Cyprus offers numerous benefits for businesses, including one of the lowest corporate tax rates, in Europe. This article provides a comprehensive overview of provisional corporate income tax in Cyprus, including important deadlines, calculation methods, estimation processes, consequences of non-payment or low estimation, and the payment & declaration process.
Guide to Provisional Corporate Income Tax in Cyprus
Provisional Income Tax in few words
Provisional income tax is a prepayment of the final corporate income tax liability. It’s applicable to companies operating in Cyprus, both local and foreign, and is based on their estimated taxable income for the current year.
The provisional income tax system in Cyprus operates on a self-assessment basis, wherein companies are required to estimate their taxable income and submit payments accordingly throughout the year.
Corporate income tax is the final tax liability imposed on companies’ taxable profits at the end of the financial year. It applies to both local and foreign companies registered in Cyprus and is calculated based on the actual taxable income earned during the fiscal year.
Corporate income tax is settled once the financial year ends, following the completion of the necessary tax returns. The tax liability is determined based on the company’s audited financial statements, taking into account allowable deductions, exemptions, and applicable tax rates.
Cyprus Tax Rules, Calculation, and Payment
Cyprus has specific tax rules and calculation methods in place for provisional corporate income tax. Understanding these rules is crucial for businesses to ensure compliance and accurate tax payments. Here’s an overview of the key aspects.
Submission Deadlines
The submission deadline for annual corporate tax returns in Cyprus falls on 31 March. Companies are required to prepare and submit their corporate tax returns based on the financial information and records of the previous calendar year, and applies to all corporate entities operating in Cyprus. It is important for companies to adhere to this deadline to avoid penalties or late filing fees.
Provisional Tax Assessment and Payment
Temporary tax self-assessment is payable in two equal installments on the following dates: July 31 and December 31 each year. It is important to note that provisional tax assessment and payment are not applicable to loss-making companies.
Calculation of Provisional Tax
Provisional tax is calculated based on the profits expected to arise in the year, considering the applicable corporate tax rate of 12.5%.
Estimation Process
The general procedure of provisional tax estimation is the following: for the first payment (in July) you should take 80% of the estimated profit, then from this amount calculate the tax (12,5%) and pay only the half of the final amount (the second part should be paid in December).
Example
The estimated profit for the year is 20 000 EUR. We need to take 80% of these 20 000 EUR – so in total we get 16 000 EUR. Then it is necessary to calculate 12.5% of the tax from 16 000 EUR – and we get 2 000 EUR. In total, in July it is necessary to pay half of this amount, i.e. 1 000 EUR, and the remaining 1 000 EUR – in December.
But let’s look at a few cases:
- If in December it becomes clear that the profit for the year is not 20 000 EUR, but 50 000 EUR, then it is necessary to calculate 80% of 50 000 (that is, 40 000), and 12.5% of tax from this account (that is, 5 000 EUR). So, as a payment in December should be paid the difference between the tax paid in July and the new amount calculated at the end of the year (which is 4 000 EUR in this case).
- If in December it becomes clear that the profit for the year is not 20 000 EUR, but 15 000 EUR, then it is necessary to carry out all the same calculations.
Important notes:
- In December, you can make changes both up and down
- Even if you do not pay tax in December (the actual profit came out less than the estimated one), you still need to declare changes in profit (TD6 form)
- If the temporary tax assessed in the Provisional Tax Declaration is less than 75% of the final tax liability, a surcharge of 10% will be imposed on the difference between the two amounts
- Dividend income is exempt from income tax
Payment and Declaration Process
Currently, the entire provisional tax process is conducted electronically. Companies must register and log in to the Cyprus Tax Portal (https://taxportal.mof.gov.cy/) to estimate their tax obligation and make payments accordingly.
Changes to Estimation
Since the second payment is due on December 31, there is a possibility that the initial estimation may require revision. Companies can make revised estimations and pay the difference accordingly. In cases where the estimation is higher, a fixed interest of 5% plus 1.75% on the difference for the first installment is applicable.
Penalty Fees
Late submission and payment of installments incur a penalty fee of 5% plus an interest rate of 2.25% on the payable amount. Failure to pay provisional tax or insufficient payment, covering less than 75% of the final profit, will result in an additional 10% tax on the tax payable for the specific year.
Conclusion
Here’s a timeline with important dates and deadlines that companies in Cyprus need to be aware of to be compliant with corporate tax obligations:
- January 1: Start of the tax year (calendar year basis).
- March 31: Deadline for submitting the annual corporate tax return for the previous calendar year.
- July 31: Deadline for the payment of the first installment of provisional tax for the current tax year.
- December 31: Deadline for the payment of the second installment of provisional tax for the current tax year and last day for revising provisional tax if needed.
- August 1 (of the following year): Deadline for the payment of the final balancing payment to bring the total tax payments in line with the actual tax liability based on the tax return.
- Six years from the end of the relevant tax year: The Cyprus Tax Department (CTD) has this timeframe to raise an inquiry or examination into a filed tax return.
- 12 years (in cases of established fraud or wilful default): The extended timeframe for the CTD to raise an inquiry or examination in cases of fraud or wilful default.
- Throughout the year: Ongoing compliance with tax laws, record keeping, and ensuring accurate financial reporting.
While business in Cyprus can enjoy numerous benefits, including a low tax rate, Cyprus is no less strict regarding enforcing tax obligations. Adhering to submission deadlines, accurate estimation processes, and timely payments are critical to avoiding penalties.
If you have doubts about the correctness of tax calculations for your company, accountants from YouReg can help! Leave your request to info@youreg.tech
