The Tax System in Cyprus

 

Contents

  1. General tax situation in Cyprus
  2. How a Cyprus tax resident is defined
  3. Personal Income Tax
  4. Corporation Tax
  5. Special Contribution for Defense
  6. Capital Gains Tax
  7. Value Added Tax
  8. Immovable Property Tax
  9. Social Insurance

1. General tax situation in Cyprus

Cyprus joining a fiscal consolidation programme (Memorandum of Understanding) after the banking crisis in 2013 caused cumulative changes to the tax system of the country. Indicatively, there were major increases in Corporation Tax (from 10% to 12.5%), in special contribution for defense (from 15% to 30%), social insurance (employer contribution from 6.8% to 7.8%) and VAT (from 18% to 19%). The need to generate income also led the Cypriot government to introduce a new immovable property tax with a progressive rate.

Despite the significant increases, Cyprus still retains the features of a tax haven, having along with Ireland the lowest corporation tax in the Eurozone (12.5%) and the second lowest in the European Union after Bulgaria (10%).

2. How a Cyprus tax resident is defined

A Cyprus tax resident is the natural person who spends 183 days per year in the free areas of the Republic of Cyprus.

3. Personal Income Tax

The table below shows the tax rates for different income scales:

Table: Personal Income Tax (natural persons)
Income scales Maximum monthly income Tax rate Accumulated tax
%
0 – 19,500 1625 0 0
19,500 – 28,000 2333 20 1700
28,001 – 36,300 3025 25 3775
36,301 – 60,000 5000 30 10885
>60,000 35

In the table below the top tax rates in different selected countries can be seen:

Table: Minimum and maximum tax rates in selected countries
Personal Income Tax Minimum Maximum
Cyprus 0% 35%
UK 0% 45%
Russia 13% 13%
Greece 22% 42%
Germany 0% 45%
France 0% 45%
Italy 23% 43%
Spain 0% 52%
Portugal 0% 54%
Estonia 20% 20%
Latvia 24% 24%
Lithuania 0% 15%
Bulgaria 10% 10%
Luxembourg 6% 40%
Malta 0% 35%
USA 0% – 3% 55.9%
Japan 8% 50%
Kazakhstan 10% 10%
India 0% 30%
China 5% 45%
Brazil 0% 27.50%

 

The following sources of income are exempt from personal income tax, but may still be subject to other taxations:

  1. Interest on bank deposits. This is subject to special contribution for defense tax (SDC).
  2. They are subject to the SDC tax.
  3. Life insurance sum received after a death.
  4. Profits from the sale of Securities.
  5. Pension lump sum.

The following are not included as income:

  1. 20% of rental income
  2. Donations to approved charity organisations
  3. Expenditure incurred for the maintenance of a building for which a Preservation Order is in force
  4. Life insurance premiums (given that they are lower than 7% of the insured amount)
  5. Social insurance contributions

 

4. Corporation tax

The way in which the tax is imposed is dependent on the tax base of the corporation:

  • Companies with a tax base in Cyprus: there is a tax on the profit made from all activities both in Cyprus and abroad.
  • Companies with a tax base abroad: there is a tax only for the profit made in their Cyprus-based branches.

The tax rate for all companies regardless of their tax base is set at 12.5%.

Found in the table below are the corporation tax rates in selected countries:

Table 1: Corporation Tax
Corporation Tax Rate
Cyprus 12.50%
Greece 26%
Germany 29.58%
France 33.33%
Italy 31.40%
Spain 30%
Portugal 23%
Estonia 21%
Latvia 15%
Lithuania 15%
Luxembourg 29.22%
Malta (1) 35%
Austria 25%
Belgium 33.99%
Finland 20%
Ireland 12.5%
Netherlands 25%
Slovakia 22%
Slovenia 17%
Bulgaria 10%
UK (2) 20%
USA 40%
Japan 35.64%
Kazakhstan 20%
India 33.99%
China 25%
Russia (3) 20%
Notes:

(1) Possibility of tax return up to 6.25%

(2) In the case of the UK the tax rate is 20% with businesses with profit under £300,000. Anything over that amount has a tax rate of 21%.

(3) This tax is separated into two parts. 2% goes into the federal budget while the other 18% is given to regional authorities. Regional legislative councils have the possibility to reduce their part of the contribution to 13.5%, which means that total corporation tax could be set up to 15.5%.

                                                       

 

The following are exempted from corporation tax:

  • 80% of the net income from royalty rights, patents and trade marks
  • Donations to approved charities
  • Social insurance contributions
  • Entertainment expenses (e.g. meals with clients). This amount should be lower than €17,086 or 1% of the gross income of the business.

The tax loss incurred during a tax year can be carried forward and set off against the profits of the next five years.

In some cases there is a possibility for corporate groups to set off the current year loss against the profit of another. For this to happen, the companies involved need to be Cyprus tax residents holding at least 75% of their equity. The same scenario is valid in the case of branches abroad.

5. Special Contribution for Defense

Special contribution for defense is different than other taxes in that it is imposed on passive forms of income. The table below briefly describes these kinds of income (tax rates are differentiated according to the legal form of the person receiving them).

Table: Special Contribution for Defense
  Tax Rate depending on legal form
Kind of Passive Income Natural Persons Legal Entities
Dividend Income from Cyprus companies 17% 0%
Dividend Income from companies abroad 17% 0%
Interest on Deposits 30% 30%
Rental Income (75%) 3% 3%

 

It is worth mentioning that the tax on deposits went up from 15% to 30% after Cyprus signed a Memorandum of Understanding.

Clarifications concerning the special contribution for defense:

  • For dividends among legal persons, the rate increases to 17% if they are declared with a delay of four years from the date accounting profit was generated.
  • If a Cyprus tax resident corporation receives dividends from a non-Cyprus resident company, the dividends are exempted from SDC tax. This does not happen in the case where the paying company’s majority of activities are related to producing investment income and in the case where the foreign dividend tax is lower than 6.25%.
  • Cypriot companies are obliged to distribute as dividends 70% of their net profit every 2 years. The remaining 30% is subject to a 17% SDC tax.

 

6. Capital Gains Tax

This tax is imposed on the gains from the disposal of shares and immovable property. The tax rate is 20%.

The following categories are exempted from that rate:

  • Transfers arising on death
  • Gifts made between up to third degree relatives
  • Gifts by a family company, under conditions
  • Expropriations
  • Exchange of property (e.g. the sale of an apartment in order to buy a more expensive one)

To determine Capital Gains Tax (C.G.T.) in the case of immovable property, the formula below is used (for example we will consider the property was bought in 1995 and sold in 2015):

C.G.T. = 20% * (Current Sale Price Year 2015 – Purchase Cost in 1995 – Cumulative Inflation between 1995 and 2015)

There is no inheritance tax in Cyprus.

7. Value Added Tax

Value Added Tax in Cyprus is set at 19%.

The following categories of services and goods are exempted from this tax:

  • Rents
  • Banking, financial and insurance services
  • Hospital services
  • Management services provided to mutual funds

For all property for which a planning permit was issued after 2004, the year when Cyprus joined the EU, need to pay VAT. In case of the construction or purchase of a first permanent residence in Cyprus, the value added tax is 5% (the law applies to all contracts concluded after 2011).  The law also covers citizens of countries outside the EU, under the condition that the residence they will purchase or build will be their main and permanent residence for the next 10 years. In case the recipient of the grant ceases to use the residence as a permanent one, s/he is obliged to notify the VAT commissioner and pay the difference between the rate of 5% and 19%.

Registration for VAT is compulsory for natural and legal persons with an annual turnover over €15,600. In case the amount is lower than that, registering for VAT happens on a voluntary basis.

In the table below are the VAT rates in different countries[1]:

Table: VAT rates by country
Country VAT
Cyprus 19%
UK 20%
Russia 0 – 18%
Greece 23%
Germany 19%
France 20%
Italy 22%
Spain 21%
Portugal 23%
Estonia 20%
Latvia 21%
Lithuania 21%
Bulgaria 20%
Luxembourg 17%
Malta 18%
USA 0 – 11.73%
Japan 8%
Kazakhstan 12%
India 5.5- 14.5%
China 17%
Brazil 17 – 25%

 

8. Immovable Property Tax

This tax is imposed on the property market price of immovable property (Price of 1st January 1980), with a uniform rate for legal and natural persons.

The rates for the immovable property tax are presented below:

Table: Immovable Property Tax
Property value (1/1/1980) Tax Rate  (‰) Accumulated Tax (€)
0 – 40,000 6 240
40,001 – 120,000 8 880
120,001 – 170,000 9 1,330
170,001 – 300,000 11 2,760
300,001 – 500,000 13 5,360
500,001 – 800,000 15 9,860
800,001 – 3,000,000 17 47,260
>300,000 19

 

9. Social Insurance

The contributions for social insurance are presented in the following table:

Table: Social Insurance Contributions
Contribution Rate
Employer’s contribution 7.8%
Employee’s contribution 7.8%
Social cohesion fund 2%
Redundancy fund 1.2%
Industrial Training fund 0.5%
Holiday Fund 8.0%

 

Regarding the Holiday fund, employees are entitled to 21 days of holidays annually while directors have the right to get an exemption.

[1] This table is particularly synoptic, since there are cases of countries with more than one tax rate.

 

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