No tax on capital gains in Cyprus: The Perfect Jurisdiction for International Investors

Cyprus is the perfect jurisdiction for international investors in equity and securities.

Why? Because they pay 0% tax on gains from their investments. Legally, and without conditions.

IN A NUTSHELL:

– no tax on gains from the disposal of securities, incl. company shares;

– no tax on income from foreign dividends;

– the ‘Notional Interest Deduction’ can reduce the tax burden on taxable company income by 80%.??

No tax on capital gains in Cyprus: Which types of investors is Cyprus perfect for?

The rule of ‘No tax on capital gains in Cyprus:’ has attracted many private and corporate investors to Cyprus, including family offices.

The following types of investors are extremely benefiting from Cyprus with its investor-friendly tax legislation that puts no tax burden on investors’ shoulders (0% tax – zero per cent tax; ‘No tax on capital gains in Cyprus:’):

• Angel Investors;
• Venture Capitalists;
• Private Equity Investors;
• Family Offices as investors;
• Corporate Investors;
• Traders (trading in titles, securities, contracts).

No tax on capital gains in Cyprus: Why are capital gains from the disposal of a wide array of securities and titles not taxable in Cyprus?

The Tax Department of the Republic of Cyprus published circular No. 2008/13 (only in Greek language) on the 17th of December 2008, ruling that profit and gains from the disposal of securities (titles) are not taxable at all, retroactively from 2003.

With its circular No. 2009/6 (only in Greek language) from the 29th of May 2009, the Tax Department clarified the types and categories of securities and titles that are covered by the the tax exemption (see below).

The Cyprus Income Tax Law covers both corporate and personal income. Therefore, ‘No tax on capital gains in Cyprus’ applies to both companies and natural persons.

No tax on capital gains in Cyprus: To which securities and titles does the 100% tax exemption in Cyprus apply?

As per the Cyprus Tax Authorities’ clarification with circular No. 2009/6, the profit and gains from the disposal of the following securities and titles are fully tax exempt, whether listed or not (as applicable):

• Ordinary company shares;
• Founder’s shares;
• Preference shares (whether listed or not);
• Options on titles;
• Debentures;
• Bonds;
• Short positions on titles;
• Futures / Forwards / Swaps on titles;
• Depositary receipts on titles (ADRs and GDRs);
• Rights of claims on bonds and debentures (rights on interest of these instruments are not included);
• Index participations only if they represent titles;
• Repurchase agreements or repos on titles;
• Participations in companies; Russian OOO and ZAO, USLLC provided they are not transparent entities for the purposes of taxation on their income (does not apply due to sanctions), Romanian SA and SRL and Bulgarian AD and OOD;
• Units in open-end or closed-end collective investment schemes that have been incorporated, registered and operate in accordance with the provisions of the relevant legislation of the incorporated country. Examples of such units are: Investment trusts, investments funds, mutual funds, unit trusts, real estate investments trusts, International collective investment schemes – ICIS, Undertakings for collective investment in transferable securities or UCITS, and other similar financial institutions.

Not subject to tax exemption are the profits and gains from the following investments:

• Currency pairs;
• Promissory notes;
• Bills of exchange;
• Cryptocurrencies.

‘No tax on capital gains in Cyprus’ makes Cyprus indeed an ideal location for investors in equity, titles, and securities.

Ideal for corporate investors based in Cyprus: No tax on foreign dividends

Foreign dividend income received by a Cyprus tax resident company is not taxable in Cyprus, without a minimum holding requirement.

This exemption does not apply only in two cases, namely;

• if more than 50% of the dividend-paying company’s profits derive directly of indirectly from investment activities;
• if the tax rate in the foreign country is less than 6.25%.

And one more bonus: The Notional Interest Deduction in Cyprus

The Notional Interest Deduction in Cyprus provides tax relief to Cypriot companies that use equity instead of debt to finance their investments. This incentive is available to all companies resident in Cyprus and entities conducting business in the country.

The Notional Interest Deduction in Cyprus is an annual deduction from the taxable profits of a Cypriot company. It is calculated based on the interest rate applied to the new capital introduced, owned, and used by the company for operational investments. This deduction is limited to 80% of the company’s taxable income, potentially reducing the effective tax rate from 12,5% to as low as 2,5%.

While profits and gains from the disposal of investments listed above are tax-exempt in Cyprus, investors may charge interest for the provision of working capital provided to the companies that they are invested in, in addition to their equity investment.

Furthermore, investors often charge management fees to the companies they are invested in, creating profit for the investor.

Such profits as explained above do not fall under the tax exemption explained in this article.

However, depending on each equity investor’s specific investment activities, the Notional Interest Deduction in Cyprus might be applicable and then reduce the total tax on taxable profits by up to 80%.

Important notice:

If investors or investment companies in Cyprus attract and invest third party funds, they are obliged to set up a ‘Cyprus Investment Firm (CIF) ‘, an ‘Alternative Investment Fund (AIF) ‘, or a ‘Registered Alternative Investment Fund (RAIF) ‘.

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