CYPRUS on «Taxes, Trusts & Funds »
Despite financial crisis Cyprus’ tax and fiscal benefits remain as attractive as always have been. This article intent to provide a briefing on Cyprus taxes, trusts and the Cyprus funds market. We are herein below trying to give a brief understanding of the great advantages that Cyprus can offer to international investors, consultants and professionals. For detailed reports please be in touch with us.
Who is subject to Cyprus Tax?
A company is subject to corporation tax in Cyprus provided it is managed and controlled in Cyprus. The same applies to permanent establishments (PEs) of non-resident Cyprus companies situated in Cyprus.
Corporation tax on income remains the lowest in the EU, at a flat rate of 12,5%. Such tax applies on the worldwide taxable profit of a company resident in Cyprus and on the Cyprus-source profits of non-resident companies with a PE in Cyprus.
Tax on royalties received by Cyprus company is by far the lowest in the EU, at 2,5% maximum of the net royalties income. Please refer to our relevant brochure for more details on Cyprus IP tax.
A taxable profit includes trading profits, sale of good will, stock, interest earned, rent from real estate, and royalties.
Reliefs on Profits:
Taxable profits are subject to major reliefs, including: trading expenditure incurred; capital allowances, credits for foreign tax paid, losses surrendered in the same year by other companies in a 75% group relationship; unused losses brought forward from previous years. In addition a Cyprus Company may use the losses generated by its foreign branch against its profits within the same year. However, the losses used will be taxed eventually as soon as the branch becomes profitable. This option provides the possibility for deferral of the tax liability.
Non Taxable Profits:
Profits or other gains derived from the sale/trading of shares/securities, dividend income received from foreign a company and capital gains from the sale of property situated abroad are excluded of taxation.
Value added tax (VAT)
A standard 19% VAT rate applies on supplies of goods and services. Cyprus’ rate on VAT remains one of the lowest rates in Europe, offering therefore significant advantages such as competitiveness over suppliers registered elsewhere in the EU. Zero and reduced rates also apply to certain transactions.
Special Defence Contribution Tax (SDC) – Applicable only for citizens of Cyprus
On Dividend Income
SDC is only imposed on Cyprus residents and does not affect Permanent Establishments of foreign companies. Further, while dividend income of individuals resident in Cyprus is charged with SDC at 17%, all companies and foreign shareholders are exempt from SDC(subject to some easily met conditions).There is no SDCwithholding requirement on dividends paid to non-residents whereas all Cyprus resident shareholders– physical persons – are taxed 17% SDC on dividends.
On Interest Income
Interest received by the company outside its ordinary course of business (principal activities) is subject to SDC at 30% on the gross amount of interest received. In such case the aforementioned income is exempt from corporate tax. Interest on SDC payable balance starts accruing earlier than interest on corporate tax balance payable. It is therefore advisable to ensure that a company lends money only within the ordinary course of its business, which is accepted to include the capitalization of subsidiaries by holding and group finance companies, adding value therefore to the usage of a Cyprus company as the financial company of the group.
For Group financing Companies specific guidelines, presented below, were provided by the Inland Revenue as to what constitutes acceptable charging interest rates by defining the profit margin on back to back loans:
- 0,35% for up to €50 mil loan
- 0,25% from €50 to €200 mill
- 0,125% for over €200 mill
Capital Gains Tax (CGT)
CGT is imposed at 20% on all gains from both:
- Disposals of immovable property situated in Cyprus.
- Disposals of shares of companies holding immovable prop¬erty situated in Cyprus.
Stamp duty is a tax on documents under the Stamp Duty Law of 1963 (it includes agreements and other executable deeds). A contract relating to property or a transaction in Cyprus cannot be produced as evidence in court unless stamp duty is paid. Stamp duty can be paid at any later stage, without any limitations, subject to a penalty.
Contracts ought to be stamped include Sale/Purchase of Immovable property agreements, Share purchase agreements, Joint venture agreements, Subscription and shareholder etc.
Stamp duty is calculated at progressive rates of the consideration stated on the face of the contract as follows:
- 0.15% for amounts up to EUR170,860
- 0.2% for amounts over EUR170,860 (€17,086 is the maximum stamp duty payable).
Capital duty on Companies
Capital duty is payable at a set rate of 0.6% of the authorized share capital of all Cyprus companies. Such duty is payable both upon incorporation and upon any increase in authorized share capital of the company. A tax planning tip could be the issuing of shares at a nominal value but at a higher premium.
Immovable Property transfer fees
After the acquisition of any type of immovable property in Cyprus (land, house, apartment; residential or not), transfer fees are payable by the buyer once title deeds are issued by the Department of Land and Surveys and property is ready to be transferred to his/her/its’ name.
Land transfer fees are charged at progressive rates on successive tranches of the sale/purchase price as follows:
- 3% for up to €85,430
- 5% from €85,430 to €170,860
- 8% for over €170,860.
THE CYPRUS TRUSTS
Cyprus International Trusts, similarly to the Cyprus companies, enjoy all and even more tax advantages, providing significant tax planning possibilities to international investors. The following tax-related advantages are what such Trusts can offer, at a summary:
- The income of a Cyprus International Trust (also referred to as “Offshore” Trust whose assets are, and income derives, outside Cyprus) is wholly exempted of taxation as it is not accrued, derived or received in Cyprus.
- Cyprus Income Tax laws exempt Cyprus International trusts from any income tax, capital gains tax and estate duty tax, making such Trusts a very attractive tax planning vehicle for the non-resident investor.
- A foreign settlor of a Cyprus International Trust who also retires in Cyprus is still exempt from tax if all the property settled and the income earned is abroad, even if he is a Beneficiary as well.
The essential elements of an International Trusts are:
- The settlor/investor is not a permanent resident of Cyprus (a Cyprus company will qualify as a settlor which may also belong to the same person);
- The beneficiary is likewise not a permanent resident;
- The trust property does not include any immovable property in Cyprus;
- A minimum of one trustee is resident in Cyprus (a Cyprus company will qualify as a resident trustee which may also belong to the settlor/investor).
THE CYPRUS FUNDS MARKET – Alternative Investment Funds
For detailed information about the Cyprus Funds, please refer to the relevant section of this website.
Cyprus Investment Funds benefit from significant tax incentives. An alternative investment fund is treated identically to any other Cypriot entity and, accordingly, enjoys a 12,5% corporate income tax. In addition, the following tax advantages are especially significant:
- Exemption from tax on profits from sale of shares and other financial instruments
- Exemption on profits on disposal of units
- Exemption from tax on foreign dividends received
- No withholding on interest and dividend payment made from Cyprus abroad
- A wide network of Double Tax Treaties with more than 45 countries.
Other Benefits of Cyprus Funds
Cyprus offers some additional specific benefits to hedge funds such as low cost of legal fees for setting up a fund (compared to Luxembourg costs, Cyprus costs can be even lower than 50%). The Cypriot regime also permits accountants with experience of the process to represent a fund to the regulator rather than requiring direct client presence with the regulator as in Luxembourg. Costs on fund administration and custodial services are also cheaper than in other centers.
The above is intended to provide a brief summary; for more detailed information please contact us.