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Tax Reform

On the 15th July 2002 the Government of the Republic of Cyprus published the new legislation reforming tax in Cyprus. This new legislation aims to conform with EU tax regulations and legislation in view of Cyprus' imminent accession to the Union, abidance with the OECD code of conduct regarding company taxation, simplification of the current tax system and transparency, while maintaining and improving its status in the international marketplace. The new legislation is effective as of 1st January 2003 except for some provisions, which are effective as of 2002, as set out below.

Changes for 2002:

Taxation on Individuals

  • Decrease in allowances for individuals
  • Increase in the tax-free income for individuals
  • Abolition of special contribution for defence on wages and pensions

Taxation on Companies

  • Increase in special contribution for defence on interest to 10%

Other

  • Increase in VAT rate

Changes for 2003:

Taxation on Individuals

  • Resident and non-resident status
  • Taxation of resident individuals
  • Taxation of non-resident individuals
  • Changes in allowances

Taxation on Companies

  • Abolition of distinction between local companies and international business companies- Resident and non-resident status
  • Taxation of resident companies
  • Taxation of non-resident companies
  • Corporation tax for entities is set at 10%
  • Abolition of restrictions regarding losses
  • Abolition of special contribution for defence for companies except for dividend and interest income
  • Transitional provisions

Other

  • Immovable Property Tax
  • Further increase in VAT rate
  • Stamp Duty
  • Capital Gains Tax

Changes for 2002:

Taxation on Individuals

  • Decrease in allowances for individuals. As of 1 January 2002 tax allowances previously made for individuals with regards to marriage, children and old age are abolished.
  • Increase in the tax-free income for individuals. All individuals who are residents in Cyprus will be taxed at the following rates for the taxable year 2002:

    Chargeable income Tax Rates
    Up to CYP 9.000 NIL
    9.001 - 12.000 30%
    12.001 and above 40%
  • Abolition of special contribution for defence on wages and pensions. As of July 2002 special contributions for defence from the following persons’ incomes are abolished:
    • Employees
    • Self employed
    • Retirees

Taxation on Companies

  • Increase in special contribution for defence on interest to 10%. Interest income is subject to special contribution for defence where the company is a resident of Cyprus, which has increased from 3% to 10%.

Other

  • Increase in VAT rate. As from 1 July 2002 the standard VAT rate increases from 10 % to 13 %. With the abolition of International Business Companies (IBCs) for VAT purposes as of 1 February 2002, the distinction between them and local companies is eliminated and IBCs are subject to the same tax provisions as local companies. It has also become compulsory for some IBCs to register with the VAT authorities and voluntary for others, depending upon the transactions carried out by the company and the place from where they are carried out. However, often the scope of their activities falls outside that of VAT and where they register voluntarily they can recover any input VAT on expenses made in Cyprus.

Changes for 2003:

Taxation on Individuals

The terms citizen of the Republic of Cyprus and alien have been abolished to prevent such discrimination and the term resident of the Republic of Cyprus is added.

An individual is considered a resident in Cyprus if he lives in Cyprus for one or more periods, which exceed the total of 183 days per fiscal year.

Taxation of resident individuals

All individuals who are residents of Cyprus are taxed at the following rates:

For the taxable year 2003:

Chargeable income Tax Rates
Up to CYP 9.000 NIL
9.001 - 12.000 20%
12.001 - 15.000 25%
15.001 and above 30%

For the taxable year 2004:

Chargeable income Tax Rates
Up to CYP 10.000 NIL
10.001 - 15.000 20%
15.001 - 20.000 25%
20.001 and above 30%

Residents are taxed on the following income gained in Cyprus or abroad:

  • Profits from a business activity including trading, manufacturing, industrial, mining, agricultural profession or vocation.
  • Rentals from immovable property and royalties.
  • Profit from sale of goodwill.
  • Employment income including benefits.
  • Pensions.

Taxation of non-resident individuals

All non-resident individuals are taxed on the following:

  • Profit from a business activity, which is carried out through permanent establishment in Cyprus.
  • Rentals from immovable property located in Cyprus.
  • Profit from sale of goodwill.
  • Pensions in respect of employment exercised in Cyprus, except for pensions from Government or local authority funds.
  • Emoluments received from employment exercised in Cyprus.

Changes in allowances

Allowances are granted to contribution to the following funds:

  • Social security contributions
  • Life assurance premiums
  • Contributions to approved provident funds and pension schemes
  • Contributions to approved medical schemes
  • An employee who was resident outside Cyprus and moves to Cyprus to be employed by a Cypriot employer, can claim an exemption of 20% of his salaried income up to a maximum annual amount of CYP 5,000 during the first three years of his stay in Cyprus. This exemption can be first claimed in the following year of his move to Cyprus.

Taxation on Companies

Abolition of distinction between local companies and international business companies- Resident and non-resident status. The differentiation between local and international business is abolished and the taxation of companies will be based on tax residency. A company is considered a resident of Cyprus if it managed and controlled in the Republic.

Taxation of resident companies

The taxable income of resident companies is that arising or derived from sources within and outside Cyprus from the following sources:

  • Profits from a business activity including trading, manufacturing, industrial, mining, agricultural profession or vocation.
  • Interest.
  • Rentals from immovable property and royalties
  • Profit from sale of goodwill.

Taxation of non-resident companies

The taxable income of non-resident companies is that arising from the following incomes:

  • Profits from a business, which is carried out through a permanent establishment in Cyprus.
  • Rentals from immovable property located in Cyprus.
  • Profit from sale of goodwill.

Permanent establishment

Permanent establishment is accomplished with establishment of a fixed place of business through which the business of the enterprise is wholly or partly carried on, and includes:

  • A place of management branch or office
  • A factory or workshop
  • A mine, oil gas well or quarry etc
  • A building site, construction or installation project, which lasts more than three months.

Corporation tax for entities is set at 10%

The corporation tax is 10% applicable to all taxable income and an additional tax at 5% will be imposed on all company profits exceeding CYP1.000.000 for the years 2003 and 2004.

In addition, profits of ship management companies are taxed at the rate of 4.25%, unless the company elects to pay tonnage tax on the ships it manages instead.

Abolition of restrictions regarding losses

While losses were allowed to be carried forward only for five years, under the new legislation they may now be carried forward indefinitely.

Losses may also be offset against profits from another activity and group loss relief is introduced in respect of the loss for the year between resident group companies.

Special contribution for defence for companies is abolished, but is levied for the following types of income:

  • Dividend income in the case where the shareholder is resident of Cyprus is subject to special contribution at a rate of 15%.

Interest income is subject to special contribution at a rate of 10% in the case where the company is a resident of Cyprus. However, interest income earned from usual trading activities is not subject such contribution.

Transitional provisions

Existing international business companies that had income from their activities in 2001 exclusively from abroad, may choose to continue to be taxed as before for the three year transitional period of 2003, 2004 and 2005.

Other


Immovable Property Tax

Immovable property tax is increase to the following rates:

Property Value Tax Rates
Up to CYP 100.000 NIL
100.001 - 250.000 2.5 %
1250.001 - 500.000 3.5 %
500.001 and above 4 %

Further increase in VAT rate

As from 1 January 2003, the standard VAT rate shall increase further from 10% to 15%.

Stamp Duty

The exemption from stamp duty formally enjoyed by international business companies is abolished with regards to contracts entered into for formal business transactions and only reorganisations, mergers, acquisition and amalgamation of companies shall be exempt from stamp duty.

Capital Gains Tax

Capital gains tax shall only be imposed on income from immovable property located in Cyprus and from shares in companies, which own immovable property in Cyprus and whose shares have not been entered into any stock market.


The above is only intended for general guidance. Mouaimis & Mouaimis will be able to provide you with any information in relation to legal or any other requirements with regard to the taxation system in Cyprus.

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