Corporation Tax

Basis of taxation

Companies that are Tax Residents in Cyprus are liable to tax on their worldwide income, which is received both in Cyprus and abroad. For companies, which are non tax residents, but carry out business activities through a permanent establishment in Cyprus, are liable to tax only on the income derived in Cyprus.

Companies are considered as Cyprus Tax Residents provided that they are managed and controlled in Cyprus.

Corporation tax rates

Profits (C£)	Rates(%)
Semi-government organisations	25
Other companies	10

Tax Exemptions

Dividends received (The international business units who continue with the previous tax regime (4,25%) are liable to tax on dividends received)	All
Interest derived not from the ordinary activities or from closely related activities of the company	50%
Profits from the disposal of securities	All
Profits from permanent establishments abroad (Under certain conditions)	All

Tax Deductions

The following expenses are deducted from the income of the company:

	Limit
Expenses incurred wholly and exclusively in earning the income of the company	All
Donations to approved charities (with receipts)	All
Employer's annual contributions to approved funds concerning employees' salaries	All
Expenditure incurred for the maintenance of listed buildings for which there has to be either a Preservation order or certificate by the Minister of Interior that the expenses are in respect of preservation work for restoring the building	Up to C£200, C£300, C£350 per square meter depending on the size of the building
Bad debts incurred(Provided all the procedures required have been followed)	All
Entertaining expenses incurred for business purposes	Lower of C£10.000 and 1% of gross revenues

The following expenses are not deducted from companies' income:

Expenses of a private saloon car (i.e. petrol, maintenance costs etc).
Interest attributable to acquiring private saloon cars, and to assets not used in the business is not deductible for 7 years. After 7 years this interest will be deductible for tax purposes.

Tax losses

Tax losses can be offset against profits from other activities. If in the same year there are no profits from other activities tax losses can be carried forward and set off against taxable income without time limit. This provision is applicable for all losses incurred from 1997 tax year onwards.

A partnership or a sole trader transferring business into a company can carry forward tax losses into the company and offset it with future profits.

A company in Cyprus can set off losses from a permanent establishment abroad against profits from the company in Cyprus. Any subsequent profits of the permanent establishment abroad should be taxed in Cyprus to the extent of the allowable losses, which were set off.

Group loss relief

Group loss relief is the offsetting of the tax loss of one company in the group with the taxable income of another company in the same group. Group loss relief is allowed if both companies are tax residents in Cyprus.

Group of companies exist when:

A company is holding 75% of the voting rights of the other company, or
Both the companies are 75% owned by a third company.

Conditions that should be met for utilisation of group loss relief:

The companies have been members of the group for the whole tax year.
Tax losses can only be offset with tax profits of the same year.

Reorganisations

Within the framework of reorganisation transfers of assets and liabilities between companies can be effected without any tax consequences.

Reorganisations are defined as

mergers
demergers
transfer of assets in exchange of shares and
exchange of shares

Wear and Tear Allowance rates

Wear and tear allowances are estimated as a percentage on the cost of acquisition of fixed assets and are deducted from the taxable income of a company.

Categories	Percentages of Allowance (%)

Machinery and Equipment
Machinery and Equipment	10
Furniture and fittings	10
Industrial carpets	10
Televisions and video	10
Farming, animal husbandry	15
Computer hardware and operation software	20

Vehicle
Saloon cars	Nil
Vans, taxis, trucks, buses, pick-up and motorcycles	20
Tractors, excavators, bulldozers	25

Loose Tools
Loose tools	33 1/3
Video tapes of video clubs	50

Buildings
Commercial buildings	3
Industrial, agricultural, hotels, tourist villages, tourist apartments	4
Flats	3
Metallic greenhouse structures	10
Wooden greenhouse structures	33 1/3

Application software
Cost of acquisition in excess of C£1000	33 1/3
Cost of acquisition lower than C£1000	100

Ships
Sailing vessels lighters	4.5
Steamers, tugs, trawlers	6
Motor launches	12.5
Second hand vessels	By Special Agreement
New passenger ships	6
New cargo ships	8
Second hand vessels	Over their useful economic lives

International business units (IBU)

As of 1st of January 2003, Cyprus International Business Entities are subject to corporate tax rate of 10%.

For IBU who had the option to continue with the previous tax regime (4,25%) for the years 2003, 2004 and 2005, provided that they had income or commercial activity in 2001, the following provisions do not apply during the transitional period when computing the taxable income:

Exemption of 50% on interest income
Exemption for dividend received from abroad
Exemption from disposal of securities
Group relief for losses
Expenses for reorganisations
Losses that can be carried forward start from year 2001 onwards and not from 1997
In the absence of double tax treaty no credit of foreign taxes can be given
The defence fund provisions for contributions do not apply

Insurance companies

Insurance companies are liable to tax like any other companies. But in the case where the corporation tax payable is less than 1,5% of the gross insurance premiums, insurance companies must pay the difference as additional corporation tax.

Shipping companies

Profits or Dividends payable by a shipping company registered in Cyprus, which owns ships registered on the Department of Merchant Shipping in Cyprus and operates in International waters are exempted from income tax.
Ship management companies providing services to vessels under other flags have a choice to be either:

The salaries of officers and crew of a ship under the Cyprus flag, which operates in international waters, are exempted from income tax.