CYPRUS AS AN INTERNATIONAL BUSINESS CENTRE A COMPREHENSIVE GUIDE FOR COMPANIES
Contents CYPRUS AS A BUSINESS CENTRE - OVERVIEW... 1 OUR COMPANY... 2 DIRECTOR S PROFILE... 3 OUR SERVICES... 4 CYPRUS COMPANY - MAIN DEFINITIONS... 7 PROCEDURES FOR FORMATION OF A CYPRUS COMPANY... 9 MAINTENANCE OF ACCOUNTING BOOKS AND RECORDS... 10 COMPANY LEVY... 11 CYPRUS CORPORATION TAX... 12 SPECIAL CONTRIBUTION FOR DEFENCE... 17 DOUBLE TAX TREATIES WITHHOLDING TAX... 21 VALUE ADDED TAX (VAT)... 25 PERSONAL INCOME TAX... 31 CAPITAL GAINS TAX (CGT)... 32 TAX CALENDAR... 33 ADMINISTRATIVE PENALTIES... 34 SOCIAL INSURANCE CONTRIBUTIONS... 35 SPECIAL CONTRIBUTIONS... 36 CONTACT DETAILS... 37
CYPRUS AS A BUSINESS CENTRE - OVERVIEW Due to an investors friendly legal and tax environment as well as a high quality service sector Cyprus has established itself as an international business centre, with an ever growing number of international businesses choosing it for setting up branches and subsidiaries, but mainly for setting up holding companies. Cyprus is part of the EU since 1 May 2004 and part of the EMU (Eurozone) since 1 January 2008. It has excellent infrastructure for transport and telecommunications and it is easily accessible since there are regular flight connections with all major European airports. The combination of high standard of living, low criminality, good weather conditions as well as good schools and hospitals makes it attractive for business executives, to buy properties and even relocate their families making Cyprus their home. 1
OUR COMPANY Kimberlite Management Services Limited started its operations in August 2008. It is located in the heart of Limassol, the International Business Centre of Cyprus. Its founder Polyvios Polyviou is a UK trained Chartered Accountant with many years experience in the accountancy profession and in industry. The main goal of the Company is to provide a complete portfolio of corporate, accountancy and consultancy services for companies and individuals doing business in Cyprus. As a newly formed company, our ambition is to grow together with our clients and in that respect we have a very competitive fee structure without compromising the quality of our service. To ensure the best service for our clients, we work together with a network of associate independent professionals and have invested heavily in our IT infrastructure, using leading software packages across the whole range of services we provide. According to Wikipedia: "kimberlite is a type of rock best known for sometimes containing diamonds. It is named after the town of Kimberley in South Africa, where the finding of a large kimberlite pipe in the 1870s spawned a diamond rush." Kimberlite is associated with wealth and success and at Kimberlite Management Services Limited we are committed in helping our clients achieving these goals. 2
DIRECTOR S PROFILE The founder and director of the Company is Polyvios Polyviou. Polyvios graduated in 1995 with First Class Honours in Mathematics, Operational Research, Statistics and Economics (MORSE) from University of Warwick. In 1995-1996, he continued his studies in mathematics at University of Cambridge, where he obtained the Master of Advanced Study in Mathematics. In 1996 he joined BDO Stoy Hayward in London as a trainee Chartered Accountant and in 1999 after successfully passing the relevant examinations he was admitted as an associate member of the Institute of Chartered Accountants in England and Wales. He is also a member of the Institute of Certified Public Accountants of Cyprus. In October 1999, after 7 years in the UK, Polyvios returned to Cyprus where he joined KPMG in Limassol as Audit Manager. In 2002 he was recruited by a Cyprus listed company as Chief Accountant. From April 2004 until July 2008 he worked in a big international investment group, with business activities in the CIS region as Finance Director. In August 2008, utilising the extensive experience gathered throughout the years, in the accountancy profession and in industry, Polyvios set up Kimberlite Management Services Limited. 3
OUR SERVICES Accounting Services We use one of the leading accounting software packages, developed by Microsoft, to offer an extensive range of accounting services: Book keeping and Management Reporting Cash Management Preparation of financial statements in accordance with International Financial Reporting Standards Invoicing Preparation and submission of tax and VAT returns Moreover we offer payroll services using a locally developed software, which complies with Cyprus legislation: Preparation of payroll (monthly/weekly) and issue of payslips Preparation of PAYE and Social Insurance documentation Preparation and execution of payments 4
Corporate Services Kimberlite, provides a comprehensive portfolio of services for international companies and individuals who would like to setup companies, partnerships or branches in Cyprus. The services we provide are: Incorporation of new companies Provision of shelf companies Directors Trustee shareholdings Company Secretary Registered Office Kimberlite has been accredited as an approved introducer by the major banks in Cyprus, following compliance with their high standards of due diligence in regards to KYC and Anti Money Laundering procedures. 5
Management Consulting Through our own experienced staff and in association with a network of independent professionals we can provide specialised consulting services in the following areas: Tax planning Cyprus VAT Company valuations Internal audit Due diligence work 6
CYPRUS COMPANY - MAIN DEFINITIONS Company Name The name of a Cyprus Registered Company limited by shares, must end with the word Limited or the abbreviation Ltd. The names must be approved by the Registrar of Companies and can be changed as many times as required, following decision by the shareholders. Shareholders Directors A Cyprus Registered private company must have at least one shareholder (public companies must have at least seven shareholders). The shareholders of a Company can be physical persons or legal entities. Cyprus legislation allows the use of nominee shareholders i.e. persons or legal entities holding shares in a Company on behalf of third parties, thus allowing for anonymity when this is required. There is no minimum amount for the share capital (or the number of shares) that must be invested in a Company. Every Company Registered in Cyprus must have a Board of Directors (BoD). The members of the BoD can be physical persons or legal entities. A private Company can chose to have only one director (public companies must have at least two). The BoD is the governing body of the Company and as such is legally responsible for the running of the business and the operations of a Company. There are no restrictions as to the nationality or residency status of the members of the BoD. The residency of the members of the BoD is a factor that will be taken into consideration when establishing whether the management and control of a Company is exercised from Cyprus. Company Secretary Each Cyprus Registered Company is requested to have a Company Secretary. The Company Secretary can be physical person or legal entity and again there are no restrictions as to the nationality. However for practical reasons, since the Company Secretary, will be communicating in Greek with the Cyprus Registrar of Companies and the Government authorities, it is recommended that the Company Secretary is Cypriot. The Company Secretary is responsible for maintaining the statutory records of the Company (e.g. Register of Members), calling meetings, sending notices and communicating with the Registrar and other duties of corporate administration nature. 7
Registered Office A Company Registered in Cyprus must have its registered office i.e. its official address, in Cyprus. The Registered Office can be different from the business address of a Company. Memorandum and Articles of Association The Memorandum and Articles of Association (M&A) serve as the constitution of the Company. The M&A must comply with the Cyprus Companies Law, Cap.113 and are signed by the initial shareholders of a Company (subscribers) and submitted to the Registrar for approval. The Memorandum states: The name of the Company The activities and purpose of the company The authorised share capital of the company. The Articles of Association state: The rights and obligations of the members and officers of the company Matters in regards to changes in the share capital The procedures to be followed in meetings. (A Company may select to use as its Articles of Association a set of rules specified in the Cyprus Companies Law, Cap.113 (Table A)). Changes in the Memorandum in regards to the Activities of a Company require special resolution (i.e. 75% of the shares entitled to vote) and is subject to the approval of the Court. Changes in the Articles of Association require special resolution. 8
PROCEDURES FOR FORMATION OF A CYPRUS COMPANY 1. An application is made to the Registrar of Companies for approval of a company name. An approved name can be reserved for a period of 6 months (usually the name approval procedure involves a few attempts in order for both the applicant and the Registrar to be satisfied). 2. Once the name is approved an application is submitted to the Registrar specifying: The authorised share capital of the company The share capital to be allotted upon registration The initial shareholders and their respective share allotments (subscribers to the Memorandum) The Memorandum & Articles of Association of the Company The Director(s) and the Secretary of the Company The address of the Registered Office. 3. On incorporation a number is allocated to the Company and the following certificates are issued by the Registrar: Incorporation (specifying company name and date and number of incorporation) Directors Shareholders Registered Office 9
MAINTENANCE OF ACCOUNTING BOOKS AND RECORDS All persons (either physical or legal) conducting business in Cyprus is obliged by Law to issue invoices and receipts in regards to its income. Invoices should be issued not later than 30 days from the date of the transaction, unless a written approval is obtained by the Commissioner of the Inland Revenue for late issue of invoices. Starting from 1 January 2012, a penalty of 100 per month applies for late issue of invoices. All legal persons conducting business in Cyprus are obliged by Law to prepare accounts in accordance to acceptable accounting standards, which should be audited by a registered auditor. The same applies to individuals with annual turnover exceeding 70.000. Accounting records should be updated within 4 months from the date of the transaction. From 1 January 2012, if records are not updated within prescribed deadline a penalty of 100 per quarter applies. Accounting books and records should be kept for a period of at least 6 years. 10
COMPANY LEVY In 2011, Cyprus introduced an annual levy of 350 imposed to Cyprus registered companies. For Group of Companies the total amount cannot exceed 20.000. The levy is imposed from the year of incorporation of a Company, and is payable by 30 th of June of each year. In case of delay in the payment of the levy the following penalties apply: Up to 2 months 10% 2 to 5 months 30% If the levy is not paid with 5 months, then the Company Registrar deregisters the Company. Re-registration of the Company can be made within two years with a payment of 500 annual fee. In case that the re-registration will take place after the period of two years from the date of de-registration the annual fee increases to 750. 11
CYPRUS CORPORATION TAX Overview Cyprus as a member state of the EU has a tax legislation complying with all EU Directives and at the same time maintaining advantages for international businesses and entrepreneurs. The main advantages of Cyprus tax laws are: Cyprus has the lowest rate of Corporation Tax in the EU of 12,5% Profit on sale of shares and other securities are exempt from corporation tax There is no withholding tax on interest and dividends paid to non Cyprus tax residents There is no withholding tax on royalties granted for use outside Cyprus There is no inheritance tax Capital gains tax applies only on gains from the sale of immovable property in Cyprus or from the sale of shares of a company owing such property Cyprus has signed double tax treaties with more than 40 countries around the Globe 12
Main definitions Cyprus Tax Resident A company is tax resident of the Republic of Cyprus if it is managed and controlled from Cyprus. Criteria which will be taken into consideration in determining whether a company is tax resident in Cyprus include: Permanent residency of the directors Location of board meetings Location of place where important strategic and operational decisions are made Permanent Establishment Permanent Establishment (PE) in the Republic of Cyprus means a stable base of a company which is used wholly or partly in the activities of the company. The term PE includes: Headquarters Branches Offices Factories Laboratories Quarries Scope of Tax Companies who are Cyprus tax residents are subject to Cyprus corporation tax on income earned from sources both within and outside Cyprus. Companies who are not Cyprus tax residents are subject to Cyprus corporation tax on income earned from PE in Cyprus. Corporation Tax Rates The corporation tax rate in Cyprus as of 1 January 2013 is 12,5% (previously 10%). 13
Exemptions The following types of income are exempt from Cyprus corporation tax: Passive interest income (e.g. interest on deposit accounts) Dividend income Profit from sale of shares Profits from PE outside Cyprus subject to: i. The PE does not directly or indirectly engage in more than 50% of its activities in generating investment income And ii. Foreign tax burden is not substantially less than Cyprus tax i.e. not less than 5%. Tax deductible expenses Expenses which are incurred wholly and exclusively for generating income are deducted when calculating taxable income. Such expenses include interest expense, donations to approved charities and expenses for scientific research. Non- deductible expenses The following expenses cannot be deducted from income in the computation of taxable income: Incorporation expenses for the formation of a company Company levy paid to the Registrar of Companies Expenses relating to share capital Private motor saloon car expenses and interest on loans for the acquisition of private motor saloon cars Professional tax to Local Authorities Business entertaining expenses over the amount of 17.086 or 1% of turnover, whichever is the lower Expenses not supported by invoices or other supporting documentation Wages and salaries on which employers contributions have not been paid to the relevant Funds (including Provident Funds), in the year they are due will not be tax deductible in the relevant tax year. If the contributions are paid within 2 years from the end of the relevant tax year then they will be tax deductible in that year. 14
Tax Losses Tax losses may be carried forward for a period of 5 years. Group Relief Two companies are considers belonging to the same group for tax purposes if: One is at least 75% subsidiary of the other, Or Both companies are at least 75% subsidiaries of another company. A company is 75% subsidiary of another company (holding) if the holding company holds 75% of the voting shares, and is entitled to 75% of its income and net assets in case of liquidation. Group tax losses may be set-off between two companies as long as both companies are Cyprus tax residents and members of the same group during the whole year of assessment. From 1 January 2012, a wholly owned subsidiary incorporated by its parent during a tax year will be considered to be a member of the group for tax relief purposes for that tax year. Only tax losses of any year of assessment can be set-off against taxable income of another group company. Tax losses brought forward from prior years cannot be used for Group Relief. Any payment, relating to the transfer of tax loss, from a group company acquiring the tax loss to the group company surrendering it will not be taken into account in the tax computation of neither company. Wear & Tear Allowances The following allowances, which are calculated on a straight line basis on the acquisition price of items of property, plant & equipment, are deductable from taxable income: % Plant & Machinery 10 Furniture & Fittings 10 Computer hardware 20 Application software (over 1.709) 33,33 Commercial motor vehicles 20 Commercial buildings 3 Industrial, agriculture & hotel buildings 4 Full wear & tear allowance is given in the year of acquisition of an asset and no allowance in the year of disposal. Expenses for software applications below 1.709 are deducted in the year of acquisition. 15
Foreign tax credit Any foreign tax suffered on income subject to Cyprus income tax, will be credited against the Cyprus income tax, irrespective of the existence of a double tax treaty. Special Methods of Taxation Intellectual Property Rights Payments made to persons who are non tax residents of the Republic, for intellectual property rights granted for use within the Republic are subject to 10% withholding tax. If royalty rights are granted for use outside the Republic of Cyprus there is no withholding tax. Withheld tax is payable to the Inland Revenue Department by the end of the month following the payment. In case of delays a penalty of 5% on the withheld tax is imposed in addition to interest. Expenses incurred for the development and acquisition of intangible assets is tax deductible over a period of 5 years including the year of acquisition. 80% of the net profit arising from exploitation or sale of intangible assets is tax deductible. The net profit is calculated after deducting all direct expenses associated with such income including the annual capital allowance on the intangible asset. Reorganisation Reorganisation means a merger, division, transfer of assets and exchange of shares, involving at least one company tax resident of Cyprus and company or companies which may or not be tax residents of Cyprus. Under a reorganisation scheme: The transfer of assets will not give rise to any taxable profits for the transferring company The receiving company will continue claiming wear & tear allowances in accordance to the rules that would have applied to the transferring company If both the transferring company and the receiving company are Cyprus tax residents then accumulated tax losses may be used against the income of the receiving company Any shares of a new company given to a shareholder in exchange for shares of a transferring or acquiring company will not give rise to any taxable gains These beneficial arrangements are effective in the cases of cross border mergers in the EU involving Cyprus tax resident companies since Cyprus has fully incorporated in its legislation the EU Mergers and Acquisitions Directive. 16
SPECIAL CONTRIBUTION FOR DEFENCE Cyprus tax residents are liable to Special Defence Contribution (SDC) as follows: Individuals Companies % % Interest income from Government Bonds and Loan Stocks 3 30* Other interest income 30* 30* Dividends from Cyprus resident company 20 - Dividends from non-resident company 20-75% of Rental income 3 3 *: 15% prior to 29 April 2013 Dividends Dividends paid by a Cyprus tax resident company to a Cyprus tax resident individual are paid net of 20% withholding SDC. Dividends paid by a Cyprus tax resident company to companies or to individuals who are not Cyprus tax residents are paid gross without any deductions for SDC. Dividends paid a Cyprus tax resident company to another Cyprus tax resident company, are not subject to SDC unless the dividends are paid indirectly (i.e. from an intermediate holding to its holding) after 4 years from the end of the year in which the underlying profits were earned. Dividends received by companies from non Cyprus tax resident companies are not subject to SDC. This exemption however does not apply if: The company paying the dividend engages in more than 50% of its activities in producing investment income And The foreign tax burden on the company paying the dividend is substantially lower than that in Cyprus. Substantially lower meaning less than 50% of the applicable corporation tax rates in Cyprus (currently 12,5%). 17
Deemed distribution of dividends Resident companies will be deemed to have distributed to their Cyprus tax resident shareholders 70% of their accounting profits after two years from the end of the year in which the profits were generated. Accounting profit is the profit after tax, calculated in accordance with acceptable accounting standards and excludes any revaluations of movable or immovable property. In addition to corporation tax the following taxes are taken into account when calculating accounting profit: SDC Capital Gains Tax Any foreign tax that has not been credited against Cyprus tax SDC on deemed distributions is paid by the Company, on behalf of its tax resident shareholders. If an actual dividend distribution takes place within the 2 year period then the deemed distribution is reduced by this and hence the SDC is adjusted accordingly. Similarly if a dividend distribution out of the accounting profits of a given year is made after the end of the 2 year period then the withholding SDC is reduced by the SDC paid on the deemed distribution (i.e. no withholding tax for distributions up to 70% of the accounting profits). Deemed dividend distribution does not apply to non resident shareholders (direct or indirect). In the case when a non tax resident person receives dividends from a Cyprus tax resident company, resulting from profits which at any stage were subject to deemed distribution then the SDC attributable to this person is refundable. In case of a Company disposes of an asset to an individual shareholder or to a shareholder s relatives up to second degree (including their spouses), then the difference between the market value of the underlying asset and any consideration received will be deemed as dividend contribution and SDC will apply. This will not apply in the case that the underlying asset was received by the Company by way of gift by the shareholder or by the shareholder s relatives up to second degree (including their spouses). Deemed dividend distribution does not apply to non resident shareholders. 18
Dissolution of Companies & capital reduction Companies that decide to proceed with voluntary liquidation, must submit within one month from the date of the relevant resolution, a deemed dividend declaration and pay the SDC in relation to the profits of the current year and the 2 preceding years. The aggregate undistributed profits of the five years prior to a Company s dissolution, for which no deemed distribution SDC was applied, are considered as distributed on dissolution and are subject to SDC. Any profits arising during the liquidation process will not be subject to deemed distribution, provided that such profits will be used entirely for the repayment of creditors and will not be any balance available for distribution to shareholders. Moreover any SDC cannot exceed the net value of the assets distributable to shareholders. In case of capital reduction, any amounts paid to individual (i.e. not legal persons) shareholders in excess of the amount paid as capital by the relevant shareholder, will be deemed as dividend and be subject to SDC. The above provisions do not apply if the shareholders of the Company are not Cyprus tax residents. Interest Interest derived from the normal carrying on of a business, including interest closely connected with the normal carrying on of a business is not considered interest but profit. Interest earned by individuals from Government bonds is subject to SDC at the rate of 3%. Interest earned by provident funds, from sources within the Republic of Cyprus is subject to SDC at the rate of 3%. Any other interest, whether earned from sources within or outside Cyprus, is subject to SDC at the rate of 30% (15% prior to 29 April 2013). Bank interest from Cyprus banks is received net of 30% (15% prior to 29 April 2013) withholding tax. Interest deemed to be payable to a company under the Income Tax Law (e.g. loans to related parties) is subject to SDC. Interest earned by individuals whose total income including interest does not exceed 12.000 is subject to SDC at the rate of 3%. The deduction at source however (if source in Cyprus) will be 30% (15% prior to 29 April 2013) and the individual may apply to the Inland Revenue for a refund of the extra 27% (12% prior to 29 April 2013). 19
Rent In the cases were the tenant of a property in Cyprus is a legal person, rent is paid net of withholding SDC of 2,25%. The tenant has the obligation to pay the tax withheld on a monthly basis to the Inland Revenue. When the tenants are physical persons the obligation of payment of the 2,25% SDC lies with the landlord. Credit in respect of foreign tax Credit in respect of any foreign tax paid on any income subject to SDC (e.g. withholding tax on dividends or interest) will be given against the Cyprus tax. 20
DOUBLE TAX TREATIES WITHHOLDING TAX The following tables summarise the withholding taxes provided in the double tax treaties signed by the Republic of Cyprus: PAID FROM CYPRUS COUNTRY Dividends %(*) Interest %(*) Royalties %(*) Non treaty countries nil nil nil(**) Armenia nil(32) 5(33) 5 Austria (31) 10 nil nil Belarus 5 (4) 5 5 Belgium 10 (1) 10 nil Bulgaria 5 (19) 7 (25) 10 Canada 15 15 (7) 10 (11) China 10 10 10 Check Republic nil(30) nil 10 Denmark nil(34) nil nil Egypt 15 15 10 Estonia (35) nil nil nil France 10 (2) 10 (9) nil (26) Germany 5 (2) nil nil Greece 25 10 nil (12) Hungary nil 10 (8) nil India 10 (2) 10 (8) 15 (15) Ireland nil nil nil (12) Italy nil 10 nil Kuwait (31) 10 10 (8) 5 (14) Kyrgyzstan (27) nil nil nil Lebanon 5 5(16) nil Malta 15 10(8) 10 Mauritius nil nil nil Moldova 5 (19) 5 5 Montenegro (28) 10 10 10 Norway nil nil nil Poland nil (35) 5 (8) 5 Qatar nil nil 5 Romania 10 10 (8) 5 (14) Russia 5 (6) nil nil San Marino nil nil nil Serbia (28) 10 10 10 Seychelles nil nil 5 Singapore nil 10 (23) 10 Slovakia (29) 10 10 (8) 5 (14) Slovenia 5 5(33) 5 South Africa nil nil nil Sweden 5 (1) 10 (8) nil Syria nil (1) 10 (8) 15 (13) Tajikistan (27) nil nil nil Thailand 10 15 (18) 5 (18) Ukraine (21) nil nil nil United Arab Emirates (31) nil nil nil United Kingdom nil 10 nil (26) United States of America nil 10 (10) nil Uzbekistan (27) nil nil nil 21
RECEIVED IN CYPRUS COUNTRY Dividends % Interest % Royalties % Armenia nil(32) 5(33) 5 Austria (31) 10 nil nil Belarus 5 (4) 5 5 Belgium 10 (1) 10 (16) nil Bulgaria 5 (19) 7 (25) 10 (20) Canada 15 15 (7) 10 (11) China 10 10 10 Check Republic nil (30) nil 10 Denmark nil (34) nil nil Egypt 15 15 10 Estonia (35) nil nil nil France 10 (2) 10 (9) nil (26) Germany 5 (2) nil nil Greece 25 10 nil (12) Hungary 5 (1) 10 (8) nil India 10 (2) 10 (8) 15 (15) Ireland nil nil nil (12) Italy 15 10 nil Kuwait (31) 10 10 (8) 5 (14) Kyrgyzstan (27) nil nil nil Lebanon 5 5 (16) nil Malta nil (22) 10 (8) 10 Mauritius nil nil nil Moldova 5 (19) 5 5 Montenegro (28) 10 10 10 Norway 5 (3) nil nil Poland nil (35) 5 (8) 5 Qatar nil nil 5 Romania 10 10 (8) 5 (14) Russia 5 (6) nil nil San Marino nil nil nil Serbia (28) 10 10 10 Seychelles nil nil 5 Singapore nil 10 (23) 10 Slovakia (29) 10 10 (8) 5 (14) Slovenia 5 5 (33) 5 South Africa nil nil nil Sweden 5 (1) 10 (8) nil Syria nil(1) 10 (8) 15 (13) Tajikistan (27) nil nil nil Thailand 10 15 (17) 5 (18) Ukraine (21) nil nil nil United Arab Emirates (31) nil nil nil United Kingdom nil(24) 10 nil(26) United States of America 15 (5) 10 (10) nil Uzbekistan (27) nil nil nil 22
Notes: *: Under Cyprus legislation there is no withholding tax on dividends and interest paid to non tax residents of Cyprus. Moreover there is no withholding tax on royalties granted for use outside Cyprus. **: In case where royalties are earned on rights used within Cyprus there is withholding tax of 10%.5% on film and TV royalties. 1. 15% if received by an entity controlling less than 25% of the voting power. 2. 15% if received by an entity controlling less than 10% of the voting power. 3. Nil if paid to an entity controlling at least 50% of the voting power. 4. This rate applies if the amount invested is over 200.000 irrespective of shareholding. 10% applies if shareholding is at least 25%, otherwise the rate of withholding tax is 15%. 5. 5% if received by an entity controlling at least 10% of the voting power. 6. 10% if dividend paid by a company in which the beneficial owner has invested less than 100.000. 7. Nil if paid to a Government or for export guarantee. 8. Nil if paid to the Government of the other State or to a financial institution. 9. Nil if paid to the Government of the other State or in connection with the sale on credit of any industrial, commercial or scientific equipment or any merchandise by one enterprise to another or in relation to any form of loan granted by a bank or is guaranteed from Government or other governmental organisation. 10. Nil if paid to the Government of the other State or to a financial institution or in respect to debt obligations arising in connection with sale of property or the provision of services. 11. Nil on literary, dramatic, musical or artistic work with exception on films used for TV programmes. 12. 5% on film royalties (apart from films broadcasted on TV). 13. 10% on literary, dramatic, musical or artistic work, films and TV royalties. 14. Nil on literary, dramatic, musical or artistic work including films. 15. 10% for payments of a technical, managerial or consulting nature. 16. Nil if paid by the Government of the other State, a political subdivision or a local authority, the National Bank or any institution the capital of which is wholly owned by the State or a political subdivision or a local authority or in the form of interest income from bank deposits. 17. 10% on interest received by a financial institution or when it relates sale on credit of any industrial, commercial or scientific equipment or of merchandise. 18. This rate applies for any copyright of literary, dramatic, musical, artistic or scientific work. A 10% rate applies for industrial, commercial or scientific equipment. A 15% rate applies for patents, trademarks, designs or models, plans, secret formulae or processes. 23
19. This rate applies to companies holding directly at least at least 25% of the share capital of the company paying the dividend. In all other cases the withholding tax is 10%. 20. This rate does not apply if the payment is made to a Cyprus tax resident entity by a resident of Bulgaria owing directly or indirectly at least 25% of the share capital of the Cyprus entity and the Cyprus entity pays less than the normal tax rate. 21. A new treaty was signed on 8 November 2012 which has not yet come into effect. 22. The treaty provides that the tax on the gross amount of the dividends shall not exceed that chargeable on the profits out of which the dividends are paid. 23. 7% if paid to a bank or financial institution. Nil if paid to the Government. 24. Treaty rate 15%, but local taxation provides for nil withholding tax. 25. Nil if paid to or is guaranteed by the Government, statutory body, the Central bank. 26. 5% on film royalties including films broadcasted on TV. 27. Applies the USSR / Cyprus treaty. 28. Applies the Yugoslavia / Cyprus treaty. 29. Applies the Czechoslovakia / Cyprus treaty. 30. Nil if the beneficial owner is a company (other than a partnership) which holds directly at least 10% of the capital of the company paying the dividends where such holding exists for an uninterrupted period of at least one year, otherwise 5%. 31. The new treaty which provides for the above rates has been published in Gazette of the Republic of Cyprus buy has not come into force until the time of publication of this booklet. 32. Rate of 5% applies if the beneficial owner has invested less than the equivalent of 150.000. 33. Nil if paid to the Government or to a local authority or to the Central Bank. 34. Nil if the beneficial owner is a company (other than a partnership) which holds directly at least 10% of the capital of the company paying the dividends where such holding exists for an uninterrupted period of at least one year. Nil if the beneficial owner is the other Contracting State or the Central Bank of that other State, or any national agency or any other agency (including a financial institution) owned or controlled by the Government of that other State. Nil if the beneficial owner is a pension fund or other similar institution providing pension schemes in which individuals may participate in order to secure retirement benefits, where such pension fund or other similar institution is established, recognised for tax purposes and controlled in accordance with the laws of that other State, 15% in all other cases. 35. Nil if the beneficial owner is a company (other than a partnership) which holds directly at least 10% of the capital of the company paying the dividends, where such holding is being possessed for an uninterrupted period of no less than 24 months, 5% in all other cases. 24
VALUE ADDED TAX (VAT) Introduction VAT is an indirect form of taxation imposed on goods and services sold in Cyprus, as well as the acquisition of goods from the EU and the import of goods into the Republic. Important definitions Taxable persons are those persons, either physical or legal entities, registered in the VAT Registry. Taxable supplies represent the sale of goods or services that are subject to VAT, in accordance to the VAT legislation. Output VAT is the VAT that is charged by a business to its customers via the sale of Taxable supplies. Input VAT is the VAT that is charged to a business via the acquisition of taxable supplies from its suppliers. The general mechanism under which VAT is collected by the Government is summarised below: Taxable persons charge output VAT, using applicable rates, on the sale of taxable supplies on the invoices they issue to their customers. At the same time Taxable persons pay input VAT to their suppliers via the corresponding purchase invoices. On quarterly basis Taxable persons prepare VAT returns showing total output VAT from which the total input VAT is deducted. The excess of the output VAT over the input VAT for a given quarter is payable by the 10 th of the second month following the end of the quarter under review (e.g. VAT for the quarter 1 st March 31 st May is payable by 10 th July). If input VAT is higher than output VAT then the difference is carried forward and set off against future output VAT. As a general principle excess input VAT can be refunded after a period of 3 years, although in some special cases excess VAT can be refunded earlier. VAT Rates There are four VAT rates: i. Zero rate (0%) ii. Reduced rate of 5% iii. Reduced rate of 8% iv. Standard rate of 18% (17% up to 14 January 2012 and 19% from 13 January 2014 onwards) 25
In addition to the above some supplies are exempt from VAT. The difference between zero rated supplies and exempt supplies is that if a business makes zero rated supplies then (provided it exceeds the limits for registration) it has to register for VAT and it may claim back input VAT, whereas a business making exempt supplies cannot claim back input VAT. Zero rated supplies The main supplies that are charged with zero VAT are the following: Export of goods Supply, importation and rental of qualifying aircrafts and ships Reduced rate of 5% The main supplies that are charged with VAT at the reduced rate of 5% are the following: Most food and drink products for human consumption (excluding alcoholic drinks which are charged at the standard rate) Most pharmaceutical products and vaccines Live animals for human consumption Animal food products Books, magazines and newspapers Bottled water, soft drinks and juices Confectionery products Transportation by bus Reduced rate of 8% The main supplies that are charged with VAT at the reduced rate of 8% are the following: Restaurants and catering services Hotel accommodation Transportation by taxis Exempt supplies The main supplies that are exempt from VAT are: Rent of immovable property Financial and insurance services Most medical and dental services Sale of land and second hand buildings Certain cultural, educational and sport activities Gambling & Lottery 26
Standard rate Any supply not falling under any other category is charged with VAT at the standard rate which currently is 18%. Registration VAT registration is compulsory when: a. The taxable supplies of a business exceed 15.600 during the previous 12 months. b. The taxable supplies of a business are expected to exceed the 15.600 threshold within the next 30 days. c. Provides services to VAT registered persons in other EU Member States. d. Offers distant sales with registration threshold 35.000. Businesses can voluntarily register for VAT even if the above criteria are not met, provided that they are making taxable supplies (i.e. not exempt). A business can also register voluntarily for VAT if it makes supplies that are outside the scope of VAT, with the right to claim input VAT. These are supplies that their place of supply is not Cyprus, but if it was Cyprus they would have been considered as taxable. Irrecoverable input VAT As an exception to the general rule, input VAT cannot be claimed on a number of cases including the following: Acquisitions for making exempt supplies Purchase or import of saloon cars Entertainment and hospitality expenses for customers Housing expenses of directors VAT on services Basic Rule The basic rule up to 31 December 2009 was that the place of supply of services is the place where the provider of the service belongs to. As of 1 January 2010 a distinction is made in regards to the recipient of the service: B2C (Business to Consumer) B2B (Business to Business) For B2C services the basic rule remains the same as before. Therefore the service is still considered to take place where the provider of the service belongs to. 27
For B2B services the basic rule is that the place of supply of a service is the place where the recipient of the service belongs to. There are exemptions in the application of the basic rule including the following: Land related the place where the property is located Passenger transport the place where the transport takes place in accordance to the distance covered Short term hiring of means of transport the place where the vehicle is put to the disposal of the customer Cultural, sporting, scientific entertainment and similar services the place where the activity takes place Restaurant and catering services - the place where the services are physically carried out Telecommunication, broadcasting and electronic services- From 1 January 2015 the place of supply of B2C supplies of telecom services will be the place where the customer is established or usually resides. B2C Services Services provided by a VAT registered provider in one member state to a non VAT registered customer (company or individual) in another member state will be considered as B2C. In this case the provider will have to charge and account for VAT in accordance to the VAT rates applicable in its own member state. B2B Services Services provided by a VAT registered provider in one member state to a VAT registered customer in another member state will be considered as B2B. In this case the customer will have to account for VAT, using the reverse charge mechanism, in accordance to the VAT rates applicable in its own member state. 28
VIES (VAT Information Exchange System) In order for a service provider to be able not to charge VAT when invoicing customers in other member states, the customers must communicate to the provider their VAT registration numbers, in their respective countries. The provider on a monthly basis will need to file a VIES return electronically to the VAT authorities where it is registered, totalling the value of the services provided to each customer registered in other member states. In that way, the EU aims to combat tax avoidance, by cross referencing information from all member states. The VIES returns must be filed before the 15 th of the month following the end of the month under review. All providers providing services to other Member States must register for VAT and file VIES returns irrespective of the VAT registration threshold. Changes in the time of supply of services From 1 January 2010 the time of supply (tax point) of a service is the earliest of the date that the service has been provided and the date of payment. For continuous supplies of services, the time of supply is the end of each billing or payment period. For example for services billed on a monthly basis, the tax point is the end of each month. Again if payment is done before then, the tax point is the date of payment. For continuous supplies for which no invoices or payments are done during a calendar year, the tax point is the end of that calendar year. Reverse Charge Mechanism A business receiving services, falling under the basic rule, from a provider in another EU member state or from a third country must account for VAT as if it is itself the provider of the service. Therefore the recipient of the service must be registered for VAT once the registration thresholds are exceeded. The recipient of the service will have the right to claim the VAT charged by this procedure, except in the cases where businesses are not entitled to claim input VAT (e.g. businesses making exempt supplies). 29
The reasoning behind this procedure is to make it indifferent, in respect of VAT, for a business to decide from which member state, including its own, will acquire services and hence eliminate any competitive advantages or disadvantages between providers from member states having different VAT rates. Obtaining VAT refunds Businesses wishing to claim VAT refunds from other member states must electronically submit claims to the VAT authorities they are registered with. The VAT will be refunded to the extent that the goods or services were used for making taxable supplies (i.e. for business purposes). The VAT authorities of the claimant will check the details of the claim and pass it to the VAT authorities of the member state responsible for the refund, which in turn will have 4 months to process the claim and notify whether they intend to approve the claim or whether they need further information (in which case period is extended). In the event of late payment interest is applicable. 30
PERSONAL INCOME TAX An individual is considered Cyprus tax resident if he/she spend more than 183 days in the Republic of Cyprus during a tax (i.e. calendar) year where the day of arrival is considered to be a day in the Republic and the day of departure a day out of the republic. Cyprus tax residents are taxed on their worldwide income whereas non residents are taxed only on their income earned in Cyprus. Current income tax rates for individuals are as follows: Taxable income Tax rate % Tax Cumulative tax 0-19.500 0 0 0 19.501-28.000 20 1.700 1.700 28.001-36.300 25 2.075 3.775 36.301-60.000 30 7.110 10.885 Over 60.000 35 (For tax rates of previous years click here). Expatriates are allowed a discount period of 3 years following the year they become tax residents of Cyprus, during which 20% of their income or 8.543 whichever is the smaller is exempt from income tax. New tax residents earning income from employment in the Republic in excess of 100.000 per annum are entitled to 50% deduction of their income for tax purposes for the first 5 years of employment. This incentive is given to both Cypriots and not Cypriots on the condition that prior to their employment they were not considered as Cyprus tax residents. Loans given by companies to their directors or shareholders or their relatives up to second degree, give rise to monthly taxable income for the individuals involved equal to 9% p.a. of the amount of the loan. The Company has the obligation of withholding the relevant tax under the PAYE system and paying it to the Inland Revenue. Any actual interest (up to 9% p.a.) charged by the Company will be deducted from the taxable income of the individual involved. Dividends and interest income are exempt for income tax purposes (however Cyprus tax residents pay defence tax on these at 20% and 30% respectively). 31
CAPITAL GAINS TAX (CGT) CGT applies only in the case of profits from the sale of immovable property located in Cyprus, or profits from the sale of shares of companies not listed in a recognised Stock Exchange which own immovable property in Cyprus. CGT rate is currently 20%. Taxable profit for CGT purposes is the difference between selling price and indexed acquisition cost (or indexed price as at 1 January 1980 if acquisition has taken place earlier) less any expenses incurred for the production of the gain also indexed for inflation. It has to be noted that: immovable property taxes and fees are not deductible expenses. Interest paid on loans for acquisition of immovable property is deductible but is not indexed for inflation. Individuals are entitled to the following lifetime deductions from capital gains: Disposal of primary private residence (conditions apply) 85.430 Disposal of agricultural land by a farmer 25.629 Any other disposal 17.086 CGT applies only in the case where the company whose shares have been sold owns immovable property. 32
TAX CALENDAR Date Obligation End of each month Payment of PAYE deducted from salaries of employees for the previous month. Payment of special defence contribution withheld from dividends, interest or rent paid in the previous month. Payment of withholding tax on payments, made in the previous month, to non tax residents. 31 January Submission of the declaration for deemed dividend distribution for the tax year 2010. 31 March Electronic submission of tax returns for the tax year 2011 for taxable persons (physical and legal) who prepare audited financial statements. Submission of return and payment of first instalment of the special tax levy on Credit Institutions for current tax year. 30 April Submission of personal tax returns by employees for the prior tax year. Submission of employers return (IR7) of the prior tax year. Payment of first instalment of provisional tax for current tax year by insurance companies on life insurance premiums. 30 June Payment of special defence contribution for the first half of the year. Submission of personal tax return by individuals not preparing audited financial statements. Payment of income tax for the prior tax year by self assessment by individuals not preparing audited financial statements. Payment of second instalment of the special tax levy on Credit Institutions for current tax year. 31 July Electronic submission of tax returns by employees for the prior tax year. Electronic submission of employers return (IR7) of the prior tax year. Submission of provisional tax assessment for current year and payment of first instalment of provisional tax. 1 August Payment of income tax for the prior year by self assessment by companies and individuals preparing audited financial statements. 31 August Payment of second instalment of provisional tax for current tax year by insurance companies on life insurance premiums. 30 September Electronic submission of personal tax return by individuals not preparing audited financial statements. Payment of immovable property tax for current tax year. Payment of third instalment of the special tax levy on Credit Institutions for current tax year. 31 December Submission of income tax returns for prior year for companies and individuals preparing audited financial statements. Payment of second and final instalment of provisional tax for current tax year. Payment of special defence contribution for second half of current tax year. Payment of third and final instalment of provisional tax for current tax year by insurance companies on life insurance premiums. Payment of fourth and final instalment of the special tax levy on Credit Institutions for current tax year. 33
ADMINISTRATIVE PENALTIES Administrative penalty of 100 is imposed for non submission of any tax return, within the deadline specified by the relevant Law. Administrative penalty of 200 is imposed for non submission of any tax return or for non provision of information requested in writing by the Commissioner of the Inland Revenue. The deadline given by the Commissioner in such cases should be at least 60 days. Additional tax of 5% on the tax due will be imposed if tax is not paid within the deadline specified by the relevant Law, or determined in a notice issued by the Commissioner of the Inland Revenue. Interest applies on late payment of tax the rate of which is determined by a decree issued by the Minister of Finance and applies throughout a tax year. The rate for 2013 has been set at 4,75% (5% for 2011 and 2012). 34
SOCIAL INSURANCE CONTRIBUTIONS An employer is obliged to pay contributions on the gross salary of its employees who work in Cyprus. A Company in order to be able to employ personnel in Cyprus must first obtain an Employers Registration Number from the Department of Social Security. The application for the Registration is submitted together with the names and Social Security Numbers of the first employee(s) of the Company. Each time there are joiners / leavers the Department of Social Security is notified accordingly together with the periodic (weekly/monthly) contribution statements. The Employers contributions are payable on the gross salaries (excluding discretionary bonuses) of the employees and are as follows: Description % Social Insurance 6,8 Redundancy Fund 1,2 Industrial Training Fund 0,5 Social Coherence Fund 2,0 Total 10,5 There is a maximum level of annual income, for 2013 set at 54.396, on which the contributions, excluding the contribution to the Social coherence Fund, apply. There is no maximum level of income for the contributions to the Social Coherence Fund. Employers are generally requested to contribute 8% of the gross salaries of their employees to the Holiday fund. Employers which contribute to this fund do not pay their employees during their annual holiday which must be at least 20 working days. In such case the contributions above are calculated on 108% of the gross salary of an employee. Most international companies apply for exception from the obligation to contribute to the Holiday fund on the grounds that they offer better terms (usually more than 20 working days of holidays) to their employees than the Cyprus Law minimum requirements. These companies have the obligation however to pay to their employees full salary (and the relevant employers contributions) during their annual holidays. Employees contributions are 6,8% on gross salary, and there is a maximum level of annual income on which this applies (for 2013 set at 54.396), which increases every year. Social insurance contributions are payable by the end of the month following the month that the contribution relates to. 35