In this article, we will explain why the structures of Cypriot investment companies are so popular that hundreds of these companies are relocating to Cyprus.
Taxation of investment firms in Cyprus
To understand how investment firms are taxed, we first need to separate their income streams into assets and liabilities. Active income is the income that the investment firm derives from its day-to-day operations such as the disposal of securities, income from commissions, etc. This income is taxed as corporation tax at 12.5% if it is not exempt.
As the majority of investment firms deal in securities which are exempt from corporation tax and VAT, this income is fully tax exempt. This is not the case with Cryptocurrencies as we explain in our previous articles. You can find more information on our website.
Commission income is subject to corporation tax if it exceeds losses carried forward and the company’s current operating expenses, which is generally rare. Therefore, it is safe to assume that active income from investment businesses is unlikely to be taxed (we exclude cryptocurrencies).
What about passive income?
It can be argued that interest income from long positions, dividends received are part of the normal day-to-day (certainly semi-annual) operations of the investment firm and as such should be taxed as normal trading income at 12.5%. Otherwise, this income would be subject to the special defense tax and would have to be taxed at 17%.
Since the distinction between active and passive income is of great financial (tax) importance, we strongly advise our clients to obtain a tax ruling (more information, click here) for their businesses so that they try (with our help) to obtain the preferred tax treatment for passive income that could properly be characterized as active income.
What about dividends paid
If the Cyprus Investment Firm is part of a group, it will pay its dividends to its parent company tax-free and without any withholding tax. Similarly, if it pays out its dividends to individuals, those dividends will only be subject to Cyprus dividend tax if the shareholders are Cypriot tax residents and domiciled persons (usually Cypriots living in Cyprus). Foreign shareholders residing in Cyprus must become Cypriot tax residents but not domiciled in order to be exempt from dividend tax. Learn more here.
Some specific examples
1. Futures and options on free shares constitute “securities”
Shall be treated in accordance with the provisions of Section 2 of the Income Tax Act, therefore any gain on the disposal of the above shall be exempt from income tax, in accordance with the provisions of Section 8 (22) of the income tax law. –> Tax free
2. Trading in securities such as stocks, futures and options
Will be tax free.
3. Dividends received from futures and stocks
It depends on a case-by-case scenario. We display below some of the tax rulings obtained:
Will be subject to a special contribution for defense in accordance with the provisions of article 3 of the law on the special contribution for defence;
a) Subject to a special defense tax of 17%, unless you are not domiciled –> No special defense tax, or
b) If you have already paid dividend tax (at source) –> You will NOT pay double dividend tax over 17% or the amount already paid.
If the natural person is not Dom, you will not pay any tax on the dividend.
Read the article on non-residents here.
4. Any interest income from bond coupons, loans granted and promissory notes
Will be subject to income tax, in accordance with the provisions of article 5 of the income tax law.
If the main activity is bond trading, etc. –> Subject to corporation tax of 12.5%.
If these interests are passive income, i.e. the natural or legal person holds them as investments and does not deal in passive investments –> subject to the special defense tax only (17% currently)
5. Income from discounted promissory notes
Will be subject to income tax, in accordance with the provisions of article 5 of the income tax law. –> Subject to Corporation Tax 12.5%
So why are Cypriot investment firms almost tax free?
- the transfer of securities is out of scope and is not taxed
- interest and dividend income could be taxed if they exceed business operating expenses and loss carryforwards (if applicable)
- dividends to shareholders are generally not taxed
So why are Cypriot investment firms so attractive?
Coupled with the tax advantages above with low business and operating expenses and one of Europe’s most attractive remuneration systems for foreign employers (read more here), Cyprus is a winner and we testify with so many investment firms residing in the Republic like Revolut, FX Pro, Exness, eToro to name but a few.
To find out more, discover some of our articles by clicking here.
Cyprus Investment Firm Regulator
The regulator of Cypriot investment firms is the CySEC (Cyprus Securities and Exchange Commission) which oversees all local activities and reports directly to ESMA. More information on laws and regulations can be obtained directly from the CySEC page.
Our firm has many regulated entities and we fulfill their legal filing and consultation obligations, such as capital adequacy reports, ICARA, internal audits, etc.
We have published several articles on Cypriot investment firms which can be obtained here.
Some popular Cypriot investment firms
CYAUSE AUDIT SERVICES
CYAUSE Audit Services Ltd provides statutory compliance services to Cypriot companies and investment funds on an ongoing basis in its capacity as an external advisor for the requirements of the compliance function and the external or internal audit function.
Whether it is an investment firm regulated by the Cyprus Securities and Exchange Commissions (CySEC) or fund, we can perform statutory compliance services and ad hoc assignments tailored to your needs. More information about our services can be obtained here.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.