When considering relocating and commencing business in Cyprus, there are many Cyprus tax benefits to take into consideration both on a personal level and on a business level. Firstly, let's start with a main question – Why Cyprus?
- Cyprus is located in a strategic position in Europe which serves as a convenient point for trade and transportation;
- Cyprus is one of the largest transportation hubs in Europe which serves the whole EU market. Numerous freight transport companies enter Cyprus on a daily basis;
- With two international airports and three main ports Cyprus is established as an international transit station for commercial air transportation and is well connected via sea links to all five continents;
- Cyprus is a member of EU and Eurozone which allows access to 500 million EU citizens and 40+ EU trade agreements;
- A regulatory framework that is aligned with EU and a legal system comparable with UK common law;
- Large amount of highly experienced, educated and multilingual workforce;
- Low costs for office operation – Cost for technical and professional support in Cyprus is much lower compared to other EU countries;
- Quality healthcare with a number of private hospitals;
- A number of private English speaking schools are available providing high levels of education leaving families feeling more at ease when re-locating to Cyprus;
- A sense of security amongst its community since Cyprus holds one of the lower crime rates in EU;
- Good climate, around 50 beaches with blue flag and a relaxed Mediterranean lifestyle;
- Majority of people in Cyprus are fluent in English. Road signs, government documents etc. can all be found in English so there is no language barrier;
- Government has amended the Blue Visa legislation that will give access to local labour market to spouses of these workers;
- Discovery of oil and gas reserves in Cyprus's Exclusive Economic Zone is set to enhance energy independence and potentially establish Cyprus as a new energy hub for Europe.
Corporate Tax Incentives:
Cyprus holds one of the most favourable corporate tax rates In the EU at 12.5%. Below we have listed the key corporate tax benefits:
All the below listed sources of income are exempt from Cyprus corporation tax:
- Dividend income (subject to conditions);
- Profits from sale of securities (shares, bonds, debentures);
- Any interest income that did not arise from the ordinary business activities of the company;
- Profits of a permanent establishment held outside Cyprus (subject to conditions);
- Foreign exchange gain (assuming gains are not from trading);
Other corporate tax benefits a Cyprus tax resident company can enjoy are below:
- Notional interest deduction for investments into Cyprus companies (See details below);
- A wide network of double tax treaties covering approximately 60 countries providing a competitive advantage for businesses conducting international operations;
- Tax losses can be carried forward and utilised against future profits for the next five years. Tax losses can also be surrendered for group relief the year they occur;
- No capital gains tax (except for disposal of real estate in Cyprus or shares of company holding real estate in Cyprus;
- No taxes on entry, reorganisations and exit;
IP Box Regime
One of the most important advantages that the Cyprus tax system has to offer to its tax residents, especially companies that hold IP assets is the IP regime. Full details are explained below:
How IP regime works:
Under the IP regime, 80% of qualifying profits generated from qualifying assets are deemed to be tax deductible. Cyprus IP companies can achieve an effective tax rate up to 2.5% on qualifying profits earned from exploiting qualifying IP.
"Qualifying intangible asset" is defined as an asset which was acquired, developed or exploited by a person in furtherance of his business, (excluding intellectual property associated with marketing) and which is the result of research and development activities and includes intangible assets for which only economic ownership exists. Examples of such assets can be seen below:
- Patents as defined in the Patents Law
- Computer Software
"Qualifying profits" are calculated based on the "nexus approach". More specifically, the level of profits eligible for the 80% tax exemption will depend on the level of R&D expenditure carried out by the taxpayer to develop the qualifying asset. The qualifying profits are calculated based on the following formula:
QP = OI multiplied by [(QE + UE) / OE]
Whereby:
QP: Qualifying Profit
OI: Overall Income
QE: Qualifying Expenditure
UE: Uplift Expenditure
OE: Overall Expenditure
"Overall Income (OI)": is defined as the gross income derived from qualifying intangible assets during the tax year less any direct costs incurred for generating the income.
"Qualifying expenditure (QE)": is defined as, but not limited to:
- Wages and salaries;
- Direct costs and general expenses;
- Commission expenses associated with R&D activities;
"Uplift Expenditure (UE)": is added to the qualifying expenditure, which will be equal to the lower of:
- 30% of QE or
- The total costs of acquiring the qualifying asset plus the cost of outsourcing to related parties of any research and development
The purposes of the uplift expenditure is to ensure that the nexus approach does not penalise taxpayers excessively for acquiring IP or outsourcing R&D activities to related parties.
Overall Expenditure (OE): relating to qualified intangible assets is defined as the sum of:
- The qualifying expenditure and
- The total cost of acquiring the qualifying asset plus the cost of outsourcing to related parties of any research and development costs outsourced to related parties incurred in any tax year.
Calculation of taxable profit
80% of the overall profit derived from the qualifying intangible asset is treated as a deductible expense. Every year the taxpayer may elect not to claim the whole or part of this allowance.
In the case of a resulting loss, only 20% of the loss can be surrendered to other group companies or be carried forward to subsequent years.
Qualifying taxpayers that are eligible for the IP regime include Cyprus tax resident persons, permanent establishments (PEs) of non- resident person and foreign PEs that are subject to tax in Cyprus.
Capital allowance
An intangible asset (qualifying or not) is eligible for tax amortisation over the useful economic life of the asset with maximum of 20 years.
Notional interest deduction for investments into Cyprus companies
Deduction on New Equity (Article 9B), was introduced back in 2015. According to this article, all Cyprus tax resident companies and Cyprus permanent establishments of non-tax resident companies are allowed a notional interest deduction (NID) if they introduce new equity to their companies for the production of taxable income. This deduction is granted annually, for as long as the equity is used in the company.
Formula used to calculate NID: NID = New Equity * NID Reference Interest Rate.
New Equity is defined as any one of the below:
- Any paid-up share capital (ordinary, preference, redeemable, convertible) and/or share premium added after the 1st of January 2015;
- Loans payable converted into issued share capital;
- Shareholders' credit balance converted into issued share capital;
- Non-refundable capital contribution converted into issued share capital;
- Any realized reserves that existed before 01/01/2015, that were converted into issued share capital, will be qualified as new equity. Subject to conditions;
New equity can be injected into the company either in the form of cash or in kind. In the event that the new equity is in the form of an asset, the new equity must not be higher than the market value of the asset.
All the above forms of new equity must be used to generate taxable income.
NID reference interest rate is defined as the 10 year government bond yield, (as of 31 December of the previous tax year) of the country in which the new equity has been injected, increased by 5% premium. The Cyprus Tax Department annually publishes the 10-year government bond yields for a number of countries.
The following rules apply to the calculation of the above formula:
- NID must not exceed 80% of the company's/Permanent Establishments taxable income that was generated from the new equity. This taxable income is calculated before the application of NID;
- NID should be calculated each year since variables such as reference rates and taxable income will be different each year;
- This interest deduction is notional; therefore no accounting entry is accounted for and there is no effect on the company's accounting profit or loss.
Personal tax incentives
It is no secret that foreigners doing business in Cyprus have also established the island as their primary or secondary residence. Foreigners constitute about a fifth of the total population of Cyprus.
A few key benefits are discussed below:
- Cyprus income tax grants the below exemptions for individuals:
- Cyprus tax residents that are not domiciled in Cyprus are exempt from defence tax on dividend and interest income;
- Lump sums received by way of retiring gratuity, commutation of pension or compensation for death or injuries;
- Capital sums paid to individuals out life insurance policies, provident fund and pension funds;
- Profit from the sale of securities is exempt from tax in Cyprus. Securities are defined as: Ordinary shares, founder shares, preference shares, options on shares, debentures, bonds, short position on titles to include futures, forwards, swaps and participation in companies. Such income will however be subject to GHCS at a rate of 2.65%;
- 50% of remuneration of individuals who took up their first employment in Cyprus from 1 January 2022 onwards is exempt (subject to the condition that the individuals were not tax residents in Cyprus for at least 15 consecutive years prior to the year of first employment in Cyprus and that their annual remuneration from the first employment exceeds €55,000 the first or second year of employment). The exemption is granted in the tax year of first employment in Cyprus and applies for a maximum period of 17 years starting from the month of employment;
- 20% employment exemption on remuneration for individuals who took up first employment in Cyprus from 26 July 2022 and onwards, provided that these individuals were employed by a non-Cyprus tax resident outside of Cyprus for at least 3 consecutive years prior to their employment in Cyprus. Exemption in granted in the tax year following the first year of employment and applies for 7 years.
- Tax credit relief can be offered if a particular income was already taxed abroad. This relief can be obtained only when the original tax payment receipt is presented as confirmation;
- Option for overseas pension to be taxed under a special mode of taxation in which pensions are exempt from tax up to €3,420 and any amount above that threshold is taxed at a flat rate of 5%;
- Gains arising from the disposal of non – Cypriot real estate are exempt from Capital Gains Tax;
- No estate duty, wealth tax, gift tax or inheritance tax in Cyprus;
When taking into consideration all the above, it is clear that Cyprus offers international investors and businesses confidence and a boost to invest and grow in Cyprus. With all the fiscal benefits in areas such as IP, dividends and interest, foreign investors can gain a competitive advantage on their overseas ventures.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
