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Cyprus has succeeded in differentiating itself from other financial centers. Cyprus accession to the EU on 1 May 2004 has helped to establish the country as the ideal gateway for EU inbound and outbound investments.
The Cyprus attractive corporate tax rate, which remains one of the lowest across EU, and the country’s double tax treaties, (48 to date with more to come), have made the island one the most progressive and efficient business centres in Europe.
However there are a number of issues which you must consider when you are looking to set up your business in Cyprus. This document takes you through some of the common questions we come across and gives you practical information about the issues you need to consider.
What type of Business Structure should we use?
There are advantages and disadvantages to all of them, and there is no one correct answer, it’s all dependent on your specific business circumstances and needs. A brief overview of the main structures is below:
Permanent Establishment (a branch of your overseas business)
- Not a separate legal entity but an extension of the overseas parent company
- No limited liability or ring-fencing of the Cyprus operations
- If you have a permanent establishment in Cyprus then profits from this PE are liable to Cyprus corporation tax.
- The permanent establishment (Branch) in Cyprus has to submit audited financial statements and tax returns to Cyprus Tax Authorities and Registrar of Companies on annual basis.
- Provides limited liability and ring-fencing to Cyprus operations
- Gives a perception of a local business, with longevity
- Corporation tax to be paid on company profits
- All Cyprus Companies, irrespective of revenue or profit, have to submit audited financial statements and tax returns to Cyprus Tax Authorities and Registrar of Companies on anual basis.
Limited Liability Partnership:
- Members (partners) have limited liability
- Profits are allocated to members who then pay Income Tax on these profits personally
- The tax residence of the member, and where the profits in the LLP originated will determine in what jurisdiction and how these profits are taxed.
How much Corporation Tax will the business pay?
All Cyprus tax resident companies are liable to 12.5% corporation tax on their profits.
Tax Deductions include:
- 100% of the expenditure incurred wholly and exclusively for the purpose of production of income
- 100% of the donations and Subscriptions to approved charity organisations
- 100% Employee Contribution to social insurance and approved funds on employees’ salaries
- Employer’s Contributions to Medical Fund limited to 1% of employees’ remuneration
- Employer’s Contributions to Provident/Pension fund for employees limited to 10% of employees’ remuneration
- Entertainment expenses for business purposes are restricted to 1% of gross income or maximum amount of €17.086
- Up to €700, €1.100 or €1.200 per square meter (depending on the size of the building) of any expenditure incurred for the maintenance of a building in respect of which there is a Preservation Order
- 80% of the profit from disposal of intellectual property and net royalty income (under certain conditions)
- From 1 January 2012, 100% of interest expenses incurred for the acquisition of the share capital of a subsidiary company when the participation in the subsidiary is 100%, directly or indirectly, and provided that the subsidiary does not own any assets that are not used in the business
- 100% of Interest Incurred for the acquisition of a fixed asset used in the business
- The notional interest deduction (NID) deduction cannot exceed 80% of the taxable profit derived from assets financed by new equity. Equity introduced to a company as from 1 January 2015 (new equity) in the form of paid-up share capital or share premium is eligible for an annual NID. The annual NID is calculated as an interest rate on the new equity. The relevant interest rate is the yield on 10 year government bonds (as at December 31 of the prior tax year) of the country where the funds are employed in the business of the company plus a 3% premium (subject to a minimum amount which is the yield on the 10 year Cyprus government bond as at the same date plus a 3% premium). Certain anti avoidance provisions apply
Tax Exemptions include:
- 100% of the interest Income not arising from or not closely connected to the ordinary activities of the company
- 100% of the dividend Income
- 100% of the profits from disposal of securities
- 100% of the profits of a permanent establishments abroad
- 100% of rent of preserved building
- 100% of gains relating to foreign exchange differences (forex) with the exception of forex arising from trading in foreign currencies and related derivatives
Non – Deductible Expenses:
- 100% of a private motor vehicle expenses
- 100% of the immovable property tax and professional tax
- 100% of professional tax
- 100% of expenses not supported by invoices or receipts
- 100% of wages and salaries related to services offered within the tax year on which contributions to Social Insurance, Redundancy Fund, Human Resource Development Fund, Social Cohesion Fund, Pension Fund and Provident Fund have not been paid in the year in which they were due