Cyprus Limited necessary for professional trading?

[gmbh]

Hello,

I live in Cyprus and do stock/forex/crypto daytrading as main income. Until now my information was, that with my non dom-status all trading profits are tax free.

Now I got the information from somebody that the Cyprus tax office could classify me as a professional trader and then I would be taxed by the normal income tax rate. So more than 60k profit/year would be a tax rate of 35%.

I asked my accountant about this and he said me that this is the law but wasn't really clear how possible it is that this law will be enforced. I heard from several people who also do trading as main income that they never heard of this and never had problems with their tax returns. Their accountants just put in their profits in their tax returns and even with high profits (more than 100k/year) nobody had a problem until now it seems.

As I am new in Cyprus I am unsure now how things are working here. Does anybody have experience with this? Would it be better to create a Cyprus Limited and just pay 12,5% taxes (but then I am not sure if I can register exchange accounts on the companys name)?

Would appreciate any help!

Thanks in advance.

 

[gmbh]

I don't know if this is allowed to ask but does anybody know another forum or an accountant in Cyprus where I could ask this? Seems nobody can help me here.

 

[curiousmarv]

On private:
- stock trading is tax free, but only on profit, not dividends (GESY/GHS).
- forex (and any trading with currencies) is definitely not tax free, even as non-dom
- crypto is a grey area and undefined, in worst case it's taxed backdated (different accountants will tell you different things because of this lack of definition in law)

On company:
- 12.5% would be taxation on active investments only (imagine a subsidiary or something)
- I think (but not sure) stocks etc. are passive investments and would be taxed on defense tax which a company has to pay (non-doms don't pay defense tax). It's something around 30%.

If you need professional advice talk with Hügge Consult accountants. They will help you for a reasonable price (I'm not financially associated with them, I just know them).

TL;DR: So at the end a Cyprus company is actually really bad for trading in my opinion.

 

[curiousmarv]

Update: okay trading is considered active investment and also only 12.5% taxed.

 

[gmbh]

Update: okay trading is considered active investment and also only 12.5% taxed.

Where do you got this information?

Would be great to have a link to a government website where they clearly speak about this because accountants here tell you different opinions...

 

[glengoolie]

forex and crypto are NOT tax free, only equities/securities like stocks(primarily), unless the company whose stocks you trade owns property in Cyprus. capital gains are tax free unless they are from properties on cyprus.

see https://www2.deloitte.com/content/dam/Deloitte/cy/Documents/tax/CY_Tax-Facts-2020EN_Noexp.pdf

as for company trading stocks, same applies. no capital gains tax BUT if the company is tax resident in Cyprus, you pay 17% to the special contribution to defence on DIVIDENDS.

from my research so far, the absolutely best setup is to be non habitual resident in cyprus and trade stocks as individual(not forex, not cypto...). you will pay absolutely 0 taxes, social security, healthcare...zero, nada, zilch..nothing. but you have to be there 6 months to be tax resident. the rest of the year you can be elsewhere.

if you want to utilize the 2 month tax residency, you have to be employed and in that case you will get hit with social security and healthcare and income tax and if you employ yourself in your own company as director and use the company to trade, you will be hit with the SDC on top of it. the government is not stupid, you have few pathsways to take and it is up to you which one you will take.

 

[BlueMist]

Would a Cyprus holding company investing in passive low cost ETFs be liable for income tax on profits? I was told that if the 50% of the income comes from trading then yes, it would be taxed. Can someone confirm this?

 

[CyprusBusiness]

Hello

There is no separation between professional investor and passive investor in the Tax legislation so I am not sure were did you receive information that professional traders are taxed differently. Cyprus at the moment attracts a lot of daytraders dealing in stock markets, money markets and cryptos due to take advantage of the exemption.

Just to clarify any profit resulting from the sale of securities is tax exempt from Cyprus corporation tax.

I note here that security has the following meaning:

The term “Securities” is defined as shares, bonds, debentures, founders’ shares and other securities of companies or other legal persons, incorporated in Cyprus or abroad and options thereon. Circulars have been issued by the Tax Authorities further clarifying what is included in the term Securities. According to the circulars the term includes, among others, options on Securities, short positions on Securities, futures/forwards on Securities, swaps
on Securities, depositary receipts on Securities (ADRs, GDRs), rights of claim on bonds and debentures (rights on interest of these instruments are not included), index participations only if they result on Securities, repurchase agreements or Repos on Securities, units in open-end or close-end collective investment schemes. The circulars also clarify specific types of participation in foreign entities which are considered as Securities.

Now if you are trading on a freelance basis and not under a Company the situation is the same and profits from sale of securities are tax exempt.

Dividend income from securities again is tax exempt on the Company level and on individual level if the individual is a non-domiciled resident of Cyprus. For other domiciled Cyprus residence a tax of 17% special defence contribution is imposed.

However there is only one situation where dividend income will not be tax exempt and this not widely known but can challenged by the Tax Office as I witnessed over the years:

The exemption of this section does not apply if:
• more than 50% of the paying company’s activities result directly or indirectly in investment income and
• the foreign tax is significantly lower than the tax burden in Cyprus. The tax authorities have clarified through a circular that “significantly lower” means an effective tax rate of less than 6,25% on the profit distributed.

When the exemption does not apply, the dividend income is subject to Special Contribution for Defence at the rate of 17%.

In addition, profits from sale of units in participations in ETFs (either Bond fund or Equity Fund) is tax exempt as it falls under the definition of security provided above.

I hope this helps.

 

[gmbh]

The exemption of this section does not apply if:
• more than 50% of the paying company’s activities result directly or indirectly in investment income and

I understand this sentence that this is the seperation between a professional investor and a passive investor.

If one does trading as a business his income is more than 50% from investments, or how do you understand this?

And is this rule only for companies? If you trade as an individual with non-dom status you are exempt from the Special Contribution for Defence, thus even if they tax your trading income, in the end it should be exempt to my understanding.

One tax advisor also told me the tax authorities could use the 10 badges of trade to decide if you are a professional trader. He also said that if they decide that you are a professional trader/that trading is your main income they will tax you profits with the income tax rate, not with SCD.
https://www.accaglobal.com/my/en/te...urces-search/2011/august/badges-of-trade.html

 

[glengoolie]

correct me if i am wrong but that is not what that means. first, this is not about capital gains, which are completely tax exempt(with exception of some real estate stuff), but about dividends, more specifically the SCD tax on dividends. second, this means that it applies only to dividends paid by a company that earns money by investing(ie. more than 50% of their income). in other words, if you own shares of REIT, which by nature is an investment company, you will pay SCD on any dividends you receive from these shares.

 

[glengoolie]

thanks for the link on those badges. i like this:

PROFIT SEEKING MOTIVE​

It is clear that having an intention to make a profit can indicate a trading activity, however by itself it is not enough. In case Salt v Chamberlain – Ch D 1979, 53 TC 143; [1979] STC 750, a research consultant made a loss on the Stock Exchange after trying to forecast the market. The loss was made after several years and over 200 transactions. This was not seen as trade and capital in nature. It was concluded that share trading by a private individual can never have the badges of trade pinned to them. These transactions are subject to capital gains tax.

 

[tsu458]

first, this is not about capital gains, which are completely tax exempt (...)

Is there a way to confirm that a capital gains tax for private individuals is not enforced / existing? With the exception of real estate in Cyprus.

I went back and forth with accountants but also in this forum, trying to find an answer - most of the discussions were about the rules within the LTD.

Example: Bought 1 BTC in 2019. Sold the same 1 BTC in 2020. 10 months between purchase and sale. I think we can rule out income tax as this long-term investing not trading.

 

[CyprusBusiness]

I understand this sentence that this is the seperation between a professional investor and a passive investor.

If one does trading as a business his income is more than 50% from investments, or how do you understand this?

And is this rule only for companies? If you trade as an individual with non-dom status you are exempt from the Special Contribution for Defence, thus even if they tax your trading income, in the end it should be exempt to my understanding.

One tax advisor also told me the tax authorities could use the 10 badges of trade to decide if you are a professional trader. He also said that if they decide that you are a professional trader/that trading is your main income they will tax you profits with the income tax rate, not with SCD.
https://www.accaglobal.com/my/en/te...urces-search/2011/august/badges-of-trade.html

Just to clarify - the provisions stated above do not concern the separation between professional investor and passive trader but instead this was part of anti-avoidance legislation to avoid shifting profits from a very low tax jurisdiction (tax haven).

The concept of professional investor comes into play due to MiFID II and does not appear in any tax legislation in Cyprus. In addition the badges of trade is an irrelevant concept and does not apply here. I cannot understand why your tax advisor brought up this concept. The link provided above relates to UK's tax regime and does not concern Cyprus. I would advise you to seek proper tax consultation from other firms as well.

Also to clarify further about dividends. Dividend income is exempt from tax for both a Company and a non-domiciled individual resident of Cyprus. Of course WHT may apply from the Country paying the dividend.

The dividend exemption above is lost if both of the following are met (and not just one condition):

• more than 50% of the paying company’s activities result directly or indirectly in investment income and
• the foreign tax is significantly lower than the tax burden in Cyprus. The tax authorities have clarified through a circular that “significantly lower” means an effective tax rate of less than 6,25% on the profit distributed.

So a good example of this is a Cyprus Company holding redeemable preference shares lets say in a professional fund registered in BVI (0% taxation applies on the level of the fund). Dividends received from the professional fund will be taxed under SDC at 17%.

In addition the gain from sale of units in that fund will not result in corporation tax in Cyprus as an exemption is granted and this applies both to an individual and a Company.

 

[CyprusBusiness]

Is there a way to confirm that a capital gains tax for private individuals is not enforced / existing? With the exception of real estate in Cyprus.

I went back and forth with accountants but also in this forum, trying to find an answer - most of the discussions were about the rules within the LTD.

Example: Bought 1 BTC in 2019. Sold the same 1 BTC in 2020. 10 months between purchase and sale. I think we can rule out income tax as this long-term investing not trading.

When it comes to the taxation of cryptocurrencies these will fall under the same tax principles as with any other business activities and a tax rate of 12.5% will apply. The tax trigger is thus when one cryptocurrency/altcoin/stablecoin is exchanged to fiat currency. in addition, there is no concept of long-term investment in trading cryptos.

This in fact the case as no legal definition was attributed to cryptocurrencies in Cyprus Tax legislation. Thus no clarification exists whether cryptocurrencies are securities (“titles”), currency or a digital asset. The accounting practice (IFRS) considers cryptocurrencies as either inventory or intangible assets, and as the the tax practice usually follows the accounting practice, inventories/intangible assets are part of the normal business operations which are taxed at 12.5%.

I hope this helps.

Please note that this comment was made to provide a general guide and for information purposes only. It is not a substitution for professional advice. I advise to seek proper tax consultation on tax and vat on cryptocurrencies.

 

[tsu458]

When it comes to the taxation of cryptocurrencies these will fall under the same tax principles as with any other business activities and a tax rate of 12.5% will apply. The tax trigger is thus when one cryptocurrency/altcoin/stablecoin is exchanged to fiat currency. in addition, there is no concept of long-term investment in trading cryptos.

This in fact the case as no legal definition was attributed to cryptocurrencies in Cyprus Tax legislation. Thus no clarification exists whether cryptocurrencies are securities (“titles”), currency or a digital asset. The accounting practice (IFRS) considers cryptocurrencies as either inventory or intangible assets, and as the the tax practice usually follows the accounting practice, inventories/intangible assets are part of the normal business operations which are taxed at 12.5%.

I hope this helps.

Please note that this comment was made to provide a general guide and for information purposes only. It is not a substitution for professional advice. I advise to seek proper tax consultation on tax and vat on cryptocurrencies.

I appreciate the insights but you are referring to business income within a company. I was talking about private individuals that own cryptos, the same way they could own stocks which they would sell with a profit. In a investment perspective - holding them at least 6 months or even years, not trading. I'm trying to see the worst case scenario for that. 20% captial gains if it would be ruled that cryptos aren't securities or something else that is exempt. Or even the full income tax (althought other jurisdictions would charge long term capital gains on that).

 

[glengoolie]

...
Now if you are trading on a freelance basis and not under a Company the situation is the same and profits from sale of securities are tax exempt.
...

are you talking about self-employment when you say "freelance basis"? because I was arguing about this in another thread with CyprusLaw. he was adamant that you must register as self-employed in order to trade stocks and I was opposing that you do not have to register and can stay unemployed because trading stocks does not involve suppliers to buy from or customers to sell to nor invoicing one way or another and you are working with your own capital. i am still trying to find out the legislature on this but so far no success since Cyprus does not have easily available collection of their laws, especially in english...as far as i know. i have reached to multiple accountant but no reply so far.

my main point was capital gains vs income and the obligations for health care and social security "taxes" that stemm from being self-employed vs none when being (willingly)unemployed.

 

[CyprusBusiness]

I appreciate the insights but you are referring to business income within a company. I was talking about private individuals that own cryptos, the same way they could own stocks which they would sell with a profit. In a investment perspective - holding them at least 6 months or even years, not trading. I'm trying to see the worst case scenario for that. 20% captial gains if it would be ruled that cryptos aren't securities or something else that is exempt. Or even the full income tax (althought other jurisdictions would charge long term capital gains on that).

Apologies for the oversight. For individuals the concept of taxation is the same and in the absence of regulation tax will be imposed at the different bands as follows:

€19.501 - €28.000	20%
€28.001 - €36.300	25%
€36.301 - €60.000	30%
€60.000 +	35%

Again in the absence of legislation to categorise Crypto Assets as currency, property, security the mode of taxation would follow the accounting treatment (inventory/intangible asset) and income tax will apply. This is however not a professional tax advise and again I would suggest to discuss this with a tax consultant.

 

[tsu458]

Really bad if that's the case. "Captial gains" on crypto in cyprus would be among the highest WORLDWIDE. So it's literally the worst developed nation to live in if you invest in crypto without a company.
https://taxsummaries.pwc.com/quick-charts/capital-gains-tax-cgt-rates

 

[glengoolie]

crypto is no-no worldwide. it was never legal to begin with. in time, there will new legislations put in place that will make it into a type of security but due to its nature, i doubt it could ever be tax exempt.

capital gains taxes are not universal because there are various types of capital. so you must always look up specifics of the law in the country you are interested in.

 

[gmbh]

When it comes to the taxation of cryptocurrencies these will fall under the same tax principles as with any other business activities and a tax rate of 12.5% will apply. The tax trigger is thus when one cryptocurrency/altcoin/stablecoin is exchanged to fiat currency.

First, thanks for your answers.

But why do you think the tax only applies when somebody exchanges cryptocurrency to fiat currency?

If somebody trades perpetual futures and does not exchange to fiat currency, he makes a profit too. But you think that this is not taxable?