Taxation Assessment

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Tax reform in 2002 put an end to the «offshore» status of Cyprus and raised the profit tax rate of international Cyprus business companies from 4.25% to 12,5%, making it the same rate as for the Cyprus resident companies. At the moment this is the one of the lowest profit tax rate in the EU, apart from Bulgaria, where the rate is  10%.

The earned and paid dividends are not taxable at all, as well as capital gains and securities transactions. However, you must keep in mind that transactions with securities for the benefit of third parties may be considered as trading, and any income will be subject to taxation if the sales price is disproportionately higher than the market value of assets. Moreover, to conduct financial transactions, the license of the Central Bank of Cyprus is required.

Enterprises registered in the EU countries and having branches in Cyprus, have the opportunity to pay tax not at a higher rate in their country of incorporation, but at a lower one, in Cyprus — 12,5%.

In the international tax planning practice it is widespread to use Cyprus company in conjunction with a shareholder from offshore jurisdictions — such as, for example, British Virgin Islands, as Cyprus does not levy any tax on dividends’ payments to such a shareholder.

Significant benefit is also the fact that at calculating of the taxable income there is no limit to loss and expenditure records, incurred in the previous period of the company’s activity.

At the present day Cyprus signed more than 40 agreements on avoidance of double taxation with different countries, including Russia and Ukraine. To take advantage of the benefits provided by such agreements, the Cyprus company must be a tax resident of Cyprus. This means that its management and control tools should be kept permanently in Cyprus. The same requirement exists with respect to Cyprus companies, used as a holding.

Provisional Tax

Cyprus operates a system of self-assessment for corporation tax. Companies have to pay provisional tax based on the estimated current year’s profits at the rate of 10% in three equal installments (1 August, 30 September, 31 December)

If provisional tax is not paid, the Tax authority may raise an assessment based on the previous year profits earned by the company. Moreover, a penalty of 10% is imposed on the actual tax to be paid plus interest of 5%.

If the income, declared for the prepayment of tax, is less than 75% of the final earnings of the year, the taxpayer must pay an additional amount equal to 10% of the difference between the preliminary and final payment of income tax.

Overpayment of tax payments is refunded with account of the 5% per annum.

Tax Calendar

The end of the next accounting month Pay-As-You-Earn tax (PAYE)

January 31

Payments to the Defense fund from dividends and interest from Cyprus sources.

April 30

Submission of income tax returns by individuals for the previous year (IRI). Submission of the payroll on employment taxes (IR7) for the previous year. Payment of the first part of the bonus tax for the companies involved in life insurance.

June 30

Payment of the first part of Defense tax for the first six months of the year. Submission of income tax report by individuals after the audit report preparation.

August 1

Submission of declaration on the provisional tax (IR6) and payment of its first part of the current year. Payment of corporate tax for the previous year by individual calculation. Payment of income tax for the previous year, based on calculations of the Tax Commissioner.

August 31

Payment of the second part of the bonus tax for insurance companies.

September 30

Payment of the second part of the income tax for the current year by individual calculation. Payment of property tax for the current year.

December 31

Submission of annual financial reports (IR4) for the previous year. Payment of the third part of the income tax for current year. Payment of the second part of the Defense tax for the other six months of the year. The third and final payment of the bonus tax for insurance companies for the current year.

Fines

If the specified terms of payment are not met, the taxpayer must make an additional payment in the amount of 9% per annum, in addition to the penalty charged in each specific area.

Taxation of Holding companies

In order for dividends paid by a Cypriot holding company to be exempt from taxation in Cyprus, the holding company must hold at least 1% of the share capital in a subsidiary abroad. In addition, the income received from a foreign subsidiary of the Cypriot holding company shall not exceed 50% of the income of the holding.

A Cypriot holding company can in turn pay the dividends received to its foreign shareholders (such as an offshore company from the British Virgin Islands) without paying the 15% for the Special Defence Contribution Tax.