Advantages of Cyprus tax system

Tax optimization is the overriding factor influencing any business owner’s decision as to where to establish his company abroad.

In recent years, Cyprus has become an extremely popular jurisdiction, where one can find a lot of advantages in terms of business matters. The tax system can be considered as one of such advantages of the Republic of Cyprus.

The state uses the mixed principle of taxation: residents (individuals and companies) pay tax on income received both in Cyprus and outside, while in respect of non-residents only income accrued or derived from sources located in Cyprus is taxed.

In this regard, the existence of double taxation treaties concluded with more than 60 countries of the world makes it possible to effectively conduct business in an international environment with minimal tax deductions. Such agreements often set forth a relatively low tax rate, as well as the ability to avoid being taxed on the same object twice in two countries simultaneously, if the rules of residence overlap, which, in a, greatly simplifies company’s tax planning.

The tax rate on corporate income in Cyprus is attractively low for any type of the company – 12.5%. Moreover, many types of income (such as dividends, interest income, income from the sale of securities, from loan restructuring, profit from a permanent establishment, etc.) are exempt from taxation.

It can be observed that business pays considerable attention to the availability of the withholding tax in the country when choosing an appropriate jurisdiction. In accordance with Cyprus tax law, dividend and interest payments made by Cyprus tax residents in favor of non-tax residents are exempt from income tax at source of payment. Furthermore, income from the shares sale and purchase is exempt from taxation, and capital gains tax is not charged as well (with some exceptions, for example, in case of the sale of real estate located within the Cyprus territory).

The rules for the value-added tax (VAT) taxation of sales of goods and the provision of services provide for three types of rates: the main one (19%) and two types of reduced rates (9% and 5%). However, these rules do not apply to the company if its annual income from taxable sale of goods and / or services does not exceed EUR 15,600.

Undoubtedly, the introduction of a special, preferential regime for the use of intellectual property, the so-called “IP box regime”, is significant in terms of tax planning for every potential or existing Cyprus businesses. It is related to expenses incurred by the taxpayer for the research and development of intellectual property, and provides for a possibility of a conditional deduction of 80%, which can be applied when calculating taxable income to qualifying profits from the use and / or disposal of such assets. In addition, capital gains resulting from the disposal of an asset are fully exempt from income taxation.