Cyprus is a well-known destination for investors. The local government has designed and prepared the last few years many incentives to attract investments and relocation of businesses in Cyprus. The Cyprus tax regime, is an important incentive itself and together with the rest of the mechanisms and legislations make the country one of the best destinations for international enterprises to come and operate. The last few years international enterprises from various sectors have relocated and now operate under the European standards enjoying security and at the same time attractive tax legislation. This supports the fast development of the companies and provides financial security and stability in a competitive and volatile business environment. Read below some of the most important incentives for enterprises. At the same time incentives such as citizenship and personal tax are reasons entrepreneurs are relocating in Cyprus.
Full tax exemption on:
- Profit from the sale of securities
- Dividends paid which are tax deductible from the paying co.
- Interest that is not arising from the ordinary type of business
- Profits of a Permanent Establishment under certain criteria
- Gains relating to foreign exchange differences (forex) (that are not arising from trading of related derivatives and currencies)
Partly tax exemptions:
Intellectual Property income:
80% of the net profit as calculated in the nexus approach derived by a qualify intangible assets in form of royalty income, embedded income and other qualify income, in effect from 1/7/2016 (new Cyprus IP regime). The previous IP Regime (from 1/1/2012) is deductible the 80% of the net profit any royalty income, embedded income and other qualifying income derived from qualifying intangible assets.
Tax deductible expenses (among others):
Notional Interest Deduction:
- Equity introduced to a company as from 1 January 2015 (new equity) in the form of paid-up share capital or share premium is eligible for an annual notional interest deduction (NID). The annual NID deduction is calculated as an interest rate on the new equity, and cannot exceed 80% of the taxable profit derived from assets, financed by new equity. The relevant interest rate is the yield on 10 year government bonds (as at December 31 of the prior tax year) of the country where the funds are employed in the business of the company plus a 3% premium (subject to a minimum amount which is the yield on the 10 year Cyprus government bond as at the same date plus a 3% premium).
- Interest expense incurred for the direct or indirect acquisition of 100% of the share capital of a subsidiary company will be treated as deductible for income tax purposes provided that the 100% subsidiary company does not own (directly or indirectly) any assets that are not used in the business. If the subsidiary owns (directly or indirectly) assets not used in the business the interest expense deduction is restricted to the amount which relates to assets used in the business. This applies for acquisitions of subsidiaries from 1 January 2012.
- Donations to approved charities.
- Any expenditure incurred by a company or by an individual for acquisition of shares in innovative enterprises are tax deductible, up to 31/12/2016. As from 1/1/2017 the Law provides a more elaborate tax incentives in line with the General Block Exemption Regulation of the European Union in order to boost and promote entrepreneurship and innovation in Cyprus. According to the new law, the innovative company should allocate at least 10% of its operating expenses on research and development in at least one of any of the last three years.
Special Tax treatment
- The legislation allows non community vessels to enter the tonnage tax regime provided the fleet is composed by at least 60% community vessels. If this requirement is not met, then non community vessels can still qualify if certain criteria are met.
- The Merchant Shipping Legislation fully approved by the EU provides for exemption from all direct taxes and taxation under tonnage tax regime of qualifying ship owners, charterers and ship managers, from the operation of qualifying community ships (ships flying a flag of an EU member state or of a country in the European Economic Area) and foreign (non-community) ships (under conditions), in qualifying activities.
- The legislation includes an “all or nothing” rule, meaning that if a ship-owners/ charterer/ ship manager of a group elects to be taxed under the tonnage tax regime, all ship owners/ charterers/ ship managers of the group should elect the same.
- Exemption is also given in relation to the salaries of officers and crew aboard a Cyprus ship.
Special Defence Contribution:
Special Contribution for Defence is imposed on dividend income, ‘passive’ interest income and rental income earned by companies tax resident in Cyprus and by individuals who are both Cyprus tax resident and Cyprus domiciled.
Legal entities are subject to Special Contribution for defence tax if the company is a tax resident in Cyprus . Prior to 16 July 2015 individuals were subject to Special Contribution for defence if they were tax resident in Cyprus . As from 16 July 2015 individuals are subject to Special contribution for defence if they are both Cyprus tax resident and Cyprus domiciled.
An individual is domiciled in Cyprus for the purposes of Special Contribution for Defence if (s) he has a Succession Law (with certain exceptions) or if (s)he has been a tax resident in Cyprus for at least 17 out of the 20 tax years immediately prior to the tax year of assessment. Anti-avoidance provisions apply.
Cyprus Citizenship by Investment:
On the basis of the Scheme, a non-Cypriot citizen, who meets certain economic criteria, either personally or through a company/companies in which he/she participates as a shareholder – in proportion to his holding percentage, or through investments done by his/her spouse or jointly with the spouse or even as a high-ranking senior manager of a company/companies that meets one of the economic criteria, may apply for the acquisition of the Cypriot citizenship through naturalization by exception.
The applicant should have made the necessary investments during the three years preceding the date of the application and must retain the said investments for a period of at least three years as from the date of the naturalization.