Overview of Cyprus Tax Implications on Business Plans
Cyprus has been an attractive jurisdiction for businesses and entrepreneurs due to its strategic location, skilled workforce, and favorable tax regime. This overview provides insights into the key tax implications on business plans in Cyprus, with the aim of helping companies make informed decisions when considering Cyprus as a base for their operations.
2. Corporate Income Tax
Cyprus has a competitive corporate income tax rate of 12.5%, which is one of the lowest in the European Union. This rate applies to both resident and non-resident companies on their worldwide income if the company is managed and controlled from Cyprus. However, non-resident companies are only taxed on their Cyprus-sourced income.
3. Tax Exemptions
Certain types of income are exempt from corporate income tax in Cyprus, including:
- Dividend income (subject to certain conditions)
- Profits from the disposal of securities
- Interest income not derived from the ordinary course of business or closely connected to the carrying on of a trade
- Profits of a permanent establishment maintained outside Cyprus (subject to conditions)
4. Deductible Expenses
In Cyprus, businesses can deduct expenses incurred wholly and exclusively for the production of income. Some of the common deductible expenses include:
- Employee salaries and related costs
- Rent and utility expenses for business premises
- Business travel and entertainment expenses
- Professional fees and services
- Depreciation of fixed assets
5. Intellectual Property Regime
Cyprus offers an attractive intellectual property (IP) tax regime, known as the IP Box Regime. Under this regime, 80% of the qualifying profits generated from the exploitation of IP assets (including patents, copyrighted software, and other IP rights) are exempt from corporate income tax, resulting in an effective tax rate as low as 2.5% on IP income.
6. Value Added Tax (VAT)
Cyprus applies a standard VAT rate of 19% on most goods and services, with reduced rates of 9% and 5% applicable to specific categories, such as catering services, pharmaceuticals, and certain utility services. VAT registration is mandatory for businesses with an annual turnover exceeding €15,600.
7. Transfer Pricing
While Cyprus does not have specific transfer pricing legislation, the arm’s length principle applies, and businesses must comply with the OECD Transfer Pricing Guidelines. Companies engaging in transactions with related parties should ensure they have proper transfer pricing documentation in place to support the arm’s length nature of their transactions.
8. Double Tax Treaties
Cyprus has an extensive network of double tax treaties with over 60 countries, aimed at reducing withholding tax rates on dividends, interest, and royalties and preventing double taxation of income.
9. Conclusion
Cyprus offers a favorable tax environment for businesses, with low corporate tax rates, multiple tax exemptions, and an attractive IP regime. However, it is crucial for businesses to understand the tax implications of their activities in Cyprus and to ensure compliance with the country’s tax laws and regulations. Professional advice should be sought when considering the establishment of a business in Cyprus or when planning cross-border transactions.
