Foreign Tax Credits – Are You Entitled?
Cypriot Tax advisors are often faced with difficulties in calculating their clients’ Foreign Tax Credit (FTC). As a consequence, in December 2011, the Income Tax Authorities issued a Circular which provides an analysis and practical guidance for the calculation of FTC, thus complementing Articles 35 and 36 of the Income Tax Law. However you may be wondering what precisely FTC is and, more importantly, how it affects Cypriot Taxation. Taxand Cyprus addresses these questions below, in view of the recent Circular.
Income received in Cyprus from abroad is, in some cases, taxed in Cyprus. However the Cyprus tax liability may be reduced in the form of a credit if tax has also been paid in the source country. For instance, any tax paid on rental income received by a Cypriot tax resident from his properties abroad is calculated as a credit in the computation of his overall tax liability in Cyprus.
In the absence of such a principle there would be a double taxation, i.e. tax paid on the same income abroad and in Cyprus. Section 34 of the Income Tax Law provides that the Cyprus Government may enter into treaties for the avoidance of double taxation treaties with other governments.
Businesses receiving income from abroad should consider this issue immediately in order to see whether you could qualify for the FTC. You will need to obtain a certificate from the foreign tax authorities, translated into Greek or English, showing that you have either paid or had tax withheld for rent, interest, dividends or any other income.