We set out below a brief summary of the income tax regime in Cyprus:
1. Under the income tax law, income tax is imposed:
(a) On the world wide income of all residents of Cyprus; and
(b) On the income generated in Cyprus of any non-residents of Cyprus.
2. In the case of companies, the test of residency is whether the relevant company has its management and control in Cyprus. In this respect, if a company wishes to take advantage of the double tax treaty network of Cyprus and in order to strengthen the argument that a Company is tax resident in Cyprus, it is highly advisable to have the majority of the directors in Cyprus and to provide that all board meetings shall take place in Cyprus. Note that our affiliate company, JNT Business Solutions Limited offers a variety of services to enable clients to exercise and maintain the management and control of their companies from within Cyprus.
3. The law provides for a uniform corporate tax rate of 12,5%.
4. Profits from the disposal of any securities are exempt from income tax.
5. The treatment of dividends is as follows:
(a) Dividends are exempt from income tax.
(b) Dividends received or deemed to be received by a resident of Cyprus are subject to a special “special contribution” tax at a rate of 17%, except in the following cases:
(i) A company that is a resident of Cyprus is exempt from the special contribution tax on dividends if it receives the dividend from another company, which is a resident of Cyprus.
(ii) A company that is a resident of Cyprus is exempt from the special contribution tax on dividends if it receives the dividend from another company which is not a resident of Cyprus. This exemption will not apply if: (a) the payer engages directly or indirectly more than 50% in activities which lead to investment income and (b) the foreign tax burden of the payer is substantially lower than the tax burden of the recipient.
6. The treatment of interest is as follows:
(a) If the interest is received in the recipient’s ordinary course of business or in close relation to it, it will be taxable as trading income at the corporate tax rate of 12,5%.
(b) If the interest is received not in the recipient’s ordinary course of business or in close relation to it, it will not be subject to income tax but at special “special contribution” tax at a rate of 30% which is levied on the gross interest received and, therefore, if substantial interest is expected, it is better to create a dedicated finance company so that it would come under paragraph (a) above.
7. Profits generated by a company resident of Cyprus from a permanent establishment outside Cyprus are exempt from taxation.