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 stock exchange indices on titles and units in open-ended or closed-ended collective investment schemes (including, inter alia, undertakings for collective investment in transferable securities (UCITS), investment trusts and funds, mutual funds and real estate investment trusts (REITs)).
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 (under conditions).
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 of an exempt foreign PE are eligible to be offset with other profits of the Cyprus head office (and via group relief, see the Group taxation section). In such a case, future profits of an exempt foreign PE abroad become taxable up to the amount of losses previously allowed.
Taxpayers may irrevocably elect to subject to CIT foreign PE profits.
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.
A Cyprus Corporate Income Tax payer will be subject to the Cyprus exit taxation provisions in cases where assets are transferred outside the Cyprus income tax net (outbound transfers) in any of the following circumstances:
- the assets are transferred from the taxpayer’s head office (HO) in Cyprus to its PE outside Cyprus, insofar as Cyprus no longer has the right to tax the transferred assets, due to the transfer;
- the assets are transferred from the taxpayer’s Cyprus PE to its HO/another PE outside Cyprus insofar as Cyprus no longer has the right to tax the transferred assets, due to the transfer;
- the taxpayer transfers its tax residence outside of Cyprus and acquires tax residence in another jurisdiction (assets which remain effectively connected to a Cyprus PE following the transfer are excluded from the exit taxation provisions); and
- the taxpayer’s business carried on by its Cyprus PE is transferred to another jurisdiction and in doing so the taxpayer ceases to have a taxable presence in Cyprus whilst acquiring a taxable presence in another jurisdiction without becoming tax resident in that other jurisdiction, and Cyprus no longer has the right to tax the transferred assets, due to the transfer.
Under certain conditions temporary transfers of assets falling within the above mentioned categories are excluded from the scope of the exit taxation provisions.
Amount subject to tax
In the circumstances outlined above, at the time of the transfer the taxpayer is deemed to have transferred the assets at an amount equal to their market value at that time, such that any profit thereon is calculated as the difference between that market value less their value for tax purposes at that time. Such profit is subject to CIT law provisions, for example the transfer of a qualifying ‘title’ (such as shares in a company) will be exempt upon transfer as qualifying titles are exempt from Cyprus income tax.
Deferral of payment of tax
Where there is a transfer subject to Cyprus corporate income tax (refer above) it is chargeable to tax at the time of transfer. In certain cases the taxpayer has the choice to make the relevant corporate income tax payment in instalments over a period of 5 years. Deferral of payment is a possible option for the taxpayer only in cases where the transfer is to another EU Member State, or a European Economic Area (EEA) State with which Cyprus (or the EU) has an agreement on the recovery of tax claims equivalent to the mutual assistance provided for in the EU Directive (2010/24/EU) concerning mutual assistance for the recovery of claims relating to taxes, duties and other measures.
When a taxpayer opts for payment of tax in instalments then the Cyprus Tax Authority (CTA) will charge interest and additionally the CTA may in certain cases request a guarantee.
If certain future events occur, deferral of payment of tax will be immediately discontinued and the balance of the tax debt will become immediately payable.
Where assets are transferred to Cyprus from another EU Member State under the same scope as for outbound transfers (refer above) then the assets’ starting value for tax purposes in Cyprus is the value at the time of transfer as established by the transferor EU Member State (unless this does not reflect the assets’ market value at that time).
Hybrid mismatch rules
The hybrid mismatch rules cover situations of ‘double deduction’ or ‘deduction without inclusion’ relating to hybrid entities, hybrid financial instruments, hybridity involving PEs, imported mismatches and tax residency mismatches. The new tax provisions also include rules on hybrid transfers and on reverse hybrid entities.
Generally, in order for the hybrid mismatch rules to be in scope the hybridity needs to involve associated enterprises, a HO and a PE (or two or more PEs of the same entity) or a structured arrangement (this is when the mismatch is priced into the terms of an arrangement).
The hybrid mismatch rules aim to ‘neutralise’ the hybrid tax position, for example by denying a tax deduction in Cyprus for a hybrid payment made by a Cyprus entity. The ‘neutralising’ rules only apply to those taxpayers subject to Cyprus Corporate Income Tax with the exception of the reverse hybrid rule which may apply more broadly.
The Cyprus transposition law provides that the annual deduction on new equity granted under the Cyprus Notional Interest Deduction (NID) regime, as well as similar deductions granted by other jurisdictions, do not fall within the scope of Cyprus’ hybrid mismatch rules.
To the extent that a hybrid mismatch results in a double deduction for tax purposes of a payment, expense or loss, the deduction shall be denied in Cyprus, if Cyprus is the investor jurisdiction. If Cyprus is not the investor jurisdiction but rather is the payer jurisdiction then Cyprus would again deny deduction but only in the case where the investor jurisdiction has not itself denied the deduction.
Nevertheless, any deduction shall be eligible for off-setting against current or future dual inclusion income. Dual inclusion income is income which is included for tax purposes in both Cyprus and in the other jurisdiction.
Deduction without inclusion
To the extent that a hybrid mismatch results in a deduction without inclusion for tax purposes of a payment (or deemed payment between a HO and PE or between two or more PEs of the same entity), the deduction shall be denied in Cyprus, if Cyprus is the payer jurisdiction. If Cyprus is not the payer jurisdiction but rather is the recipient jurisdiction then Cyprus should tax the income except in the following cases as Cyprus has opted under the possibilities provided for in the Directive not to apply the hybrid rule of taxation of income to: (i) a payment to a hybrid entity, or, (ii) a payment or a deemed payment involving PEs and hybridity. However, refer below for the specific cases of disregarded PEs and reverse hybrid entities.
Temporarily excluded from the ‘deduction without inclusion’ rule, are, under certain conditions, hybrid mismatches resulting from intra-group financial instruments issued with the sole purpose of meeting the issuer’s loss-absorbing capacity requirements (e.g. regulatory hybrid capital). This temporary exclusion for such financial instruments applies until 31 December 2022.
The law provides that these new provisions do not apply in cases where Cyprus will include (for tax purposes) dividend income for dividends that have a deduction (for tax purposes) in the jurisdiction of their payment. This is because the rules in effect in Cyprus since 2016 already deal with this hybridity.
Imported mismatches are essentially payments from Cyprus which indirectly fund hybrid mismatches between parties outside of Cyprus. These can also result in a denial of deduction in Cyprus for the payment in cases where the other parties involved in the hybrid mismatch have not made adjustments to neutralise the hybrid mismatch.
Disregarded PE income
Cyprus requires income inclusion for tax purposes to the extent a hybrid mismatch involves income of a disregarded exempt foreign PE, unless a double tax treaty concluded with a third country (i.e. with a non-EU Member State) requires Cyprus to exempt the income. A disregard PE is one where the HO jurisdiction considers the resident taxpayer to have a PE in another jurisdiction, but the other jurisdiction views matters differently and does not consider there to be a PE in its jurisdiction.
To the extent a hybrid transfer is designed to produce withholding tax relief for more than one of the parties involved, then Cyprus shall limit the relief it grants to the Cyprus taxpayer in proportion to the net taxable income in Cyprus. A hybrid transfer is where an arrangement to transfer a financial instrument results in the underlying return on that instrument being considered for tax purposes to be derived simultaneously by more than one party in the arrangement.
Reverse hybrid entities
A reverse hybrid entity is an entity that is not considered to be a taxpayer in its jurisdiction of incorporation or establishment (e.g. a partnership where the partners are considered to be the taxpayer and not the partnership itself) but is considered as a taxable entity when viewed from the investor’s jurisdiction perspective.
A reverse hybrid entity, under conditions, shall be regarded as company a resident of Cyprus in cases where Cyprus is the jurisdiction of incorporation or establishment of the entity, and shall be subject to Cyprus Corporate Income Tax (and Cyprus Special Contribution for Defence) on its income to the extent this income is not otherwise taxed in Cyprus or in any other jurisdiction.
This rule shall not apply to collective investment vehicles set up in accordance with the Open-Ended Undertakings for Collective Investment (UCI) law and the Alternative Investment Funds (AIFs) law.
This rule has a later effective date than the other hybrid mismatch rules and shall be effective as from 1 January 2022.
Tax residency mismatches
To the extent that the dual (or more) tax residency status of a taxpayer results in a double deduction of a payment, expense or loss, Cyprus shall deny deduction insofar as the duplicate deduction is set off in the other jurisdiction against non-dual-inclusion income (dual inclusion income is income which is included for tax purposes in both Cyprus and the other jurisdiction).
In cases where the other jurisdiction is another EU Member State, the “loser” State under the tax residency tie-breaker rule of the relevant double tax treaty between Cyprus and that other EU Member State shall deny the deduction.