New Tax Legislation for International Business Companies

As from 01.06.2002 the house of Parliament of Cyprus introduced new tax legislation for International Business Companies. As from 01.01.2003 all companies registered after 31.12.2001 will be taxed at the rate of 10%. Companies registered before 31.12.2001 and have declare income will be taxed with the rate of 4.25% until 2005.

Below we give you the main provisions of the new tax law:

  • The definition of resident of Cyprus is introduced. A company is resident in Cyprus if its management and control is in Cyprus.
  • There is no longer a distinction between local companies and International business companies (IBCs). The taxable profits of all Cypriot companies will be taxed at the rate of 10%. Existing IBCs that had income from their activities at 31 December 2001 can choose to be taxed with the rate of 4,25% until the end of the fiscal year 2005 (but certain tax exemptions provided by the new legislation will not be available).
  • Dividend income from abroad and from Cyprus is wholly exempt from corporation tax.
  • Profits earned from a permanent establishment abroad are fully exempt from corporation tax.
  • No taxation on the profits from the disposal of securities for all the companies that are residents of Cyprus. “Securities” are defined as shares, bonds debentures founders` shares and other securities of companies or other legal persons, incorporated under the law in Cyprus or abroad and options thereon.
  • Abolition of the 5 year restriction for the carrying forward of losses. No time restriction on the carrying forward of losses.
  • Losses of a company can be set off against profits of another company of the same group.
  • In order to conform with EU, the new tax legislation adopts the appropriate EU directive which enables without tax implications reorganizations, mergers acquisition and amalgamations of companies.
  • Abolition of 10% minimum tax on utilization of losses brought forward from previous years.
  • 50% of the interest income of a company resident of Cyprus is exempt from corporation tax. However interest income earned from the trading activities of a company is fully taxable.
  • For 2002, 20% of the interest income earned by a company resident of Cyprus is exempt from corporation tax.
  • Abolition of reduced rates for Income Tax for profits from exports.
  • Abolition of exemptions available for the importation of foreign exchange from activities abroad.
  • No withholding tax on the payment of dividends, interest and royalties to non-resident of Cyprus.
  • There are special rules for an additional special tax for 2002, 2003 and 2004 for semi-government bodies and companies that are not controlled by foreigners.

Special contribution of defence for entities

  • Abolition of special contribution for defence for companies.
  • Dividend income is subject to special contribution for defence at the rate of 15% in the case where the shareholder is resident of Cyprus. In the case where a company resident of Cyprus does not proceed with the distribution of a dividend two years after the end of the fiscal year on which profits have been earned, 70% of the profit will be considered as distributed (deemed distribution). In the case where the shareholder is non-resident of Cyprus there is no deemed distribution of dividends.
  • Interest income is subject to special contribution for defence at the rate of 10% in the case when the company is resident of Cyprus. Interest income earned from usual trading activities is not subject to special contribution for defence (from 1 July 2002).

Income tax for individuals

  • An individual is resident of Cyprus if he lives in Cyprus for one or more periods which exceed the total of 183 days per fiscal year.
  • All individuals who are residents in Cyprus are taxed at the following rates:

For tax year 2002

Chargeable income
Cyprus Pounds

Tax rates
%

Up to 9,000

Nil

9,001 – 12,000

30

12,001 and above

40

For tax year 2003

Chargeable income
Cyprus Pounds

Tax rates
%

Up to 9,000

Nil

9,001 – 12,000

20

12,001 -15,000

25

15,001 and above

30

For tax year 2004

Chargeable income
Cyprus Pounds

Tax rates
%

Up to 10,000

Nil

10,001 – 15,000

20

15,001 -20,000

25

20,001 and above

30

  • Dividend income from abroad and from Cyprus is fully exempt from income tax.
  • The whole amount of interest income is fully exempt from income tax. For 2002, interest income of CYP600 plus 50% of amount exceeding CYP600 is exempt from income tax.
  • No taxation on the profits from the disposal of securities for individuals that ate residents of Cyprus. “Securities” are defined as shares, bonds debentures founders’ shares and other securities of companies or other legal persons, incorporated under the law in Cyprus or abroad and options thereon.
  • Abolition of personal allowances and deductions for individuals who are residents of Cyprus including married allowances and allowances for children. Social grants will be provided in lieu of the allowances abolished.
  • Abolition of reduced income tax rates for expatriates working in international business companies. For non-Cyprus residents taking up employment in Cyprus a special exemption from income tax will apply for the first three years of their employment in Cyprus amounting to 20% of income earned or CYP5.000 per annum whichever is the lower.
  • Profits of an individual earned from permanent establishment abroad are wholly exempt from income tax.

Special contribution for defence on individuals

  • Abolition of special contribution for defence on employees, self-employed persons and retirees (from 1July 2002).
  • Dividend income is subject to special contribution for defence at the rate of 15% in case where the shareholder is resident of Cyprus.
  • Interest income is subject to special contribution for defence at the rate of 10% in case where the individual is resident of Cyprus.

In case where the total annual income including interest income does not exceed CYP7.000, the interest income is subject to special contribution for defence of 3%. Individuals earning interest income from saving bonds, development bonds and deposits with the Housing Finance Corporation including interest earned by a provident fund will be subject to special contribution for defence at 3% (from 1 July 2002).

Value Added Tax (VAT)

  • VAT rate is increased from 10% to 13% as from 1 July 2002.

Immovable property tax

Immovable property tax is imposed on immovable property situated in Cyprus and the rates are amended as follows:

Property value
Cyprus Pounds

Rate
%

Up to 100,000

100,001 – 200,000

2.5

250,001 -500,000

3.5

500,001 and above

4

 

 

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