A coherent offshore tax planning strategy is essential to maximise the effectiveness of any offshore company. Eltoma can assist by structuring the most tax efficient strategy to fulfil your requirements.
Eltoma can guide you as to which jurisdictions offer the best tax plan by identifying the types of tax payable as well as applicable exemptions and incentives. Eltoma will provide tax planning advice that can identify which is the best jurisdiction in terms of favourable tax laws efficiency.
Income in Cyprus is administered under a number of Directives. Specific incomes are taxable only under one Directive, depending on how they were derived.
The Tax Categories (Directives) are as follows:
- Corporate Income Tax.
- Personal Income Tax.
- Value Added Tax (V.A.T.).
- Special Defence Contribution Tax.
- Capital Gains Tax.
- Immovable Property Ownership Tax.
- Inheritance Tax.
- Stamp Duty Tax.
Corporate Income Tax:
Corporate Incomes for all companies are liable for 12.5% annual Corporate Income Tax, this is the lowest rate in the EU. An exemption to this rule are ship management companies, who are liable to 4.25% annual Income Tax.
Corporate expenses are tax deductible (Tax is levied on Net Income) with the exemption of entertainment expenses (hotels, restaurants, bars etc) for which there is an annual ceiling. Expenses that surpass the ceiling are not tax deductible.
Corporate losses can be brought forward for up to five (5) years, and thus reducing the tax burden of the following year. Please also note that corporate profits fall under double taxation – taxed at the corporate level when the company earns them, and taxed again in the personal level (personal income tax) when the corporation distributes its profits as dividends (Under Special Defence Contribution).
How it is paid:
Cyprus tax is based on the principle of self – assessment, where individuals and corporations have to calculate their tax liabilities themselves. Companies have to estimate their annual income for the current year, estimate the tax payable, and pay it to the government in two instalments within the year, under the temporary income tax provision. (First instalment 31st of July, second instalment 31st of December). When submitting audited final accounts, the audited taxable income / tax liability, should be about 70% of the estimated income declared (and paid) under provisional income tax, otherwise the company is liable to some penalties.
Corporations have to complete and submit Inland Revenue 4 (I.R.4) form to Inland Revenue Authorities, along with audited financial statements to the Company House.
Personal Income Tax:
Salary income earned in the republic is taxed with brackets as follows:
|Income bracket||Tax rate|
|19,501 – 28,000||20%|
|28,001 – 36,300||25%|
The first €19,500 is exempt from taxation. Contributions to the Social Insurance fund of the republic are exempted (tax deductible). Donations (to authorised institutions) are also exempt, but the individual has to provide the suitable receipts. (€150 can be claimed as donations without submitting receipts). Subscriptions to recognised professional bodies are also exempt. Premiums paid for life insurance are exempt. Contributions to recognised provident/retirement funds could also be exempt.
How it is paid:
It is the employer’s responsibility to calculate, deduct, and pay the appropriate personal income tax of any employees on a monthly basis via (Pay as You Earn: P.A.Y.E. tax). Which is payable for the current month, and can be delayed for one month, companies usually pay for the previous month, for example, by the end of September they will pay for August.
Individuals who are liable for personal Income tax are obligated to complete and submit a form (IR1) to Inland Revenue once a year. Corporations have to submit an Inland Revenue 7 (I.R.7) form, with the amounts stated or declared / paid as salaries, once a year.
The government assumes that 70% of corporate after tax profits will be distributed to Shareholders within two years. Dividends paid to Shareholders who reside within the republic are taxed under Special Defence Contribution with a 17% Burden. Thus, whether a company chooses to distribute its profits as dividends, or to re-invest them, 70% of profits are taxed as dividends anyhow. This effectively brings the effective corporate tax rate for profitable Cyprus companies to about 15% as opposed to the nominal rate of 12.5%. The above rule does not apply for Shareholders who are non-tax-residents in Cyprus.
Value Added Tax (VAT):
Value added Tax (V.A.T) is a pan European indirect tax on purchases, payable by consumers (end users). Businesses (V.A.T registered companies) are required to act as government agents, i.e. collect V.A.T from their customers and pass it (pay) to the government, even though businesses are not V.A.T taxable themselves. Moreover, it is the legal responsibility of the agent to maintain accurate transaction records and provide V.A.T data to the government.
Currently the standard V.A.T rate in the republic is 19%. Companies invoicing (selling) to individuals or other companies within the republic are required to inflate their products / services by 19%. Some transactions have a 0% V.A.T rate, for example basic food staff, or payments for rent. Other transactions, such as restaurants have a reduced rate (9%).
For EU sales (sales from a company based in one EU member to a customer based in another EU member state) the standard rate of the supplier applies if the customer is an individual. If the customer is a V.A.T registered company then the V.A.T rate is zero.
Sales to Customers whom reside in a non-member state (foreign Sales) are exempt from V.A.T (usually applies for services, not for physical goods).
How is it paid:
Every three months the difference between V.A.T charged on Sales, and the V.A.T incurred on purchases within the republic is payable to the government.
A V.A.T declaration form is submitted quarterly.
V.A.T Information Exchange System (VIES) was introduced by the E.U. in order to prevent and deter the abuse of the 0% V.A.T rate on intra-community transactions (sales from a company based in one EU member state to a company based in another EU member state).
Any V.A.T. registered entity who sells goods or services to a V.A.T registered entity in another member state is required to declare all the intra-community sales made during a calendar month. It is therefore the responsibility of the agent to maintain records of V.A.T. registered customers’ V.A.T numbers.
See VAT Tax & Compliance Requirements for more information.
Capital Gains Tax:
In Cyprus there is no capital gains tax for securities/financial instruments, making the island ideal to set up Financial Services Entities.
Exemption: There is a 20% capital gains tax on real estate. Also the sale of shares of a company that owns real estate is subject to Capital Gains Tax (CGT).
If an individual sells his first property, or the property in which he resides, he is liable to an exemption from capital gains tax (but there is a ceiling to the amount that can be claimed as exempt).
Special Defence Tax:
Rent income, dividends, and interest earned are all taxable under special defence contribution.
Dividends earned by Cyprus residents (note: they don’t have to be Cypriot nationals) are taxed at 17%. Dividends paid from one company to another are not taxed. Dividends paid to non-residents are not taxed.
Interest earned on deposits is taxed at 30%.
Exemptions: Interest Earned from Government Bonds, deposits with semi-government entities etc (example housing finance organisation) is taxed at 3%. Physical persons whose Income is less than €7,000 per annum are exempt.
Note: Interest earned from the normal operations of a business, example late payment interest on invoices, is not considered interest.
Rent Income is taxed at 3%.
Special category: if company Directors have balances with their companies (i.e. borrowed money from the company) the government assumes that the Director earns 9% interest on these loans, and deemed interest is added to their taxable income.
How it is paid:
Companies that pay interest / Dividends are obligated to estimate the tax playable and pay it (SDC is always paid at source).
Individuals that earn dividends, Rent Income, should include them in their annual income declaration form. Companies should prepare and declare dividends payment form.
International aspects of Cyprus taxation:
- Anti-avoidance regulations are enforced. Cyprus Tax Code follows OECD Recommendations.
- Transfer Pricing: There is no specific legislation in Cyprus tax code. However, arm’s length test will apply to related party transactions.
- Double Taxation Agreements: see below.
Double taxation agreements:
See the Cyprus Double Taxation Treaties page.
Annual reporting requirements:
Cyprus international companies are required to comply with the following:
Every company must prepare a full set of financial statements in accordance with international financial reporting standards.
Annual return must be submitted to the Registrar accompanied by the full set of financial returns.
Every Cyprus Company is obliged to appoint a local qualified Auditor to audit the financial records and submit an annual financial report to the authorities. A copy of the audited financial statements together with the Annual Report must be submitted to the Registrar of Companies. The financial statements are required to be prepared and submitted by December 31st of the year following the year of company registration.
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