Taxation of companies - 2003 onwards

Basis of taxation

• A company is taxed if resident or Cyprus.
• A company is resident of or Cyprus if it is managed and controlled in Cyprus. Incorporation in Cyprus is no longer sufficient to establish residence in Cyprus,
• A company not managed and controlled in Cyprus is not considered as resident of Cyprus.

Taxable income of resident companies.

A Cyprus resident company is taxed on its worldwide income. This includes but is not limited to profit from business activities such as trading, manufacturing, industrial, mining, agricultural, profession or vocation, dividends (for defence contribution only), interest, rentals from immovable property, royalties and profit from sale of goodwill. Taxes paid abroad are credited against Cyprus tax payable on the same income. Certain types of income such as dividends, profits from abroad and interest are taxed under special rules as analysed below.

Taxable income of non-resident companies

A non-Cyprus resident company is taxed on its profit arising from a business activity which is carried out through a permanent establishment in Cyprus.

Rental from immovable property located in Cyprus and profit from sale of goodwill In Cyprus is also taxable irrespective of the existence of a permanent establishment.

Definition of a permanent establishment

A fixed place of business through which the business of the enterprise is wholly or partly carried on and induces especially a place or management, a branch, an office, a factory, a workshop, a building site or construction for a duration exceeding three months, a mine, a gas well, a quarry or any other place of extraction of natural resources.

Corporation tax

• The taxable income of all Cypriot companies is taxed at the rate of 10%. For years 2003 and 2004 any profits above £1.000.000 are subject to an additional tax of 5%.
• Profit earned by a Cyprus shipping company which owns ships under the Cyprus flag and operates in international waters are exempt from income tax.
• Profit of ship management companies are taxed at the rate of 4, 25% unless the company elects to pay tonnage fax on the ships it manages.

Income exempt from corporation tax

• Dividend income from Cyprus and from abroad.
• Profits from the sale of securities. Securities is defined as shares, bonds, debentures, founders` shares and other securities of companies or other legal persons, incorporated in Cyprus or abroad and options thereon.
• 50% of passive interest. However, passive interest is subject to defence tax as explained below. Active interest is fully taxable and is not subject to defence tax. Active interest includes interest arising from the ordinary activities of the company as well as interest closely related to the ordinary activities of the company.
• Profits of a permanent establishment abroad. This exemption is not available when:
  - The permanent establishment directly or indirectly is engaged more than 50% in activities which result in investment income;
  
  and
  - The foreign tax suffered by the permanent establishment is significantly lower than the tax payable in Cyprus.

Tax losses

• Losses can be carried forward and set-off against future profits indefinitely.
• Croup relief (set off of the loss of one company with the profit of another) is allowed between resident companies of a group. Group is defined as:
  - One company holding at least 75% of the voting shares of the other company,
  - At least 73% of the voting shares, of two companies are held by another company
  Croup relief (is available only when both companies belong to the same group for the whole year. Losses incurred in one year can be set off only against profits of the same year.
• Partnership transferring business into a company can carry forward tax losses into the company for future utilisation.

Tax deductible expenses

As a general rule, all expenses incurred wholly and exclusively in earning the income of the company are deductible bur there are certain restrictions.

Non-tax deductible expenses

• Entertaining expenses exceeding 0, 5% of gross revenues or £5.000, whichever is the lower.
• Expenses relating to private saloon cars.
• Interest on assets not used in the business as well as interest on private saloon cars.

Withholding taxes

• There are no withholding taxes on payments to non-residents in respect of dividends and interest. There are also no withholding taxes on royalties arising from sources outside Cyprus. Royalties arising from the use of an asset in Cyprus are subject to 10% withholding tax.
• Rentals on Sims shown in Cyprus are subject to 3% withholding tax.
• Income of non-resident professionals, entertainers and athletes from activities in Cyprus is subject to a 10% withholding tax.

Mergers, reorganisations, demergers of companies

In the case of reorganisations, the Transfer of property, and the transfer of shares in exchange for shares in another company are exempt from income tax.

Reorganisations include merger, demerger, transfer or assets and exchange of shares between resident and/or nan-resident companies in Cyprus.

• A merger is:
  - One or more companies on dissolution without liquidation transfer their total net assets to a pre-­ existing company in exchange of shares or with cash consideration not exceeding 10% of the nominal value of the shares, or in the absence of nominal value the accounting value of the shares.
  - Two or more companies transfer on dissolution without liquidation, their total net assets to a new company they incorporate in exchange for shares or with cash consideration not exceeding 10% of the nominal value of the shares, or in the absence of nominal value the accounting value of the shares.
  - A company Transfers at dissolution without liquidation, its total net assets to its 1CO% holding company,
• A demerger is:
  - A company at dissolution without liquidation, transfers its total net assets to two or more existing or new companies in exchange far shares to its own shareholders or with cash consideration not exceeding 10% of the nominal value of the shares or in the absences of nominal value the accounting value of the shares.
  - A transfer of net assets taxes place when a company at absolution without liquidation transfers one or more of its divisions/activities to another company in exchange of shares.

Transitional provisions

International Business Companies (lBCs}, which during the tax year ended on 31 December 2001 had income from sources outside Cyprus from a business carried on outside Cyprus are entitled to elect to be taxed at the rate of 4,25% for a transitional period for the years 2003, 20O4 and 2005.

During this transitional period, the company must:

• Make the ejection for all three years
• Belong to non-residents.
• Earn its income exclusively from sources outside Cyprus.

The following tax reform provisions do not apply to companies electing for tax under the transitional period rules:

• Exemption from tax on profit on disposal of securities.
• Exemption from tax of dividend income from abroad.
• Exemption from tax of profits from permanent establishment abroad.
• Loss group relief.
• Exemption from tax on mergers, reorganisations, demergers.
• Credit of foreign taxes.
• 50% exemption from corporation tax on passive Interest income.
• Companies taxed under transitional rules will not be within the scope or defence contribution up to 2005.