Selling of Securities are also exempt from Income tax.


Important, even if a company's main activity is trading of securities, it is still possible to avoid income tax on these activities.

3. The Corporate Income Tax in Cyprus is 10%. [One of the lowest in EU] [Please Note that Corporate lncome Tax is likely to increase to 12.5% in the near future].
4. All Expenses associated with generating revenue are deductible from Taxable Income Calculations.
5. Profits from the Sale of Russian Partnership Companies, l"0OO" companies] that don't issue shares can be exempt from Income tax.
6. Dividends Received and Interest Income are exempted from income Tax land are taxed under S.D.C. Tax].

There are also some notable exemptions, i.e. financial instruments that are not considered as securities under Cyprus Tax guidelines, and therefor do not fall under the Capital Gains Tax directive (0% Tax Rate]. They are effectively classified under Special Defense Contribution Tax [S.D.C.] Directive and any interest income derived from them is taxed under S.D.C.

They are as follows:

 

Number

Name

Treatment

1. Promissory Notes Promissory Notes are not considered securities [they are classified and treaded as loans for tax purposes].
2. Re-Purchase agreements Re-Purchase agreements are not considered securities [they are classified and treaded as loans for tax purposes].
3. Bonds  Bonds are considered as loans for tax purposes and are there-fore not classified as securities. Capital gains from the trading of Bonds [profits] have to be separated; part is treaded as interest income on a loan and taxed under S.DC. Tax and part is traded as capital gains profits and taxed under Capital Gains Tax.

Cyprus also provides favorable tax provisions pertaining to V.A.T. for financial services, that is to say, if you are offering financial services through a CIF most likely you will not have to charge your clients V.A.T.

 In determining whether a Service is taxable under V.A.T. provisions, there are two important rules:

 

Number

Rule

1. The nature of the service [whether the Service is Exempt or Taxable, as certain financial services are exempt from V.A.T. — please refer to the following table].
2. To whom the service is provided? Even if a specific service is subject to V.A.T. the entity consuming the service and the place of consumption of the service can determine whether Cyprus V.A.T. should be levied. To state this differently. Whether Cyprus V.A.T. should be charged and accounted for on taxable financial services depends on the status and the establishment of the recipient.

 

It is also noted that ancillary Services may only be provided together with an investment service [as per relevant provisions regulating investment firms in Cyprus]. Whether an ancillary service is subject to V.A.T. depends as to whether the service is offered as a standalone, or as ancillary to an Investment service.

The following table covers V.A.T. applicability for Investment Services [as described by CySEC]

 

No

Investment Services

As Standalone Service

Where one of the Service is the main Supply and the other auxiliary/Notes

Notes

1. Reception and Transmission of Orders in Relation to one or more financial instruments. Taxable 1. Is Exempt if Provided in conjunction with 2, i.e. if the main service is the execution of orders  
2. Execution of Orders / on Behalf of Clients. Exempt unless in relation to the physical possession or disposal of commodities. CySEC and the V.A.T. Commissioner do not provide adequate guidance on this point. 99% of Financial Instruments that deal with commodities [Futures for example] are usually settled in cash, and do not end in delivery of the underlying commodity being traded. Therefore I would argue that this service is practically Exempt. This Service pertains to brokerage commissions. In reality [99% of cases] brokers do not charge a commission per see but generate revenues from the Bid-Ask Spread [this is the widely used industry practice]. Therefore it is impossible and unreasonable to impose V.A.T. on this service. This implies that the Revenues of Forex Companies [which are essentially Foreign Exchange Brokers] are exempt from V.A.T. Taxation.
3. Dealing on own accounts. Exempt unless in Relation to Commodities. As Stated above [point 3] most Financial Contracts do not end in delivery of the underlying commodity being traded, therefore I would argue that this service is exempt.  
4. Portfolio Management Taxable. Exempt where provided as an auxiliary supply of the execution of orders. This is exempt if the manager only provides some investment advice/ guidance before executing orders (acting as a broker). However when full discretion is exercised over clients’ funds this is taxable. However it falls under the normal provisions of V.A.T. Services. If for example a Cyprus Company is providing portfolio management services to clients outside of the EU, then it is exempt from charging Cyprus V.A.T.
5. Investment Advice Taxable. Exempt where provided as an auxiliary supply of the execution of orders. As point 4 above, if the main service being provided is brokerage, and the manager only provides some guidance before executing clients orders, this is exempt. It also falls under the general provisions of V.A.T. so if a Cyprus Company provides Investment Advice to a client outside of the European Union, it does not have to charge Cyprus V.A.T.
6. Underwriting Exempt of financial instruments and / or placing of finan cial instruments on a firm commit ment basis. Exempt. n/a Investment Banks issuing [underwriting] securities are exempt from V.A.T. Provisions.
7. Placing of financial instruments without a firm commitment basis (advice for placement) Taxable. n/a This pertains to Investment Banking advisory services; however there is very little guidance from CySEC or the V.A.T. Commissioner as to the actual provisions of how this service should be taxed.
8. Operating of Multilateral Trading Facilities (Exchange Platform) Exempt. n/a This refers to companies managing an Exchange, or a comprehensive multi trading platform (electronic exchange market). Thus far nobody provides this service in Cyprus (no CIF has applied for this service yet) and there is little guidance form CySEC on this service.

 

The following table covers V.A.T. applicability for ancillary services (as described by CySEC)

 

Number

Ancillary Service

Issues To Consider

1. Safekeeping and administration of financial instruments, including custodianship and related services.  Follows the treatment of the main supply but if e.g. safekeeping is charged separately and does not have the meaning of global custody services, then it's taxable.
2.  Granting credits or loans to one or more financial instruments, where the firm granting the credit or loan is involved in the transaction.  Exempt.
3.  Advise to undertakings on capital structure, industrial strategy and related matters and advice and service relating to mergers and the purchases of undertakings. Follows the treatment of the main supply but if on isolation is taxable.
4.  Foreign exchange services where these are connected to the provision of investment services.  Follows the treatment of the main supply.
5.  Investment research and financial analysis of other forms. Follows the treatment of the main supply but if on isolation is taxable.
6.  Services related to underwritings.  Follows the treatment of the main supply, e.g. underwriting.
7.  Investment Services and activities as well as ancillary services where these are connected to the pro- vision of investment or ancillary services.  Follows the treatment of the main supply.

 

It is worth noting that calculating V.A.T. on financial services could be challenging. For ex- ample portfolio management services to clients in Cyprus are taxable; however the standard industry convention is that an incentive fee is charged on annual portfolio returns. The company must calculate its V.A.T. liability on a quarterly basis however. The standard convention under \/.A.T. directives (for uncertain cases) is that a liability to V.A.T. arises the earliest of issuing a sales invoice, or cash collection form the client.

In the case of portfolio management, the company providing the service is obligated to build in its annual incentive fees the applicable V.A.T. rates, and calculate and declare V.A.T. accord- ingly on a quarterly basis (a task that could be challenging).

Given the complexity of financial services, it is advisable that all ClFs write a letter to the commissioner of V.A.T. describing in detail the nature of their operations and the services they intend to provide, and asking for his written guidance on all issues before commencing operations. Eltoma Corporate Services can assist you in this process.

Take the next step, we are here to help.

Register a Cyprus investment firm company.
Open a Cyprus investment firm bank account.

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