Cyprus – Tax Facts for Individuals and Companies 2015
Individuals:
Imposition of Tax
An individual who is tax resident in the Republic of Cyprus is taxed on income accruing or arising from sources both within and outside the Republic.
An individual, who is not tax resident in the Republic, is taxed on income accruing or arising only from sources within the Republic.
Tax residency
An individual is tax resident in the Republic if he/she is present more than 183 days in a tax year in the Republic and there are various applicable criteria for the purpose of calculating the days of presence in the Republic.
Exemptions
The following are exempt from income tax:
- Lump sum received as retiring gratuity, commutation of person, death gratuity or as consolidated compensation for death or injury (the whole amount);
- Lump sum repayment from life insurance schemes or from approved provident funds (the whole amount);
- Interest income (interest income arising in the ordinary course of business, including interest closely connected with the carrying on of the business is not considered as interest income and is not exempt) (the whole amount);
- Dividend income (the whole amount);
- Remuneration from any employment exercised in the Republic by an individual who was resident outside the Republic before the commencement of the employment is exempted for a period of 3 years for up to 20% of the remuneration or €8.550 (whichever is lower);
- Remuneration from any employment exercised in the Republic by an individual who was resident outside the Republic before the commencement of his employment is exempted by 50%. Exemption applies for a period of 5 years from the first year of employment privded that the annual remuneration of the employee exceed €100.000;
- Gains from disposal of securities including units in an open-ended or closed-ended collective investment scheme (the whole amount);
- Remuneration from the rendering of salaried services outside the Republic to a non-resident employer or to a permanent establishment outside the Republic of a resident employer for a total period in the year of assessment of more than 90 days (the whole amount);
- Profits of a permanent establishment maintained outside the Republic (subject to certain conditions) (the whole amount);
- Rent of preserved building (subject to certain conditions) (the whole amount);
Deductions
All expenses incurred wholly and exclusively for the production of income are deductible from taxable income including:
- Interest relating to the acquisition of fixed assets used in the business (the whole amount);
- Expenses for letting of buildings (20% of the rental income);
- Interest in respect of the acquisition of a building for rental purposes (the whole amount);
- Subscriptions to trade unions or professional bodies (the whole amount);
- Expenditure for the maintenance of buildings under preservation order (subject to certain conditions) (up to €700, €1.100 or €1.200 per sq.m – depending on the size of the building);
- Donations to approved charitable organisations with receipts (the whole amount);
- Special contribution on salaries and pensions (the whole amount);
- Profits from the exploitation and/or disposal of intellectual property rights such as royalties (80%);
- Expenditure incurred for the acquisition of shares in an innovative business (the whole amount);
Non – Deductible expenses
The following expenses are not tax deductible:
- Expenses not incurred wholly and exclusively for the production of taxable income (the whole amount);
- Business entertainment expenses (amount in excess of 1% of the gross income or €17.086 whichever is the lower);
- Private motor vehicle expenses (the whole amount);
- Professional tax (the whole amount);
- Immovable property tax (the whole amount);
- Interest payable or deemed to be payable in relation to the acquisition of a private motor vehicle, irrespective of whether it is used in the business or not, or other asset not used in the business. This restriction is lifted after 7 years from the date of purchase of the relevant asset ( the whole amount);
- Interest expense incurred for the acquisition of shares in a wholly owned (direct or indirect) subsidiary will be deductible for income tax purposes provided that this subsidiary does not own (directly or indirectly) any assets which are not used in the business. If this subsidiary does own (directly or indirectly) assets that are not used in the business, the interest expense that corresponds to the percentage of assets not used in the business will not be deductible. This applies to shares acquired from 1/01/0212.
- Expenditure which is not supported by invoices and relevant receipts or other supporting documentation as required by the relevant Regulations (the whole amount);
- Wages and salaries relating to services offered within the tax year on which contributions to the Social Insurance Fund, Redundancy Fund, Human Resource Development Fund, Social Cohesion Fund, Pension Fund and Provident Fund have not been paid in the year in which they were due, will not be tax deductible for the calculation of taxable income (the whole amount); In case the above contributions (including any penalties and interest) are paid in full within 2 years following the due date, such wages and salaries will be tax deductible in the tax year in which they were paid.
Loans or other financial assistance provided to company directors or individual shareholders
Any amount received as a loan or financial assistance by a company’s director, or by a company’s individual shareholder, or by his/her spouse, or by any relative up to a second degree is considered a monthly benefit equal to 9% p.a. calculated on a the above amount. Such benefit, will be included in the individual’s income subject to income tax. The amount of tax on the monthly benefit should be withheld from the individual’s monthly salary and paid to the Inland Revenue on a monthly basis under the PAYE system.
Annual wear and tear allowances
Annual wear and tear allowances available for companies are also available to individuals
Losses
Tax Losses carried forward
Individuals who have an obligation to prepare audited financial statements (ie with turnover in excess of €70.000) will be able to carry forward tax losses incurred during a tax year over the next five years from the end of the tax year in which they were incurred, to be offset against taxable income.
Where a person, including a partnership, converts his business into a limited liability company, any unrelieved losses can be transferred to the new company.
Loss of a permanent establishment outside the Republic
Losses arising from a permanent establishment maintained outside the Republic can be offset against profits of a the company arising in the Republic in the same year. However, any subsequent profits from such a permanent establishment up to the amount of losses utilized are included in the taxable income.
Personal Allowances
The following are deductible from income:
- Social Insurance contributions, contributions to approved provident and pension funds, the General Health Plan, contributions to medial or other approved funds as well as life insurance premiums. The total amount of this allowance is limited to one-sixth of the taxable income as calculated before deducting this allowance.
- The annual life insurance premium is restricted to 7% of the insured amount;
- Life insurance policies, in respect to the life of the claimant’s spouse, which were in existence up to the 31/12/2002 and for which the claimant was receiving a tax allowance, will continue to be deductible by the claimant;
- In the event of cancellation of life insurance contract within 6 years from the date it was entered into, part of the life insurance premiums already given as an allowance will be taxable as follows: Cancellation within 3 years 30% / Cancellation between 4 to 6 years 20%;
Tax credit for foreign tax paid
Any tax suffered abroad on income subject to income tax in Cyprus will be credited against any Cyprus income tax payable on such income irrespective of the existence of a tax treaty.
Companies:
A company which is tax resident in the Republic, is taxed on income accruing or arising from sources both within and outside the Republic.
A company which is not a tax resident in the Republic, is taxed on income accruing or arising only from sources within the Republic.
Tax Residency
A company is tax resident in the Republic if it is managed and controlled from the Republic.
Tax rate
The corporate income tax rate is currently 12.5%
Exemptions
The following are exempt from corporate income tax:
- Interest income (the whole amount); [Interest income arising in the ordinary course of business including interest closely connected with the carrying on of a business and interest earned by open-ended or closed-ended collective investment schemes is not considered interest income and is not exempt]
- Dividend income (the whole amount);
- Gains from the disposal of securities including the redemption of units or other ownership interests in an open-ended or closed-ended collective investment scheme (the whole amount);
- Profits from a permanent establishment maintained outside the Republic (subject to certain conditions) (the whole amount);
- Rent of preserved building (subject to certain conditions) (the whole amount);
Deductions
All expenses incurred wholly and exclusively for the production of income are deductible from the taxable income including:
- Interest incurred for the acquisition of a fixed asset used in the business (the whole amount);
- Expenditure for the maintenance of buildings under preservation order (subject to certain conditions) (up to €700, €1.100 or €1.200 per sq.m (depending on the size of the building);
- Donations to approved charitable organisations (with receipts) (the whole amount);
- Profits from the exploitation and/or disposal of intellectual property rights (80% exemption);
- Employer’s contributions to approved funds on employees’ salaries (the whole amount);
- Special contribution on salaries (the whole amount);
- Expenditure incurred for the acquisition of shares in an innovative business (the whole amount);
Non – deductible expenses
The following are not deductible from income:
- Business entertainment expenses (amount in excess of 1% of the gross income or €17.086 whichever is lower);
- Private motor vehicle expenses (the whole amount);
- Professional tax (the whole amount);
- Immovable property tax (the whole amount);
- Interest payable or deemed to be payable in relation to the acquisition of a private motor vehicle, irrespective of whether it is used in the business or not, or other asset not used in the business. This restriction is lifted after 7 years from the date of acquisition of the relevant asset (the whole amount);
Interest expense incurred for the acquisition of shares in a wholly owned (direct or indirect) subsidiary will be deductible for income tax purposes provided that this subsidiary does not own (directly or indirectly) any assets which are not used in the business. If this subsidiary does own (directly or indirectly) assets that are not used in the business, the interest expense that corresponds to the percentage of assets not used in the business will not be deductible. This applies to shares acquired from 1/01/2012.
- Expenditure which is not supported by invoices and relevant receipts or other supporting documentation as required by the relevant Regulations (the whole amount);
- Wages and salaries relating to services offered within the tax year on which contributions to the Social Insurance Fund, Redundancy Fund, Social Cohesion Fund, Pension Fund and Provident Fund have not been paid in the year in which they were due will not be tax deductible for the calculation of taxable income;
In case the above contributions (including any penalties and interest) are paid in full within two years following the due date, such wages and salaries will be tax deductible in the tax year in which they are paid.
Losses
Two companies are considered to be part of a group for group relief purposes if
- One is a 75% subsidiary of the other, or
- Both are 75% subsidiaries of a third company.
From 1/01/2012, where a company has been incorporated by 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.
Loss of a permanent establishment outside the Republic
Losses arising from a permanent establishment outside the Republic can be offset against profits of the company arising in the Republic in the same year. However, any subsequent profits from such a permanent establishment up to the amount of losses utilized, are included in the taxable income.
Insurance companies
Insurance companies of general and life business are taxable in the same way as all other companies. In the case where there is no tax payable or where the tax payable on the taxable income of the life business is less than 1.5% of the gross insurance premiums then the insurance company pays the difference as additional tax.
- Losses of the life business can be offset against profits of the general business
- Losses of the life business can be offset against profits from other sources
Tax credit for foreign tax paid
Any tax suffered abroad on income subject to income tax in Cyprus will be credited against any Cyprus income tax payable on such income irrespective of the existence of a tax treaty.
Capital Gains Tax
Capital Gains Tax is imposed at the rate of 20% on gains from the disposal of immovable property situated in the Republic including shares of companies not listed on a recognized Stock Exchange which own immovable property situated in the Republic.
In computing the capital gain the value of the immovable property as of 1/01/1980 (or cost if the date of acquisition is later), the cost of any additions after 1/01/1980 or the date of acquisition if later, any expenditure incurred for the production of the gain and the indexation allowance, are deducted from the sale proceeds.
The following expenses are not considered expenses wholly and exclusively for the production of the gain and therefore are not deductible:
- Immovable Property Tax
- Immovable Property Fees
- Sewerage Council Fees
Exemptions
The following disposals of immovable property are exempt from capital gains tax:
- Transfer on death;
- Gifts between spouses, parents and children and relatives up to third degree;
- Gift to a company whose shareholders are members of the donor’s family and continue to be members of the family for a period of five years from the date of the gift;
- Gift by a family company to its shareholders, if the company had also acquired the property in question via donation. However, if the shareholder disposes the property within 3 years then the shareholder will not be entitled to the deductions listed below;
- Gifts to charitable organisations or the Republic;
- Exchange or disposal under the Agricultural Land (Consolidation) Law;
- Exchange provided the gain is used for the acquisition of new property. The gain derived from the exchange reduced the cost of the new property and the tax is paid when the latter is disposed;
- Expropriations;
- Transfer of ownership of a missing person under administration;
- Transfer of ownership between spouses that their marriage has been dissolved by a court order or in case of transfer of ownership between the same persons for the purpose of settling their property according to the Settlement of Property Relationships between Spouses Law.
Deductions
Individuals are entitled to deduct from the gains the following:
- Disposal of principal private residence (subject to conditions) = €85.430
- Disposal of agricultural land by a farmer = €25.629
- Other disposals = €17.086
The above are lifetime deductions
Administrative penalties
Administrative penalties amount to €100 or €200 depending on the specific case, will be imposed for late submission of declarations or late submission of supporting documentation requested by the Commissioner. In the case of later payment of the tax due, an additional penalty at the rate of 5% will be imposed on the unpaid tax.
Immovable Property Tax
Immovable property tax is imposed on an annual basis, on the market value as of 1/01/1980, of the immovable property situated in the Republic owned (as well as property for which a contract has been submitted to the Land Registry but for which no title has yet been issued) by each person as of 1 January of each year. Different rates apply according to the value of the property (as at 1/01/1980). Property owners with total property value not exceeding €12.500 (using value of 1/01/1980) are exempt from immovable property tax. Certain properties are exempted from immovable property tax such as schools, embassies, consulates, hospitals, public cemeteries, buildings of charitable organisations etc.
Transfer fees for immovable property
These fees are paid by the acquirer to the Department of Land and Surveys on transfers of immovable property and are calculated on the market value of the property as estimated by the Land Registry department.
Transfer fees paid on the transfer of property to a family company are refunded in five years provided the company still owns the property and there have not been any changes to its shareholders.
On the transfer of immovable property from a family company to its shareholders as well as on transfers by donation between spouses, spouses and children or relatives up to third degree of kindred, transfer fees are calculated on the value of the property as at 1/01/1980 at the following rates:
Transfer to spouse: 0.4%
Transfer to children: 0.2%
Transfer to relative (up to third degree) 0.4%
In case of a company re-organisation, tranfers of immovable property by a company to another company are exempt from transfer fees.
Transfer fees for the period 2/12/2011 – 31/12/2016
For the above period the following apply:
- Exemption from transfer fees if the transfer related to a transaction that is subject to VAT;
- In case the transfer relates to a transaction not subject to VAT, the legislation provides for an exemption of 50% of the transfer fees. This applies to transactions where:
- Transfer fees apply or are due; and
- The transfer relates to plots of land, buildings or interests in land or indivisible interests that are sold for the first time from the date of issue of the relevant building permit; and
- The relevant contract is prepared and submitted for the first time to the local District Land Registry during the period of application of the law.
Estate Duty
Estate duty is not levied in relation to individuals who have died on or after 1/01/2000.
The Deceased Persons Estate (Taxations Regulations) Law of 2000 provides for a compulsory submission of an “assets and liabilities” statement of the deceased person to the Commissioner of Income Tax within six months from the date of death.
*For information and specific rules and figures applicable in Cyprus on Social Contributions, Value Added Tax, Tax Treaties, Special Contribution for Defence, Companies Registrar Rights and Fees and Special Contributions for the Employees, Self-Employed Individuals and Pensioners of the private Sector please contact us at [email protected]
