TAXATION

The tax reform of 2002 has eliminated the “offshore” status of Cyprus international companies and has raised the corporate tax rate on profits from 4,25 % to 10 %. There is no distinction between local and offshore companies. At the moment it is the lowest rate of corporation tax in the European Union, not including Bulgaria where the rate is also at 10 %.

Dividends received and paid are not subject to any withholding tax in Cyprus. Profits on the disposal of securities are not subject to capital gains tax. However, operations in unquoted securities (traded in a non-recognised stock exchange) in favour of third parties may be considered as trading and any gains will be dealt with under corporation tax, if the selling price is disproportionately higher than the market value of the assets. Moreover, a special license by the Central Bank is necessary for carrying out financial services operations.

Foreign companies which are registered in EU countries and have established a branch in Cyprus, may elect that their profits arising from the branch, to be taxed in Cyprus at the rate of 10% instead of the higher rate in their respective country. In practice, as part of international tax planning our clients use a Cyprus company together with the shareholder from a “ tax-free” jurisdiction - for example, the British Virgin Islands as the payment of dividends to non resident shareholders is not liable to tax.

Other important features of the Cyprus Tax Law are firstly the fact that taxable profit is reached after deducting all expenses and charges incurred in generating that income, and secondly the ability to transfer losses to be offset against future profits for an indefinite period.

Cyprus has at present concluded more than 40 agreements on avoidance of the double taxation with the various countries of the world including Russia and Ukraine. In order to take advantage of the privileges given by such agreements, the Cypriot company should be a tax resident of Cyprus. Tax residency is defined as where the management and control of the company is exercised. The same requirement applies to the Cyprus Holding companies.

CYPRUS TAX ALERT

Companies are required to submit provisional self assessments on their estimated income for the current year by 1 August and pay the tax thereon. In the absence of any provisional self assessment, the provisional assessment is raised by the Income Tax Office based on the previous year’s tax assessment. Provisional tax is payable by three equal installments at 1 August, 30 September and 31 December in the year of assessment.

The provisional tax assessment may be revised at any time before 31 December of the tax year to which it relates. Any underpayment may be paid by self-assessment by 1 August of the following year to avoid interest being charged at a rate of 8% annually as from that date.

If the income declared for the payment of the provisional tax is lower than 75% of the income as finally determined, the taxpayer must pay, in addition to the normal tax, an amount equal to 10% of the difference between the final and provisional tax.

Overpaid tax is refunded and carries interest at a rate of 8% annually.

Tax Diary

End of the following month
Payment of tax deducted from employees salary (P.A.Y.E.).

31st January

Payment of defence fund for deemed distribution.

30th April

Submission of individuals' personal returns (IRI) for the previous year
Submission of the payroll list (IR7) for the previous year by the employers
Payment of the first instalment of premium tax for life insurance companies

30th June

Payment of the first instalment for the special contribution for defence for the first six months of the current year.
Submission of income tax return by individuals when audited financial statements are prepared.

1st August

Submission of provisional tax declaration (IR6) and payment of the first instalment of provisional tax for the current year
Payment of previous year final corporation tax under the self-assessment method
Payment of Income Tax for the previous year based on the assessment raised by the commissioner of Income Tax

31st August

Payment of the second instalment of premium tax for life insurance companies

30th September

Payment of provisional tax second instalment for the current year
Payment of immovable property tax for the current year

31st December

Submission of previous year accounts and tax returns (IR4)
Payment of provisional tax third instalment for the current year
Payment of the second instalment of special contribution of defence for the last six months of the current year
Payment of premium tax for the insurance companies - third and last instalment for the current year

Penalties
If the deadlines mentioned above are not followed, an annual interest of 9% in addition to a penalty charge depending on the circumstances will apply.