See Foreign income in the Income determination section for a description of the foreign tax credit regime.
The Cyprus holding company
together with the fact that Cyprus does not withhold taxes on payments abroad of dividend, interest, and royalty (unless right is used in Cyprus) and its extensive DTT network, as well as full adoption and access to all EU Directives, make Cyprus an ideal 'holding company' EU jurisdiction.
The Cyprus financing company
The low headline CIT rate of 12.5% imposed on interest incomes, coupled with other tax law provisions, make Cyprus a very competitive 'financing company' EU jurisdiction.
Please also refer to Transfer pricing in the Group taxation section for recent developments regarding IGFTs.
Notional interest deduction (NID) on corporate equity
Equity introduced to a Cyprus tax resident company post 31 December 2014 (‘new equity’) in the form of paid-up share capital or share premium may be eligible for an annual NID for tax purposes, calculated as new equity x NID interest rate. New equity may be settled in cash or with assets contributed in kind. The NID is also applicable to Cyprus PEs of non-Cyprus tax resident companies.
NID calculated on new equity is deductible for tax purposes in a similar manner as for actual interest expense (see the Deductions section for more information); the NID cannot, however, exceed 80% of the taxable profit generated by the activities financed by the new equity (as calculated prior to the NID). Any NID deduction that is restricted due to the cap of 80% is not available to be utilised by way of carryforward to future tax years or otherwise. A taxpayer may elect not to claim all or part of the available NID for a particular tax year.
The NID interest rate used in the calculation is the yield on ten-year government bonds (as at 31 December of the prior tax year) of the country where the funds are employed in the business of the company plus a 3% premium. This is subject to a minimum amount, which is the yield of the ten-year Cyprus government bond (as at the same date) plus a 3% premium. Accordingly, the minimum NID interest rate is 5.302% for tax year 2019 (4.881% for 2018).
In order to tackle possible abuse of the NID, the NID provisions include specific anti-avoidance provisions and a general anti-avoidance provision for non-commercial transactions.
Intellectual property (IP) box
The CIT IP box provisions have been aligned with the conclusions of the OECD BEPS Action 5 report on the (modified) nexus approach. The new Cyprus IP box applies with retrospective effect from 1 July 2016, and the initial ('old') Cyprus IP box was closed on 30 June 2016 and is subject to transitional/grandfathering rules.
New Cyprus IP box
The new Cyprus IP box allows for a deductible notional expense calculated as 80% x qualifying profits from qualifying IP.
For the purposes of the 80% deduction, qualifying IP may be legally or economically owned and comprise:
- copyrighted software
- utility models, IP assets that grant protection to plants and genetic material, orphan drug designations, extensions of patent protection, and
- other IP that are non-obvious, useful, and novel, that are certified as such by a designated authority, and where the taxpayer satisfies size criteria (i.e. annual IP related revenue does not exceed EUR 7.5 million for the taxpayer, and group total annual revenue does not exceed EUR 50 million, using a five-year average for both calculations).
Marketing-related IP, such as trademarks, do not qualify.
Qualifying profits include, inter alia:
- royalties or other amounts in relation to the use of qualifying IP
- amounts for the grant of a licence for the exploitation of qualifying IP
- amounts derived from insurance/compensation in relation to the qualifying IP
- trading income from the sale of qualifying IP (note that capital gains on IP are excluded; as such, capital gains are not subject to taxation in Cyprus), and
- IP income embedded in the sale of products, services, or the use of processes directly related with qualifying IP assets.
In calculating the amount of the qualifying IP profits entitled to the 80% deduction, a fraction is applied to the above IP profits based on R&D activity of the taxpayer; the higher the amount of R&D undertaken by the taxpayer itself (or via a taxable foreign PE or via unrelated third party outsourcing), the higher the amount of R&D fraction (modified nexus fraction).
Old Cyprus IP box
The old Cyprus IP box closed from 30 June 2016. Under transitional/grandfathering rules, taxpayers with IPs that were already included in the old Cyprus IP box as of 30 June 2016 continue to apply the old Cyprus IP box provisions for a further five years (i.e. until 30 June 2021) for that IP.
A much shorter transitional/grandfathering period to 31 December 2016 applied in the case of IPs acquired directly or indirectly from related parties during the period 2 January 2016 to 30 June 2016, unless at the time of acquisition such IPs were already benefiting from an IP box (including the Cyprus IP box) or were not acquired with the main purpose (or one of the main purposes) being tax avoidance.
Embedded income and income earned from IPs economically but not legally owned will only qualify in the relevant transitional/grandfathering period if earned from those type of IPs that would qualify for the new Cyprus IP box (i.e. patents, copyrighted software, etc.).
Any expenditure of a capital nature incurred for the acquisition or development of such IPs may be claimed as a tax deduction in the year in which it was incurred and the immediate four following years on a straight-line basis.
In line with BEPS Action 5 recommendations, it is expected that Cyprus will spontaneously exchange information (under existing international agreements) on taxpayers who benefit from the transitional/grandfathering arrangements of the old IP box if the IP entered the old IP box in the period 7 February 2015 to 30 June 2016 for the particular taxpayer.
Exemption from CGT on acquired Cyprus immovable property
Land and land with buildings acquired at market value (excluding exchanges, donations, and foreclosures) from unrelated parties in the period 16 July 2015 to 31 December 2016 will be exempt from CGT upon their future disposal.
The Cyprus Alternative Investment Funds (AIFs) and Undertakings for Collective Investment in Transferable Securities (UCITS)
Law 124(I)/2018, to the extent amended (hereinafter, the ‘AIF Law’), defines alternative investment funds as any collective investment undertakings, including investment compartments thereof, which, collectively:
- raise capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors, and
- do not require authorisation pursuant to section 9 of Law 78(I)/2012, as amended (hereinafter, the ‘UCI Law’), or pursuant to the legislation of another member state that harmonises the provisions of Article 5 of the Directive 2009/65/EC, as amended.
The AIF Law allows for three types of AIFs to be registered in Cyprus:
- Alternative Investment Funds with Limited Number of Persons (up to 50) (AIFLNPs).
- Alternative Investment Funds with Unlimited Number of Persons (AIFs).
- Registered AIFs (RAIFs).
The various legal forms in which either type of AIFs can manifest are as follows:
- Variable capital investment company (VCIC).
- Fixed capital investment company (FCIC).
- Limited partnership (LP).
- Common fund (CF).
The UCI Law defines UCITS as undertakings the sole object of which is the collective investment in transferable securities and/or other liquid financial instruments as referred to in section 40 (1) of the UCI Law, of capital raised from the public, which operate on the principle of risk-spreading, and the units of which are, at the request of investors, redeemed or repurchased, directly or indirectly, out of these undertakings’ assets.
UCITS can take the following legal forms:
Taxation of funds
Funds that are opaque for tax purposes and managed and controlled in Cyprus are tax resident in Cyprus and are subject to the general provisions of the Cyprus tax framework.
In the case of funds that have compartments, each compartment is assessed separately for tax purposes, subject to the provisions of the law.
Under circumstances and depending on the legal form of the fund, some funds may be transparent for tax purposes.
Additional key provisions that are relevant to funds are set out below:
Sale of fund units
There is no CGT on the gains arising from the disposal or redemption of units in funds unless the fund owns immovable property in Cyprus.
However, even if it owns immovable property in Cyprus, no CGT arises if the fund is listed on a recognised stock exchange.
The subscription, redemption, conversion, or transfer of a fund’s units should be exempt from Cyprus stamp duty.
No creation of a permanent establishment (PE)
Based on the Cyprus tax legislation, no PE will be deemed to arise in Cyprus in cases of:
- investment into Cyprus tax-transparent investment funds by non-resident investors, and
- management from Cyprus of non-Cyprus investment funds.
The management fee charged for the provision of collective management services to investment funds is exempted from VAT, provided certain conditions are met.
Audiovisual industry incentives
Audiovisual tax exemption
Profits of corporate persons from the production of films, series, and other related audiovisual programs in Cyprus are exempt from CIT.
The audiovisual tax exemption shall not exceed 35% of the eligible production expenditure incurred in Cyprus. The amount of audiovisual tax exemption, subject to certain criteria and conditions, shall not exceed 50% of the corporate person’s taxable income from the production.
The audiovisual tax exemption, to the extent that it is not granted due to the above percentage limitation, will be carried forward and be granted within the next five years, subject to the above percentage limitation.
Investments in audiovisual infrastructure and technological equipment
Small and medium enterprises (SMEs) investing in audiovisual infrastructure and technological equipment related to the audiovisual industry are entitled, subject to certain criteria and conditions, to deduct from their taxable income the value of such investment in the year the amount was invested.
The maximum tax deduction is 20% of the eligible infrastructure and technological equipment expenditures for a small enterprise and 10% for a medium enterprise.
The tax deduction, to the extent that it is not granted due to the above percentage limitation, will be carried forward and be granted within the next five years, subject to the above percentage limitation.
The investment in technological equipment related to the audiovisual industry needs to remain in Cyprus for at least five years.