Cyprus Company Formation, Holding Cyprus, Cyprus Investment Firm, Offshore Company Formation

Company Formation Cyprus: Tax and Accounting Regulations

Company Formation Cyprus: Tax and Accounting Regulations

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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

Company Formation Cyprus: 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 a number of 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).

Personal Income Tax:

Salary income earned in the republic is taxed with brackets as follows:

Income BracketTax Rate
19,501 – 28,00020%
28,001 – 36,30025%
36,301 +30%

The first 19,500 EUR are 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 EUR 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 be exempt.

  • How it is paid:

It is the responsibility of the employer to calculate, deduct, and pay the appropriate personal income tax of his employees on a monthly basis (Pay as You Earn – P.A.Y.E. tax). Which is payable for the current month, but can be delayed for one month, companies usually pay for the previous month, example, by the end of September they will pay for August.

  • Compliance:

Individuals who are liable for Personal Income Tax are obligated to complete and submit a form to Inland Revenue once a year. Corporations have to Submit Inland Revenue 7 (I.R.7) form, where they state the amounts declared / paid as salaries, once a year.

Deemed Dividends:

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 15% 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 13% as opposed to the nominal rate of 10%.

  • 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 three instalments within the year, under the temporary income tax provision. (First instalment 1st of August, second instalment 30th of September, third 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.

  • Compliance:

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.

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 15%. Companies invoicing (Selling) to individuals or other companies within the republic are required to inflate their products / Services by 15%. 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 (8%).

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.

  • Compliance:

Vat declaration form is submitted quarterly.

VAT 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.

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 are subject to capital gains tax.

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 15%. 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 10%

Exemptions: Interest Earned from Government Bonds, deposits with semi-government entities etc (example housing Finance Organization) is taxed at 3%. Physical Persons who’s Income is less than 7,000 EUR 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 (borrowed money from the company) the government assumes that the company earns 9% interest on these loans, and this interest is taxed at 10%.

  • 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).

  • Compliance

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

Annual Reporting Requirements:

Cyprus International Companies are required to comply with the following:

  • Financial Statements:

Every company must prepare a full set of financial statements in accordance with International Financial Reporting Standards

  • Annual Return:

Annual return must be submittedn to the Registrar accompanied by the full set of financial returns

  • Audit
  • 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 31st December the year following the year of company registration.