One of the biggest advantages of Cryptocurrencies is that they are decentralised which is important for tax purposes as it implies that the tax treatment of the profit earner from Crypto transactions is determined by the country of Tax Residency of the Legal (Company) or Physical Person.
So what happens to Cyprus? How does Cyprus taxes Cryptos?
Finally, clarity in the skies!
Cyprus is now in a position to issue tax rulings about Crypto transactions therefore making it easy for Companies to apply local taxation without any reservations and ambiguity.
If you would like us to obtain a tax ruling about your Cyprus Company or your personal Crypto gains, feel free to contact me directly at kt@cyprusaccountants.com.cy.
The Cyprus Tax Law
To determine the Crypto tax one must consider firstly a) whether or not trading activity takes place and secondly b) if it does whether the underlying assets are directly linked to Cryptos (as explained below).
Let's start with the first main test:
- Trading Activities or One-Off Transactions
The treatment of the Cyprus Tax Law depends on the general taxation principles which primarily assesses if the profits from Crypto currencies are derived from trading activities or from one off (isolated) transactions.
If a Physical or Legal Person who is tax resident in Cyprus trades Cryptocurrencies on a regular basis then profits will be taxed as any other trading activity for Companies (12.5% Corporation Tax and Dividend or Deemed Dividends will apply accordingly) and for Physical Persons at the income tax rate (progressive rates from 20% to 35% for profits exceeding Euro 60,000 per annum).
On the other hand, if the Legal or Physical Person made a profit on a one-off transaction then this transaction is considered a capital gain and as the underlying asset is not a property (which would have been taxed at 20% Capital Gains Tax) but a digital currency for which no tax rate exists, will be tax free.
Note: At the time of this article there is no indication whether the Capital Gains Tax on Crypto currencies will be introduced but it is unlikely as the Cyprus law treat crypto currencies like any other physical currency where if an exchange takes place the tax originates from the value difference of the underlying asset and not the fluctuation of the currency.
Same applies for VAT. Cryptocurrency trading is exempt from VAT.
How do we determine whether a trading activity took place?
To ascertain and argue about the trading activity we need to go back to the fundamentals of Income Tax and what is considered to be a trading activity by performing the below tests which are called budgets of trade. Budgets of trade are used by the HMRC in the UK and the Cyprus Income Tax Office to ascertain trading activity and apply appropriate taxation rates to both Companies and Individuals acting as self-employed persons.
More information can be obtained directly from the ACCA website:
Budgets of Trade
- profit seeking motive
- the number of transactions
- the nature of the asset
- existence of similar trading transactions or interests
- changes to the asset
- the way the sale was carried out
- the source of finance
- interval of time between purchase and sale
- method of acquisition.
Each of the above criteria must be reviewed, accessed, argued and documented in order to reach a conclusion as to whether or not the disposal of the Cryptocurrency should be considered as an isolated event which is not taxed or a continuous trading activity which is taxed.
For Cryptos, the number of transactions and profit seeking motive are the key parameters with the more weight and which could determine the tax treatment.
Tax Rulings
Budgets of trade should also be analysed in any tax ruling seeked to prove the trading or non trading activity of the applicant.
Tax Examples:
- Trading Activities
Physical and Legal Persons are performing trading activities of Cryptos
Company
- Taxed at 12.5% Corporation Tax
- Subject to Special Defence Tax on Actual and Deemed Dividends except if shareholders are not Cyprus Tax Residents or Cyprus Tax Residents but Non-Domiciled
- NHS does not apply
- Crypto losses can offset Crypto and other taxabale gains
Physical Person
- Taxed at Income Tax Level (progressive from 20% to 35% for taxable gains exceeding Euro 60,000)
- Crypto income is added to salary and other sources of income
- NHS does not apply
- Crypto losses can offset Crypto and other taxable gains
- Non-Trading Activities
Physical and Legal Persons are NOT performing trading activities of Cryptos. They have performed a one-off transaction.
Company
- Tax Free
- No Corporation Tax applies
- No Special Defence Tax applies
- NHS does not apply
Physical Person
- Taxed Free
- No PAYE Applies
- NHS does not apply
- Crypto losses can offset Crypto gains (if one off) but not taxable transactions.
TAX Planning
Cyprus Individuals who are Tax Residents in Cyprus
Local Cypriots or International Persons being tax residents in Cyprus should consider setting up a Cyprus Company to avoid paying PAYE at the highest progressive level of 35% PAYE Tax (assume NHS and SIC reached their ceilings)
- Company Corporation Tax of 12.5% is significantly lower than the 35% PAYE rate
- Company Corporation Tax effective rate appr. 8% after all company expenses are deducted
- Avoidance of additional Social Securities tax up to the ceiling level as the company will be paying dividends instead of salaries (NHS applies to dividends as well)
Cyprus Companies
- Enjoy the low Corporation Tax Rate on Company Profits at 12.5% (effective rate 8%)
- Do not pay Dividend Tax to Overseas Shareholders or Cyprus Tax Resident but Non-Domiciled Persons
- Do not Pay Extra Social Security Contributions and PAYE on the progressive level of 35%
Cyprus Investment Companies
What happens when a Cyprus investment company trades financial securities and Cryptos?
Cyprus Income Tax Office – View
Cyprus income tax view, which is not yet written anywhere - but verbally confirmed on numerous occasions, is that all financial instruments tied up to cryptocurrencies are not considered securities and as a result they are taxed as normal trading income.
The income tax office has explicitly stated in numerous occasions that the definition of securities excludes cryptocurrencies and that the cryptocurrencies are not expected to be included in a revised list.
Consequently, all transactions affecting Cryptos if a trading activity takes place should be included in the tax computations and taxed under corporation tax. It can be argued that CFDs, Futures etc of bundled packages where Cryptos and other securities are grouped together and result to returns by investment banks and firms can be treated as securities; it is our view that the approach to be adopted in this case is to apportion the income attributed to cryptocurrencies and tax is accordingly whilst exclude the % of income which is generated by non-taxable activities.
Note: This is a highly specialized area and special consultation and examination needs to be carried out to determine the accuracy of the treatment.
Tax Ruling by the Cyprus Income Tax Office
Over the last few years, the Cyprus Income Tax Office has introduced the tax ruling service where regulated audit and assurance firms and tax experts can apply for a tax ruling on specific tax treatments, based on the current guidelines and best practices in an engaging written response by the Cyprus Income Tax Office.
Our firm obtains regularly tax rulings from the Income Tax Office and VAT office for Cyprus Regulated and Unregulated entities and can obtain a tax ruling for your entity clarifying the specific tax treatment of your Crypto activity for a fee which depends on the complexity of each case.
Process of tax ruling:
- Prepare Application
- Supporting Explanatory Narrative
- Payment of Tax Ruling Application Fees
- Submit Tax Ruling electronically
Typically, we fill in the tax application and describe the issue, firm activities and tax treatment of the income streams we need the confirmation on. We will argue how we believe each revenue stream or business profits should be taxed based on specific tax laws and directives and we send the application to the authorities for their response.
Depending on the application fee paid we should get a response with in 2 months or 4.
The application disbursements (fees paid to the government) for a normal application is Euro 1,000 payable to the Cyprus Income Tax Office or Euro 2,000 for the fast process where a response should be received within 2 months.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
