Taxation
The main advantages of Cyprus tax legislation are:
Companies
- Favourable tax rate of 12.5%
- Cyprus IP Box – Favourable taxation of Intellectual property Companies including software development with effective tax rate of 2,5% or less
- No tax on disposal of securities
- Notional Interest Deduction
- Dividend income is tax exempt subject to conditions
- Notional Interest Deduction on capital introduced in the company
- No capital gains tax except from sale of immovable property located in Cyprus
- No withholding taxes on payments of dividends, interest and royalties outside Cyprus
- Extensive list of Double Tax Treaties
- Access to EU directives
- Tax legislation approved by the European Union. Cyprus is also largely compliant country based on OECD reviews
Individuals
- Cyprus Tax Resident individuals by staying in Cyprus 60 days during the year
- Favourable exemptions for highly paid employees in Cyprus who were not resident of Cyprus before employment
- Easy access and tax effective Non-Domiciled status
Cyprus IP box tax regime
Introduction
As of the 1st of July 2016, a new Intellectual Property (IP) tax regime (IP Box) is applicable in Cyprus. The Cyprus IP tax legislation is now fully compliant with the OECD and it was amended as per the recommendation of the Base Erosion and Profit Shifting (BEPS) action 5 on Harmful Tax Practices.
As will be demonstrated below, the Cyprus IP regime provides great incentives for IP companies to transfer their seat, offices and personnel in Cyprus. Based on the IP Box 80% of the profits qualifying for the regime are exempt from tax and therefore, with an applicable corporate tax rate of 12.5% this can result in an effective tax rate of 2.5% or less. Furthermore, other incentives also exist rendering Cyprus an attractive jurisdiction for the establishment of fully-fledged offices for IP companies such as lower cost structure (labour and operational costs), strategic location in the middle of three continents, member of the EU, English are widely spoken and the availability of highly skilled workforce.
Executive summary
– Effective tax rate of 2.5% or less on profits from qualifying assets,
– Qualifying Assets:
(a) patents,
(b) computer software, and
(c) other intellectual property which is legally protected
-Qualifying Profits
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
Nexus approach explained
The new Cyprus IP regime follows the nexus approach. But what this nexus approach really is? The word ‘nexus’ indicates a connection linking two or more things. When referring to IP assets the nexus approach requires a link between the income taking advantage of the relevant IP rules, and the extent to which the taxpayer has actually performed the underlying research and development (R&D) that generated the IP asset. Therefore, a direct link between the qualifying income and own qualifying expenses is essential for the IP to qualify.
Cyprus IP regime
Under the new IP Box, qualifying intangible asset is an asset which has been acquired, developed or exploited by a person within the course of carrying out their business which is the result of research and development activities. Such assets specifically comprise of
(a) patents,
(b) computer software, and
(c) other intellectual property which is legally protected and comprises of utility models, IP assets, which provide protection to plants and genetic material, orphan drug destinations and extensions of protection for patterns or non-obvious, useful and novel (which are certified as such by an appropriate authority) where the person utilizing such does not generate annual gross revenues in excess of Euro 7.5 million from all intangible assets (or Euro 50 million for groups).
Qualifying intangible assets specifically exclude trademarks, business names, brands image rights and other IP rights used for the marketing of products and services.
Persons that may benefit from the Cyprus IP regime include Cyprus tax resident taxpayers, tax resident permanent establishments (PEs) of non-tax resident persons are well as foreign PEs that are subject to tax in Cyprus.
Moreover, the new regime introduced the nexus fraction for the purposes of determining the amount of qualifying profits used to determine the relevant tax deduction. For the calculation of the qualifying profits the overall income (being the gross income derived from qualifying intangible assets minus any direct costs), the qualifying expenditure, uplift expenditure and overall expenditure are taken into consideration. The nexus approach is additive in that the calculation requires that expenditure includes all expenses incurred by the taxpayer over the life of the IP asset.
Why Cyprus
As explained above the Cyprus IP regime gives considerable benefits to IP companies wishing to transfer their offices and personnel in Cyprus. Apart from such tax benefits, other advantages also exist rendering Cyprus an attractive jurisdiction for the establishment of fully-fledged offices.
A number of incentives are available for managers, higher officers and employees of a company wishing to re-locate on the island. Apart from obtaining the tax resident non-domiciled status (with exemptions from the Special Defence Contribution tax), expatriate relief is also available, whereby 50% of the gross emoluments (exceeding €100.000) are allowed to be deducted from taxable income for individuals that were not tax residents of Cyprus prior to the commencement of their employment in Cyprus. This deduction is available for a period of ten (10) years, commencing from the date of employment.
The Cyprus IP Box
The amount of qualifying profit can be derived through the application of the following formula:
QP = OI x QE + UE
OE
The terms explained:
QP – 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.
OI – Overall income derived from qualifying assets is defined as the gross profit from the assets (i.e. gross income less any direct expenditure). Overall income includes, but is not limited to: ·
– Royalties or any other amounts relating to the use of qualifying assets
- Any amount for the grant of a license for the exploitation of the qualifying assets
- Any amount relating to the insurance or compensation of the qualifying assets;
- Trading income from the disposal of the qualifying asset
- Embedded income on qualifying assets, which is derived from the sale of goods, the provision of services or use of any processes that are directly related to the qualifying assets.
Capital gains arising from the disposal of a qualifying asset under the new IP regime are not included in qualifying profits and are fully exempt from income tax.
QE – Qualifying expenditure relating to a qualifying asset is the sum of all R&D expenditure incurred in any tax year wholly and exclusively for the development, enhancement or creation of a qualifying asset and that is directly related to that asset.
Qualifying expenditure includes, but is not limited to:
- Salary and wages
- Direct costs
- General expenses associated with R&D activities
- Commission expenditure associated with R&D activities
- R&D expenditure outsourced to unrelated parties
Qualifying expenditure does not include:
- The acquisition cost of a specific intangible asset
- Interest paid or payable
- Expenditure relating to the acquisition or construction of immovable property that has been paid or is payable directly or indirectly to a related person carrying out R&D, regardless of whether the amounts relate to a cost sharing agreement
Capital allowances on intangible assets are also available and will be tax deductible over the useful economic life of the asset, as determined by generally acceptable accounting principles (up to a maximum useful life of 20)
(UE) – Uplift expenditure of a qualified asset is the lower of (i) 30% of the qualifying expenditure, and (ii) the total acquisition cost of the qualifying asset and any R&D costs outsourced to related parties
(OE) – Overall expenditure of a qualifying asset is the sum of (i) qualifying expenditure, and (ii) the total acquisition cost of the qualifying asset and any R&D costs outsourced to related parties incurred in any tax year.
How can we help
We can assist with:
- Provide free tax advice on appropriate structure
- Advice on qualifying assets and expenditure
- Assist on registration of Intellectual Property in Cyprus and internationally
- Assist on relocation of staff in Cyprus
- Advice in respect of any restructuring of your Company
OSS & IOSS VAT solution for e-Commerce sellers
Introduction
The European Union (EU) has introduced new rules to the value added tax (VAT) system that will affect e-commerce sellers and marketplaces as of 1 July 2021. The low value exemption from VAT for goods imported into the EU will be abolished.
From July 2021, B2C sellers of goods will no longer be required to register for VAT in various EU countries and make VAT returns in the EU countries where they are selling. Instead, they may opt to for OSS (One Stop Shop) and file one single VAT return covering all of their B2C EU sales.
The VAT on these transactions can be collected either by:
- Import VAT collected upon importation, with the customs declarant paying the VAT and then recovering it either from the customer or the supplier.
- The supplier registers for the “import one-stop shop” (IOSS) and collects VAT from the customer at the point of sale. If the IOSS is used, import VAT is not due at the time of importation.
IOSS regime (Import One Stop Shop)
IOSS is a new system for reporting and collecting VAT on B2C sales of low-value goods imported from non-EU countries. Low value goods are goods with a value, not including separately stated transportation costs and VAT, not exceeding €150. For these purposes, the value of the product is calculated as the total of the value of all the products in a single package.
Non-EU sellers
Sellers who are non-resident in the EU may also use the OSS simplified filing. They must first register as a ‘non-Union’ taxpayer with the tax authority of any EU member state. They can then file quarterly OSS filings like any EU e-commerce seller. There is a requirement to file a regular domestic VAT return in at least one EU member state. VAT incurred on imports may be declared in the OSS, too.
Union Scheme (OSS) and Non-Union Scheme (OSS)
There are two OSS Schemes that can be used as illustrated below:
| Non-EU established taxable person/supplier | EU established taxable person/supplier | |
| Supplies of services to consumers (B2C) | Non-Union scheme (OSS) | Union scheme (OSS) |
| Distance sales of goods within the EU | Union scheme (OSS) | Union scheme (OSS) |
| Domestic supplies Of GOODS by DEEMED SUPPLIERS | Union scheme (OSS) | Union Scheme (OSS) |
The Union OSS
The Union One-Stop Shop (OSS) is the electronic portal businesses can use to comply with their VAT obligations on e-commerce sales within the EU to consumers from 1 July 2021.
Who can use the Union OSS and for which supplies?
- A taxable person established in the EU(who is not a deemed supplier)can use the Union OSS for:
- Supplies of B2C services taking place in a Member State in which he is not established;
- Distance sales of goods within the EU.
- A taxable person not established in the EUfor:
- Distance sales of goods within the EU .
- An electronic interface (established in the EU or outside the EU) facilitating supplies of goods (deemed supplier) for:
- Distance sales of goods within the EU ;
- Certain domestic supplies of goods.
How to register for the OSS?
Each EU Member State will have an online OSS portal where businesses can register from 1 April 2021 and can use for transactions made on or after 1 July 2021
The Non-Union OSS
From 1 July 2021, the non-Union scheme is extended and can be used:
- Exclusively by (online) sellers not established in the EU.
- For all B2C supplies of services taking place in the EU made by these non-EU online sellers.
How can we help
We can assist with:
- Register your company with OSS or IOSS as appropriate
- Manage your quarterly VAT / OSS / IOSS returns
- Reduce cost of VAT compliance for e-commerce businesses
- Assist on recruitment or creating a Cyprus establishment if needed
Cyprus Non-Domiciled Individuals and the 60 Days rule
Worldwide Dividend income at zero tax
Under the Cyprus Non-Domicile Scheme, Non-Domiciled tax residents of Cyprus are not subject to defence tax on Dividends, Interest and Rental income. In combination with the exception of dividends from Income taxes, it allows 0% taxation on dividend income from Cyprus and abroad.
Under the current law Defence Tax is payable only by tax residents of Cyprus on dividends, interest and rental income. Tax resident of Cyprus is any individual who spends more than 183 days in Cyprus every year. Under the new tax law, the term “Domiciled” in Cyprus is introduced and those individuals who are not Domiciled in Cyprus would not be subject to defence tax on dividends, interest and rental income.
Domiciled in Cyprus is anyone domiciled by origin or domiciled by choice under the Wills and Succession Law of Cyprus. An individual who during at least 17 years out of the last 20 years is tax resident in Cyprus, will be considered as domiciled in Cyprus.
The above measure excludes owners of companies that are not Cypriots from any defence tax in case they want to re-locate to Cyprus to run their business from Cyprus. Therefore, such individuals will not pay any taxes on dividends or interest income.
60 days rule
This rule came in 2017 as an amendment to the “183 days” rule and provides incentives to high profile individuals, professionals and executives to become Cyprus Tax residents.
The 60 days rule is effective as from tax year 2017. An individual can become a tax resident by either the 183 days rule or the 60 days rule.
How does the “60 days” rule applies?
An individual who in the relevant tax year:
- do not reside in any other country for a time period of more than 183 days(aggregate) and
- is not a tax resident in any other country and
- resides in Cyprus for at least 60 days and
- has various other Cyprus ties such as :
- contract of employment
- he is a business owner
- he is a director of a Cyprus Tax resident company.
The above must take place in a tax year and considered not valid in case of termination of employment during the tax year. In addition, the individual must maintain a residential property during the tax year either owned or rented.
Advantages of Cyprus Tax residents
– Income exemption for employment in Cyprus
An individual with annual remuneration of more than €100.000 and who was not a tax residence in Cyprus before the employment, is entitled for 50% tax deduction on his income.
This deduction refers to income deriving from Cyprus and the rule is valid for a period of 10 years starting on the day of his employment.
- Exception from taxes on dividend income
Cypriot Non-Domiciled individuals are not subject to defence tax which means that worldwide dividend income is exempt from any taxation in Cyprus.
- Exception from defence tax on interest income
Cypriot Non-Domiciled individuals are not subject to defence tax which means that worldwide interest income is exempt from any taxation in Cyprus.
- Exception from defence tax on rental income
Cypriot Non-Domiciled individuals are not subject to defence tax which means that worldwide rental income is exempt from defence tax in Cyprus. However, rental income is subject to income tax.
Finally, Cypriot Non-Domiciled individuals are entitled to all other tax benefits of Non-Cypriot tax residents such as no capital gains on disposal of securities, access to Double Tax Treaties etc.
How can we help
We can assist with:
- Registration of your Company in Cyprus
- Assist in finding property to buy or rent in Cyprus
- Arrange employment agreement and relevant registrations to the social insurance department
- Registration of the individual to the immigration department and obtain the relevant “yellow” slip
- Application to the tax authorities to obtain the Cyprus Non-Domiciled status
- Assist on compliance with tax and other obligations for the individual and the Cyprus company
Notional interest deduction on New Equity
Introduction
Cyprus is continuing to provide further tax incentives to attract more foreign investments. Cyprus companies are now allowed to reduce their tax liability for new equity injected in Cyprus companies giving investors further options in international tax planning. Cyprus company formation is becoming more and more beneficial driven by tax incentives, relatively low costs compared to most European Countries, perfect geographical location and an ideal location for both business and leisure with 300 sun shining days a year!
Cyprus introduced provisions to allow notional deduction of interest for funds introduced to the company in the form of equity instead of loans. Deemed interest deduction will be allowed on new equity funds injected into a Cyprus company and those funds are used for taxable operations of the company. The deemed interest will be calculated on the basis of an interest rate, which is the higher of:
- the yield on the 10-year government bond of the country where the new funds are invested, plus 5%
- or the Cyprus government bond yield (currently about 1%) plus 5%
The term New equity means any equity funds introduced into the company after 1 January 2015 in the form of share capital or share premium provided that it has been actually paid. New equity may be in the form of cash or in assets in kind, in which case the amount of new equity should not exceed the market value of the asset in agreement with the tax authorities. The maximum notional interest to be deducted is the 80% of the taxable income of the company, before the deduction of the notional interest expense which means that the effective tax rate can be reduced up to 2,5%. The funds for which the interest is calculated should have been used to finance taxable operations. There are also Notional interest anti-avoidance provisions in order to eliminate the possibility of using the tax incentive just to avoid taxes. There should be substantial economic and business purpose for the New Equity. Also, the new capital for which allowances are claimed should not have derived from capital existed prior to 1st January 2015 and which is presented as new capital through actions or accounting transactions with related parties with the main objective to reduce taxes based on this allowance.
The notional interest deduction on new equity can be used as an incentive to attract more foreign investments through healthy and well capitalised companies and also to eliminate the beneficial ownership issues of certain structures that are widely used such as back-to-back loans. Overall, the notional interest allowance is a very attractive incentive and enhances the use of Cyprus companies corporate structures.
Cyprus Double Tax Treaties
Withholding taxes – paid to Cyprus (inbound payments to Cyprus)
| COUNTRY | DIVIDENDS % | INTEREST % | ROYALTIES % |
| Armenia | 0/5 | 5 | 5 |
| Andorra | 0 | 0 | 0 |
| Austria | 10 | 0 | 0 |
| Azerbaijan* | 0 | 0 | 0 |
| Bahrain | 0 | 0 | 0 |
| Belarus | 5/10/15 | 5 | 5 |
| Belgium | 10/15 | 0/10 | 0 |
| Bosnia*** | 10 | 10 | 10 |
| Bulgaria | 5/10 | 0/7 | 10 |
| Barbados | 0 | 0 | 0 |
| Canada | 15 | 0/15 | 0/10 |
| China | 10 | 10 | 10 |
| Czech Republic | 0/5 | 0 | 0/10 |
| Denmark | 0/15 | 0 | 0 |
| Egypt | 5/10 | 10 | 10 |
| Ethiopia | 5 | 5 | 5 |
| Estonia | 0 | 0 | 0 |
| Finland | 5/15 | 0 | 0 |
| France | 10/15 | 0/10 | 0/5 |
| Georgia | 0 | 0 | 0 |
| Germany | 5/15 | 0 | 0 |
| Greece | 25 | 10 | 0/5 |
| Guernsey | 0 | 0 | 0 |
| Hungary | 5/15 | 0/10 | 0 |
| Iceland | 5/10 | 0 | 5 |
| India | 10 | 0/10 | 10 |
| Iran | 5/10 | 5 | 6 |
| Ireland | 0 | 0 | 0/5 |
| Italy | 15 | 10 | 0 |
| Jersey | 0 | 0 | 0 |
| Kuwait | 0 | 0 | 5 |
| Kazakhstan | 5/5 | 0/10 | 10 |
| Kyrgystan* | 0 | 0 | 0 |
| Latvia | 0/10 | 0/10 | 0/5 |
| Lebanon | 5 | 5 | 0 |
| Lithuania | 0/5 | 0 | 5 |
| Luxembourg | 0/5 | 0 | 0 |
| Malta | 0 | 0/10 | 10 |
| Mauritius | 0 | 0 | 0 |
| Moldova | 5/10 | 5 | 5 |
| Montenegro*** | 10 | 10 | 5 |
| Netherlands** | 0/15 | 0 | 0 |
| Norway | 0/15 | 0 | 0 |
| Poland | 0/5 | 0/5 | 5 |
| Portugal | 10 | 10 | 10 |
| Qatar | 0 | 0 | 5 |
| Romania | 10 | 0/10 | 0/5 |
| Russia | 0/5/15 | 0/5/15 | 0 |
| San Marino | 0 | 0 | 0 |
| Saudi Arabia | 0/5 | 0 | 5/8 |
| Singapore | 0 | 0 | 5 |
| Seychelles | 0 | 0/7/10 | 10 |
| Slovakia | 0/5/10 | 0/10 | 0/5 |
| Slovenia | 5 | 5 | 5 |
| South Africa | 5/10 | 0 | 0 |
| Spain | 0/5 | 0 | 0 |
| Sweden | 5/15 | 0/10 | 0 |
| Syria | 0/15 | 0 | 0 |
| Switzerland | 0/15 | 0/10 | 10/15 |
| Tadzhikistan* | 0 | 0 | 0 |
| Thailand | 10 | 10/15 | 5/10/15 |
| Ukraine | 5/15 | 5 | 5/10 |
| United Arab Emirates | 0 | 0 | 0 |
| United Kingdom | 0/15 | 0 | 0 |
| United States | 5/15 | 0/10 | 0 |
For more information contact us!
