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Company Tax Residence
A company should be tax resident in Cyprus in order to be able to be taxed under the Cyprus Tax Law and enjoy all possible benefits. A company considered to be tax resident in Cyprus if its management and control is exercised in Cyprus.
Management and Control
In the Cyprus Tax Legislation there is no definition of management and control. However, in practice the Cyprus Tax Authorities take into consideration the following in order to decide whether management and control is exercised in Cyprus:
1. All directors, or at least the majority, are Cyprus tax residents.
2. All board meetings of the Company are held in Cyprus.
3. The major policy decisions regarding the company are taken place in Cyprus.
The coexistence of all the above three criteria is essential.
Tax resident in Cyprus Company
A company which is tax resident in Cyprus is taxed on its worldwide income at a flat rate of 12.5% (flat rate of 10% for 2012 and previous years).
Any foreign tax paid on income subject to income tax in Cyprus is credited against any Cyprus income tax payable on such income, irrespective of the existence of a tax treaty.
Non-Tax resident in Cyprus Company
A company which is non-tax resident in Cyprus, will only be taxed on its profits arising from a permanent establishment in Cyprus.
Examples of a permanent establishment include:
1. A fixed place of business through which the business of an enterprise is wholly or partly carried on
2. An office
3. A branch
4. A factory
5. A workshop
6. A mine, an oil or gas well
Examples of a permanent establishment does not include:
1. Storage facilities
2. Maintenance of a stock of goods and delivery of them
3. A branch
Tax exempt income
Dividend income received by a company which is tax resident in Cyprus from a foreign company is exempt from corporation tax in Cyprus. However, it may be subject to special defence contribution if ALL of the following apply:
a. More than 50% of the paying company’s income is a result of investing activities; and,
b. The foreign tax burden is significantly lower than the Cyprus tax burden (5% and less is considered as significantly lower)
The profit from the sale of securities is exempt for all Cyprus tax residents companies and individuals. However, gains from the sale of shares of companies (other than shares of companies quoted in any recognised Stock Exchange), which own immovable property in Cyprus may be subject to capital gains tax.
The whole interest income of a company is exempt from income and corporation tax as from the year 2009 if it is not arising from the ordinary course of the business or is not closely connected with the business of the Company (interest income may be subject to special defence contribution at a rate of 30%). However, if the interest accruing from the ordinary course of the business, including interest closely connected with the carrying on of the business, and interest received by a collective investment scheme, is not considered interest but business income and is taxable under income tax at the flat rate of 12,5%.
The profits of a foreign permanent establishment although treated as part of the profits of the Cyprus tax resident company, are tax exempt in Cyprus.
In accordance with the Cyprus Tax Law, all the expenses incurred by a Company wholly and exclusively for the production of the income, are deducted from its taxable income, provided that they are supported by invoices and receipts.
Losses carried forward
Any taxable losses can be carried forward and set-off against future taxable profits for five years.
Losses of a permanent establishment
The restriction of carry forward of losses for five years applies also to the losses of a permanent establishment (PE) abroad and the losses of a PE abroad are set off first against the profits from other sources abroad, of the same year. However, any profits of the permanent establishment abroad that might be incurred in the following five years will be taxable under the Income Tax in Cyprus at the rate of 12.5% up to the amount of losses already surrendered to the Cyprus Company (losses recapture).
Losses for Group relief
Taxable Losses may be surrendered by a tax resident company to another tax resident company, if the companies are deemed to be members of a set-off of group losses. A loss of a non-resident company cannot be surrendered to a resident company and vice-versa, a resident company cannot surrender its loss to a non-resident company.
Two companies are deemed to be members of a group if the following apply:
One company is a 75% (voting shares) subsidiary of the other, directly or indirectly, or
Both companies are 75% (voting shares) subsidiaries of a third company, directly or indirectly.
The companies should be members of the group for the entire tax year.
From 1 January 2012, in the case where a subsidiary Company was incorporated from its parent Company during the tax year, this company will be deemed to be a member of this group for group relief purposes for that tax year.
As from 1 January 2015 interposition of a non- Cyprus tax resident company will not affect the eligibility for group relief as long as such company is tax resident of either an EU country or in a country with which Cyprus has a double tax treaty.
Transfers of assets and liabilities between companies can be completed without tax consequences (subject to conditions) within the framework of a reorganisation and tax losses can be carried forward by the receiving entity.
exchange of shares
transfer of assets
Payment of dividends, interest and royalties made by a Cypriot company to non-resident shareholders are free from any withholding taxes except in the case of royalties earned on rights used within Cyprus, which are subject to a WHT of 10%.
Income tax returns and tax payments
The Cyprus tax year coincides with the calendar year, from 1 January to 31 December.
Company’s annual income tax return – T.D.4
The company’s annual income tax return (T.D.4) is filed by 31 December following the tax year. If the submission is made electronically, via Taxisnet, the deadline is extended by 3 months. (For example, the IR4 for the tax year 2018 should be submitted electronically by the 31st of March 2020.)
There is a fine of €100 if the annual income tax return – T.D.4 is not declared until the due date of filling.
Company’s temporary income tax return – T.D.6
The company’s temporary income tax return – T.D.6 is filled by the 31st of July of each current tax year, based on the current year’s taxable income. The estimated taxable income can be revised at any time prior to 31st of December of the current tax year. If it is not expected a taxable income for the year it is not required to submit the temporary tax return.
If the taxable income declared for temporary tax purposes is less than 75% of the taxable income as finally determined, the company must pay, in addition to the normal tax, an amount equal to 10% of the difference between the final and the temporary tax.
There is a fine of €100 if the temporary income tax return – T.D.6 is not declared until the due date of filling.
Payment of company’s temporary tax
The temporary tax is payable in two equal installments, on the 31st of July and on the 31st of December of each current tax year, based on the company’s temporary income tax return – T.D.6. (For example, for the tax year 2018 temporary tax should be paid in two installments of the same amount, on the 31st of July 2018 and on the 31st of December 2018).
Any late payments of temporary tax are subject a 5% fine. There is also an interest at 3.5% p.a. (interest rate is based on the prescribed interest rate for each year).
Payment of company final tax – IR158
The final payment of the company tax must be made via self-assessment until the 1st of August of the year following the tax year. (For example, for the tax year 2018 final tax should be paid until the 1st of August 2019).
Any late payments of final tax are subject a 5% fine (there is a grace period of 30 days). There is also an interest at 3.5% p.a. for each complete month (interest rate is based on the prescribed interest rate for each year).
The above should be used only as a source of general information and it is not intended to provide, and should not be relied on for tax, legal or accounting advice. It is also subject to Disclaimer. Before engaging in any transaction you should seek for professional advice.
For further details on these issues, please do not hesitate to contact us.