Inventories generally are stated at the lower of cost and net realisable value. Last in first out (LIFO) is not permitted for taxation purposes. First in first out (FIFO) is permitted. Conformity between book and tax reporting is not required.
Profits from disposals of corporate 'titles' are unconditionally exempt from CIT. 'Titles' are defined as shares, bonds, debentures, founders’ shares, and other titles of companies or other legal persons incorporated in Cyprus or abroad and options thereon. According to a circular issued by the Cyprus Tax Authority (CTA), the term includes, inter alia, futures/forwards on titles, short positions on titles, swaps on titles, depositary receipts on titles, repos on titles, units in open or close CISs, international collective investment schemes (ICISs), undertakings for collective investment in transferable securities (UCITS), investment trusts and funds, mutual funds, real estate investment trusts (REITs), and units in stock exchange indices on titles.
Capital gains on Cyprus-situated immovable property (and on non-quoted shares directly or indirectly holding such Cyprus-situated immovable property) are taxed separately in Cyprus. See Capital gains tax in the Other taxes section for more information.
Dividends received from other Cyprus tax resident companies are exempt from all taxes, subject to certain anti-avoidance provisions.
Dividends earned from foreign investments are exempt from CIT in Cyprus, with the exception of dividends that are deductible for tax purposes for the paying company. Such deductible foreign dividends are subject to CIT and are exempt from SDC. Other (i.e. non-deductible) foreign dividend income is also exempt (participation exemption) from SDC unless:
- more than 50% of the foreign paying company’s activities directly or indirectly result in investment income, and
- the foreign tax is significantly lower than the tax burden in Cyprus (i.e. an effective tax rate of less than 6.25%).
In those cases where the above-mentioned Cyprus participation exemption on foreign dividend income is not available, any foreign withholding tax (WHT) imposition on dividends paid to the Cyprus company will be credited against the Cyprus flat SDC rate of 17% on such dividends, without the need for a DTT to be in place with the paying jurisdiction. Furthermore, in some cases, a credit for underlying foreign tax (i.e. foreign tax on the paying company’s profits) is also available.
A Cyprus corporation can distribute tax-free dividends of common stock (bonus shares) proportionately to all common stock shareholders.
See Special Defence Contribution (SDC) in the Taxes on corporate income section for a description of the tax treatment of interest income.
Royalty income is taxed under CIT, after deducting allowable expenses, at the rate of 12.5%.
Cyprus has an intellectual property (IP) box fully aligned with the provisions of the OECD BEPS Action 5 report (modified) nexus approach as well as a grandfathered IP box (see Intellectual property [IP] box in the Tax credits and incentives section for more information).
See Special Defence Contribution (SDC) in the Taxes on corporate income section for a description of the tax treatment of rental income.
Foreign currency exchange (forex) differences
Forex differences are tax neutral for CIT purposes (i.e. forex gains are not taxable and forex losses are not deductible). However, forex differences arising from trading in foreign currencies (and related derivatives) are subject to CIT.
Resident corporations are subject to tax on their worldwide income. However, foreign PE income (see below), as well as most dividend and capital gains income from abroad (see Dividend income above), may be exempt from taxation in Cyprus.
Profits from a PE abroad are exempt from CIT, subject to anti-avoidance rules set out below.
The PE exemption is applicable, unless the below anti-avoidance rules apply:
- more than 50% of the foreign PE’s activities directly or indirectly result in investment income, and
- the foreign tax on the income of the foreign PE is significantly lower than the tax burden in Cyprus (i.e. an effective tax rate of less than 6.25%).
Losses from an exempt foreign PE are eligible to be offset with other profits of the Cyprus company in Cyprus (and via group relief, see the Group taxation section). In such a case, future profits of an exempt PE abroad become taxable up to the amount of losses previously allowed.
Taxpayers may irrevocably elect to subject to CIT foreign PE profits (and utilise foreign PE losses).
Where foreign income is taxed in Cyprus, double taxation is avoided through granting tax credits for the foreign taxes, without the need for a DTT to be in place with the foreign jurisdiction. Transitional rules apply in certain cases on the granting of foreign tax credits where a foreign PE was previously exempt from taxation and subsequently a taxpayer elects to be subject to CIT on foreign PE profits.