Our team of professionals can provide tax consultation on international tax issues and select the most effective vehicle(s) for our clients in order to achieve tax minimization. By identifying the relevant local law considerations we can assist in structuring cross border investments and acquisitions, establish holding corporate structures, repatriation and exit planning.
Cyprus during the past decades has succeeded to become a reputable and most favourable International Financial Centre since Cyprus is widely chosen by businessmen and entrepreneurs all over the world in order to maximise their corporate profits through an effective utilisation of Cyprus tax system.
Dividends received by a Cyprus resident Company by another Cyprus resident Company are exempt from taxation.
Dividends received by a Cyprus resident company are generally exempt from taxation in Cyprus if they are received from a foreign entity.
The exemption does not apply where the foreign entity:
- Receives more than 50% of its income from investment activities, and
- The foreign tax burden of the company paying the dividend is substantially lower that that of the Cyprus resident company
“Substantially lower” has been interpreted as meaning less than 5%
The Cyprus Tax Authorities have acknowledged that foreign tax burden does not cover only the tax paid by the company paying the dividend but includes also the tax paid by lower level subsidiaries. In practice, therefore, dividends received from subsidiaries or associates are rarely taxed.
Where dividends do not satisfy the requirements for exemption from taxation then they are subject to defence tax at the rate of 20%. However, any tax withheld at source is allowed as a deduction from this tax even if it is made from a country that does not have a double tax treaty with Cyprus.
A tax credit will be afforded according to the Double Taxation Agreements concluded by Cyprus. In the absence of such an agreement, Cyprus unilaterally affords a credit for the foreign tax paid on such income. The underlying tax credit is also available for dividends received from EU member states.
The taxation of interest income depends on whether it is derived in the ordinary course of business or it is closely related with that business. In such cases, the interest income earned is included in the calculation of taxable income under corporation tax and taxed at 10%. Interest earned by banks, financial companies, hire purchase companies or leasing companies is considered to arise from the ordinary course of business.
Interest earned as detailed below is considered to be closely related to that business and is also subject to corporation tax.
a) businesses such as car dealers, property developers that sell their products on extended payment terms and charge interest on their trade debtors
b) interest on current account balances at banks
c) interest earned by companies which act as a vehicle through which a group finances the operations of companies within it. No formal definition of “group” has been provided but it is generally considered that a group comprises any relationship where the companies are ultimately controlled by one entity. Consequently, two entities that are owned by a physical person without a common holding company are not considered a group.
In all other cases, where the interest is considered to arise outside the ordinary course of business then is subject to defence tax at the rate of 15%. Interest on deposit accounts and interest earned on loans granted to third parties are treated in this way.
A credit is provided against the defence tax payable for any taxes withheld at source, irrespective of whether a double treaty exists or not.
Gross amount of royalties from sources within Cyprus by a company which is not a tax resident of Cyprus are liable to 10% withholding tax at source, subject to relief under any applicable double taxation treaty. If the intangible property right however is granted to a Cyprus company for use outside Cyprus, then there is no withholding tax and the corporate rate is applied only on the profit margin left in the Cyprus Company.