Holding and trading in securities has a number of tax incentives in Cyprus. The following are relevant:
Gains from disposal of titles qualifying as securities are not taxable.
Titles, as per the Income tax law, include:
- Ordinary shares.
- Preference shares.
- Founder’s shares.
- Options attached to on titles.
- Debentures and bonds.
- Swaps on titles, short position on titles and futures/forwards on titles.
- Participation in Companies such as the Russian OOO and LLC, the American LLC (provided that it is subject to taxation on their profits), the Romanian SA and SRL and the Bulgarian AD and OOD.
- Repurchase agreements or Repos on titles.
- Units in open-end or closed-end collective investment schemes provided that they are incorporated, registered and operating according to the provisions of a specific and relevant legislation of the Country in which they were founded.
In case where it is not clear whether a title falls within the definition of securities, a request for ruling can be submitted to the Commissioner of Income Tax.
It should be noted that the list above does not include promissory notes and Bills of Exchange as well as complex investments like swaps, futures/forwards, gold e.t.c. Therefore gains from such titles will be subject to corporation tax at the rate of 12,5%.
It should be noted that losses from trading in titles qualifying as securities are not treated as tax deductible. In addition, any expenses relate to the acquisition of titles are not treated as tax deductible (i.e. legal fees, interest expense e.t.c.) as well as a portion of the administrative expenses is added back in the tax computation in proportion to the cost of investments in relation to the Total Assets of the Company. The only exemption to this rule is interest expense which directly relate to the acquisition of wholly owned subsidiary provided that the assets of the subsidiary constitutes business assets.
Dividends received by a Cyprus Company exempt from corporation tax. They also exempt from Special Defence Contribution (SDC) if one of the two criteria below is satisfied:
- The income of the Company paying the dividends derives by more than 50% from trading or
- The tax rate burden payable by the Company paying the dividends is not significantly lower than the tax rate applicable in Cyprus i.e. not less than 50% of the corporation tax rate of 12,5%.
If both criteria are not satisfied then SDC at the rate of 17% will be imposed in Cyprus. In such a case, any withholding tax paid overseas can be deducted from the SDC paid in Cyprus.
Interest income: The interest income is subject to taxation based on whether is classified as active or passive interest.
Active interest is the interest which is directly related or is closely related to the ordinary activities of the Company. The active interest is subject to 12,5% corporation tax and exempts from Special Defence Contribution.
Passive interest is the interest which is not related or closely related to the ordinary activities of the Company. The passive interest exempts from corporation tax but it is subject separately to 30% special defence contribution.
It is therefore very important the auditors and tax consultants to classify correctly the interest in the proper category in order the Company to pay the correct tax rate. It is tax advantageous the interest to be treated as active since the tax payable is much less than the passive interest. The active interest should be classified in the Financial Statements within the Turnover of the Company where the passive interest is generally classified within the finance income.
Fair value gains on titles are not taxable as well as fair value losses are not tax deductible.
The above Article sets out the fundamentals for correct treatment of the investments acquired by a Cyprus Company for both accounting and tax levels. The accountants, auditors and taxpayers should be aware of these issues and determine the correct treatment.
For any further clarifications on this Article please do not hesitate to contact our office.