Cyprus company taxation
Cyprus Company, taxation and declaration
Cyprus tax-resident companies are required to submit a Provisional Tax Declaration by 31 July of each year, in which they must estimate their taxable profit for the whole year. The resulting tax (at 12,5%) is then paid in 2 equal instalments, the first on 31st July and the second on 31st December. If no taxable profit is expected, there is no need to submit a nil return (the tax authorities will not accept “Nil” returns).
More details regarding this system is in the explanatory note 1 below.
As you will see in the note, penalties apply if the estimated taxable profit declared for the year is significantly lower from the actual taxable profit as will be finally determined by the Income Tax Office.
If you believe that the companies you represent may have taxable profits in 2016, please contact us as soon as possible in order to arrange so that a relevant tax return is filed and the tax is paid on time.
In order to enable you to estimate your taxable profit, explanatory note 2 below briefly describes how some common types of income are taxed in Cyprus. As you will see, most holding companies will not have income subject to income tax (although they may have income subject to Special Defence Contribution, but this tax is not dealt with in the Provisional Tax Declaration). However, it is important to consider the company’s individual circumstances carefully.
EXPLANATORY NOTE 1
PROVISIONAL TAX DECLARATIONS
Under the provisions of the Assessment and Collection of Taxes Laws of Cyprus, a company is required to estimate its taxable annual profit each year by completing and filing a Provisional Tax Declaration by 31st July annually. The tax due of 12,5% is payable in two equal instalments as follows.
- 1st instalment: by 31st July
- 2nd instalment: by 31st December
The following should be taken into consideration when preparing and submitting the Provisional Tax Declaration:
- If the temporary tax assessed in the Provisional Tax Declaration is less than 75% of the final tax liability (as determined by the Income Tax Office), a surcharge of 10% will be imposed on the difference between the two amounts.
- Any delayed tax payments, including the two instalments referred to above, are subject to 4% interest per annum followed by 5% penalty on the amount of the instalment due. Any over payment of tax will be refunded along with added interest of 4% per annum.
- Revised Provisional Tax Declarations can be filed with the Income Tax Office during the period from 31st July to 31st December if it becomes apparent during this period that the Company’s actual taxable profit for the year will be significantly different to that declared in the initial assessment. Upwards revision can be made for any amount whereas downwards revision can be made up to the amount already paid through the first instalment. The final tax instalment will also be altered in line with the revised assessment and, in the case of upward revision, interest will also be calculated on the amount of the resulting underpayment of previous instalment.
EXPLANATORY NOTE 2
TAX TREATMENT OF TYPICAL HOLDING CYPRUS COMPANY INCOME
Please note that this note deals only with Income Tax matters and does not address other taxes (e.g. Special Defence Contribution, Capital Gains Tax and VAT).
Typically, the income of a holding company would normally fall under three categories:
- Dividend income
Dividend income is exempt from income tax.
Interest income which is deemed not to be from, or closely related to, a company’s ordinary business activities is exempt from income tax. In the case where the interest is considered to have been earned by a company in the ordinary course of business or where the interest is closely related to the ordinary activities of the business, the interest will be subject to income tax and should be included in the income tax return. An example of such interest income would be that generated by a bank (current a/c) or in a company which is used primarily as a group financing vehicle.
- Trading/Capital Gain on disposal of investments
Any capital or trading gain arising from the disposal of “titles” – shares or similar investment instruments – is exempt from taxation (except if the company owns immovable property in Cyprus). If you are in doubt whether a certain instrument is included in the definition of “titles”, please contact us.
As you will see, in most cases, the only income subject to income tax which would arise in a holding company is interest earned in case the company is being used as a group finance vehicle. A holding company which is used to hold shares in subsidiaries or which buys and sells investment will, in most cases (please see note for income from hybrid instruments below), not have any income subject to income tax.
It is worth noting that tax losses incurred in any one year, can be carried forward and set off against future profits in the next five years ( i.e. in the calculation for year 2016 profits we can only include losses incurred in the tax years 2011 and onwards. Therefore any losses incurred in years 2010 and before, should not be taken into consideration).
Losses deriving from the exploitation of Intellectual Property
Any losses deriving from the application of the special IP regime provisions must be restricted to 20% for Group relief purposes (to be surrendered to other companies of the group) or for carrying forward to subsequent years.
This new amendment in the Income Tax Law is applied retrospectively from 1/1/2012.
Expenses associated with non-taxable activities should be ignored for calculating the estimated taxable profit (i.e. expenses incurred for the sale of shares should not be taken into consideration to decrease the estimated taxable profit).
Cyprus company. Income from Hybrid Instruments
Please note that as from 1st January 2016 to comply with the Parent Subsidiary Directive provisions, dividends will only be exempt from Income tax provided that they were not tax-deductible by the paying company.
In case where the exemption does not apply, the income will not be considered as “dividend income” for Special Defence Contribution purposes i.e. it will only be taxable under income tax.
Cyprus company. Foreign exchange differences
Any foreign exchange differences arising from transactions (either realised or unrealised) which are not triggered as a result of trading in FX, must be reversed (adjusted) for tax purposes. The companies trading in FX can elect irrevocably for any unrealised exchange differences to be adjusted. Such election is made through a special tax form.