Key Features of the Cyprus Tax System

• Simple, transparent and EU harmonised tax system following recommended OECD practices.
• Enjoys the tax benefits of EU Directives (Parent – Subsidiary Directive, Merger Directive and Interest and Royalties Directive).
• Extensive Tax Treaty network with more than 65 countries.
• A corporate income tax rate of 12.5%, one of the lowest within the EU with possibility to enjoy a much lower effective tax rate.
• Availability of a Notional Interest Deduction for companies receiving new equity funding. The tax deduction can reach up to 80% of the taxable income generated by the new equity.
• IP Box regime based on the nexus approach which allows 80% deemed deduction on qualifying profits from the business use of qualifying IP.
• Increased deduction of 20% on the actual expenditure incurred for scientific research as well as research and development, subject to conditions.
• Attractive Tonnage Tax (TT) regime for ship owners, managers and charterers.
• Attractive tax jurisdiction for funds and attractive tax regime for fund managers.
• Capital gains are exempt from tax (except for capital gains arising from the disposal of immovable property located in Cyprus).
• Profits of a foreign Permanent Establishment exempt from tax.
• Gains from trading in securities (shares, bonds and certain other financial instruments) are exempt from tax.
• Unilateral credit relief for foreign taxes.
• No withholding tax on dividend, interest or royalty payments (for use of royalties outside of Cyprus) made abroad.
• No taxes on entry and on qualifying reorganisations.
• Carry forward of tax losses for five years.
• Tax incentives for expatriate employees taking up employment in Cyprus (20%/50% exemption).
• Dividend income and interest income are exempt from SDC for non-domiciled individuals taking up tax residency in Cyprus.
• Possibility to obtain Cyprus tax residency by spending only 60-days in Cyprus (subject to conditions).
• No inheritance tax.
• No immovable property tax.

Corporation Tax

The Corporation Tax Rate: 12.5%.

Basis of taxation

All companies that are tax residents of Cyprus are taxed on their income accrued or derived from all sources in Cyprus and abroad. A non-Cyprus tax resident company is taxed on income accrued or derived from a business activity which is carried out through a permanent establishment in Cyprus and on certain income arising from sources in Cyprus. A company is considered tax resident of Cyprus if it is managed and controlled from Cyprus.

Special Types of Companies

Shipping companies 

The Merchant Shipping Legislation, fully approved by the EU, provides for an exemption from all direct taxes and taxation under tonnage tax regime. The merchant shipping legislation applies to qualifying shipowners, charterers and ship managers, which are involved with the operation of qualifying community ships (ships under a CY flag or a flag of an EU member state or of a country in the European Economic Area) and foreign (non-community) ships (under conditions) and provided that they engage in qualifying activities. The legislation allows non community vessels to enter the tonnage tax regime provided the fleet is composed by at least 60% community vessels. If this requirement is not met, then non community vessels can still qualify if certain criteria are met. Exemption is also given in relation to the salaries of officers and crew aboard a Cyprus ship.

Insurance companies 

Profits of insurance companies are liable to corporation tax similar to all other companies except in the case where the corporation tax payable on taxable profit of life insurance business is less than 1.5% of the gross premium. In this case the difference is paid as additional corporation tax.

Administration and Compliance

The tax year is the calendar year. The accounts of a company may be closed on a date different from 31st of December, in which case taxable profits are apportioned on a time basis relevant to the tax years.

Consolidated Returns:  Taxation on a consolidated basis is not permitted and each company is required to submit a separate standalone tax return. A set-off of group losses is possible provided there is a 75% parent subsidiary relationship, including subsidiaries under 75% control of a common parent company. Group loss relief is available only between resident companies (and EU-based companies/companies with which Cyprus has concluded a double tax treaty, provided that they have exhausted all options to utilise the losses in their country of residence). 

Filing Requirements:  Corporate tax returns must be filed electronically by the 31st of March of the year following the year under consideration (i.e. 15 months from the year-end). Companies are required to pay provisional tax in two equal instalments by 31st of July and 31st of December of the year under consideration. Any underpayment is due to be settled via self-assessment by 1st of August of the following year. If the income declared for the payment of the provisional tax is lower than 75% of the actual income as finally determined, an additional tax equal to 10% of the difference between the final and provisional tax is payable. 

Personal Income Tax

All Cyprus tax residents are taxed in Cyprus on all income accrued or derived from all sources in Cyprus and abroad such as employment income, rental income etc. (i.e. worldwide income). Individuals who are not tax residents of Cyprus are taxed on income accrued or derived from sources in Cyprus. An individual is tax resident in Cyprus if one of the following conditions are met: 

• he/she spends physically in Cyprus over 183 days during the relevant tax year, or 

• he/she does not remain in any other state for one or more periods which altogether exceed 183 days in the same tax year and he/she is not tax resident in any other state for the same tax year and all the following conditions are cumulatively met: 

• he/she should remain in Cyprus for at least 60 days during the tax year 

• he/she should pursue any business in Cyprus and/or to work in Cyprus and/or to be a director in a company tax resident in Cyprus at any time during the tax year • he/she should maintain a permanent residence in Cyprus, which can be either owned or rented by him/her

Personal Tax Rates

The following income tax rates apply to individuals:

Tax Incentives for Expatriate Employees Taking Up Employment in Cyprus

The individuals who were non-Cypriot tax residents prior to the commencement of their employment, but become Cypriot tax residents afterwards, are eligible for a 50% exemption from income tax if all the following conditions are met: 

• their remuneration from the employment exercised in Cyprus is over €55,000 per annum; and 

• they were not tax residents of Cyprus for 10 consecutive years prior to the commencement of their employment; and 

• the exemption is available from 1 January 2022, it is granted from the first year of employment and it can be enjoyed for a period of 17 years 

• individuals with annual remuneration below €55,000 who were non-Cypriot tax residents in the 3 years preceding their employment, are eligible for a 20% exemption from income tax (maximum exempt amount is €8,550 per year) 

The exemption is available from the 1st of January following the year of commencement of the employment and can be enjoyed for a period of 7 years. 

*It is important to note that the above provisions were recently introduced (published in the Official Gazette of the Republic on 26/07/2022 ) as amendments to the previous rules that were applicable until the publication date. The amended provisions also include certain transitional provisions that may enable the individuals that claimed the exemptions based on the previous rules to enjoy the exemptions based on the provisions included in the new rules. Furthermore, the individuals that do not fall within the transitional provisions, are eligible to continue claiming the exemption based on the previous rules for the remaining years, without being affected by the new rules.

Value Added Tax (VAT)

Imposition of Value Added Tax (VAT) is imposed on the supply of all goods and services in Cyprus, on the acquisition of goods from other Member States and on the importation of goods from third countries. The standard rate of 19% applies to the supplies of all goods and services in Cyprus which are not subject to the zero rate, the reduced rates (5% and 9%) or are not exempt. Cyprus constitutes an attractive EU VAT jurisdiction applying several options permissible by the EU Directive among others a flexible VAT Grouping. As long as the pre-requisite links are satisfied, and governmental revenues are not put into jeopardy, related entities can form a VAT group disregarding intragroup transactions and having a representative member submitting a single VAT return. Even such entities not incorporated in Cyprus can form a VAT Group in case they are tax resident or possessing an establishment in Cyprus.

Special contribution for defence

Special contribution for defence (SDC) is imposed on the dividend, interest and rental income earned by Cypriot tax resident and domiciled individuals. Non-domiciled Cypriot tax residents are exempt from SDC.

Submission of tax returns

The tax year is the calendar year. Tax on employment income is withheld by the employer under the PAYE system and remitted to the tax authorities. Self-employed individuals pay tax through the provisional and self-assessment systems. Tax returns must be filed electronically by 31st of July following the tax year for employees, 30th of September for self-employed persons who are not required to file audited/reviewed financial statements and 31st of March of the year following the year under consideration (i.e. 15 months from the year-end) for self-employed persons whose returns are accompanied by audited/reviewed financial statements. Sole proprietors with an annual turnover of more than €70,000 are obliged to prepare financial statements that are either audited or are subject to a review by a statutory auditor (in case their net turnover does not exceed the amount of €200,000 and the total value of the assets without deducting liabilities does not exceed the amount of €500,000).

Cyprus has concluded double taxation treaties with 67 countries which provide important tax advantages.

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April 2023