Tax optimization is managing financial affairs that aim to minimize tax payments. This is achieved through various tax incentives, discounts, and deductions, as well as through the optimal allocation of income and expenses.
Tax optimization can involve the use of various legal and financial methods, such as:
- registration of the company in tax havens;
- use of agreements on the transfer of intellectual property rights;
- investing in tax-advantaged instruments, etc.
It is important to note that tax optimization should not be confused with tax evasion, which is illegal and can carry severe penalties. Tax optimization is done within the law and can be a valuable tool to reduce tax payments and improve financial management efficiency.
Methods and legal schemes of tax optimization
Many tax optimization techniques can be used to reduce tax payments. Some of them include the following:
- Optimization of the business structure. For example, registering a company in a tax haven, reorganizing a business to gain access to tax benefits, and using branches and subsidiaries to distribute income and expenses. In the latter case, this allows the use of tax credits, deductions, and rebates available in each country where the company operates.
- Use of tax credits and deductions. Each country has its conditions that can be used to reduce tax payments. For example, in some countries, you can get deductions for children, education, home mortgages, charitable donations, etc.
- Investing in tax-advantaged instruments. Some countries have tax incentives for investing in specific tools such as pension funds, investment funds, real estate, etc. These instruments may allow investors to earn tax-exempt income or receive tax deductions which can be used to reduce tax payments.
- Tax payment planning. This is the optimal allocation of income and expenses between several periods to minimize tax payments in a particular period.
- International tax optimization. The use of tax treaties between countries to avoid double taxation and legal structures that allow profits to be transferred to countries with lower tax rates.
However, it is essential to note that these methods must be used within the law and must not violate tax rules and requirements. Consultation with professional tax advisors and SPM Real Estate lawyers can help you choose the best optimization method and reduce the risks of possible consequences.
Tax optimization in Cyprus: examples
Cyprus is one of the most popular jurisdictions for tax optimization because the country is not offshore but offers a very mild tax climate and some of the lowest taxes in Europe.
Here are some examples of tax optimization in Cyprus.
- Using the residency regime to pay a low rate of VAT
Cyprus allows companies registered in the country to receive VAT-related tax benefits. Under this regime, a company can register as a VAT resident in Cyprus if its turnover in Cyprus exceeds 15,600 € per year. Once registered, the company may apply the VAT rate (19% in 2023) on all its goods and services. Until the beginning of 2023, the island had a reduced VAT rate of 9%, but these conditions have been abolished. However, even 19% is lower than in most EU countries.
- Use of double taxation treaties
Cyprus has tax treaties with many countries worldwide, allowing companies to avoid double taxation. For example, if you have a subsidiary in Cyprus and another one in another country, you can minimize the taxes you pay on your subsidiary in Cyprus.
- Use of tax credits for non-EU withholding of income
Cyprus provides tax incentives for companies that earn income outside the EU. This can include revenue from the export of goods and services, income from intellectual property, and other payment types. Cyprus also provides tax incentives on profits from selling shares or other securities.
Why is it profitable to pay taxes in Cyprus?
In Cyprus, several advantages make paying taxes more favorable:
- Low tax rates. Cyprus has one of Europe’s lowest income tax rates — 12,5%. There are also several tax benefits.
- A well-developed infrastructure facilitates business processes and increases the efficiency of companies.
- Cyprus is a stable and prosperous economy, creating conditions for business growth and attracting foreign investors.
- Convenient geographical location. The island is located at the junction of three continents — Europe, Asia, and Africa- facilitating access to different countries' markets.
- Favorable tax legislation ensures international competitiveness and business attractiveness.
- Double taxation treaties with 67 countries reduce tax risks and protect against double taxation.
- The residency program allows foreign investors to obtain residency status, which provides several tax and other benefits.
What are the taxes in Cyprus?
In Cyprus, several taxes are usually levied on individuals and businesses. Some of the most critical include:
- Value Added Tax. VAT in Cyprus is levied on most goods and services at 19%. Some goods and services may be exempted.
- Income tax in Cyprus is 12,5% and is levied on the profits of companies registered in Cyprus. In addition, the country has several incentives that can help reduce the tax burden.
- Property tax in Cyprus is levied depending on the property’s value and can be up to 1,9% of the property’s assessed value.
- Personal Income Tax is levied on income earned by individuals registered in the jurisdiction. Income tax rates start at 0% and can be as high as 35%.
What taxes are not to be paid in Cyprus?
In Cyprus, many tax benefits and exemptions can significantly reduce the tax burden on individuals and legal entities.
- Zero tax on dividends. Persons and legal entities registered in Cyprus are not required to pay tax on dividends received from foreign companies.
- Zero tax on capital investments. Cyprus does not tax income from the sale of shares and other securities.
- Zero inheritance tax. Inheritance is not taxed in Cyprus.
- Tax incentives for companies. The country has several tax incentives that can help reduce the tax burden on companies, including a reduced income tax rate, the possibility of tax deductions for research and development expenses (IP-Box program), and the ability to carry forward unrealized losses.
- Tax benefits for retirees. Specific categories of pensioners, especially those who have moved to Cyprus from another country, may be eligible for tax benefits.
It is important to note that these tax benefits and exemptions are subject to change depending on changes in Cypriot tax policy. Therefore, it is recommended to consult a qualified advisor for more detailed information and analysis of the situation.
IP Box program in Cyprus: how to pay 2,5% tax?
IP Box is an intellectual property tax incentive program that Cyprus introduced in 2012. The program aims to attract research and development companies to the island and encourage investors and business people to invest in research and development in Cyprus. It is mainly about IT companies, as it is easier for them to comply with the terms of preferential treatment.
According to the IP Box, Cypriot companies can reduce their income tax from 12,5% to 2,5% on income derived from intellectual property, including income from patents, developments, software, copyrights, trademarks, etc.
To qualify for the IP Box program, a company must register its intellectual property in Cyprus, which must be used for commercial purposes. In addition, you need to have a physical office on the island and be engaged in research and development for one year.
The IP-Box program is part of the Cyprus-wide tax system, which sets low tax rates to attract businesses and investors to the island. However, before companies start using this program, they are advised to consult with a lawyer or consultant of SPM Real Estate to ensure that they fully comply with the requirements of the program and do not violate the laws of Cyprus or other countries in which they operate.
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