CYPRUS TAXATION

1. PERSONAL INCOME TAX 

Basis of taxation Personal tax rates

An individual who is tax resident in Cyprus is taxed on all income accrued or derived from all sources in Cyprus of Cyprus (Cyprus) and abroad. 

Individuals who are not tax residents of Cyprus are taxed only on income accrued or derived from sources in Cyprus. 

The following income tax rates apply to individuals:

 CHARGEABLE INCOME 

Taxable income

Tax Rate

Tax

Cumulative Tax

%

0-19.500

0

0

0

19.501-28.000

20

1.700

1.700

28.001-36.300

25

2.075

3.775

36.301-60.000

30

7.110

10.885

60.001 and above

35

 

 

 

An individual is tax resident in Cyprus if he spends in Cyprus more than 183 days in any one year. 

Furthermore an individual is also considered a Cyprus tax resident if he: - does not spend more than a total of 183 days in any country within a tax year; and - is not a tax resident of another country within the same tax year and satisfies all the following three conditions: 

a. remains in Cyprus for at least 60 days during the tax year; 

b. carries on a business in Cyprus or is employed in Cyprus or holds an office in a Cyprus tax resident company at any time during the tax year; and 

c. maintains a permanent residence in Cyprus, which can be either owned or rented.

Exemptions 

The following are exempt from income tax:

Interest 

Whole amount 

Dividends

Whole amount 

Remuneration of individuals who, before commencing employment in Cyprus, were not Cyprus tax residents

20% of the Cyprus remuneration or €8.550(whichever is lower)

Remuneration of individuals who, before commencing employment in Cyprus, were not Cyprus tax residents and their income from employment is more than €100.000 per annum

50% of total emoluments

Lump sum on retirement, commutation of pension or compensation for death or personal injury

Whole amount 

Profits on disposal of titles

Whole amount 

Capital sums received in respect of eligible life insurance policies or provident, pension and other funds

Whole amount 

Profits from a permanent establishment abroad are exempt subject to certain conditions

Whole amount 

Rent from preserved buildings

Whole amount 

Income arising from operations in Cyprus in the audio-visual industry

Whole amount 

 

Deductible expenses 

All expenses incurred wholly and exclusively for the production of income are deductible in calculating taxable income, including the following:

Annual subscriptions to trade unions and professional associations

100%

Donations to approved charitable institutions (with receipts)

100%

Rental income if the rented property is a building

20% on gross rental income

Interest on a loan used to acquire rented properties

100%

All expenses incurred wholly and exclusively for the production of income provided that are supported by proper documentation

100%

Expenditure incurred for the purpose of maintaining a preserved building

Subject to restrictions

Life insurance premiums

100%

Wages and salaries and contributions to Social Insurance Fund, Redundancy Fund, Human Resource Development Fund, Social Cohesion Fund, Pension Fund and Provident Fund

100%

Expenditure incurred for the acquisition of shares in an “innovative business”

Up to 50% of the investment – subject to restrictions

Special Contribution

100%

Expenditure on film infrastructure and technological equipment

Up to 20%

Wear and tear allowances 

Individuals doing business are allowed to deduct wear and tear allowances from their taxable income.

Loans or other financial assistance provided to company directors or individual shareholders 

Any amount provided by the company as a loan or financial assistance to a director, or to an individual shareholder, or to his/ her spouse, or to any relative up to a second degree is considered as a monthly benefit equal to 9% per annum calculated on the amount received. Such benefit, is included in the individual’s taxable income subject to income tax.

Losses carried forward 

Individuals who have an obligation to prepare audited financial statements may carry forward tax losses incurred during a tax year over the next five years, to be offset against taxable income. Where a person, including a partnership, converts a business into a limited liability company, any unutilised tax losses can be transferred to the new company.

Losses of a permanent establishment outside Cyprus

Tax losses arising from a permanent establishment maintained outside Cyprus can be offset against taxable profits of the company arising in Cyprus in the same year. However, any subsequent taxable profits from such a permanent establishment are taxable up to the amount of tax losses previously offset. 

Tax credit for foreign tax paid 

Any foreign tax paid on income subject to income tax in Cyprus is credited against any Cyprus income tax payable on such income, irrespective of the existence of a tax treaty.

2. COMPANIES INCOME TAX 

A company is subject to tax in Cyprus if its management and control is exercised in Cyprus, irrespective of its place of registration. 

A company which is not tax resident in Cyprus, is taxed on income accruing or arising only from sources within the Republic.

Tax rate 

Corporate income tax 12,5%

Tax registration 

As of 1st July 2011, a Company is obliged to register with the tax authorities within 60 days of its registration with the Companies Registrar.

Tax losses

Losses from one source of income can be set off against income from other sources in the same year. Any loss remaining after the set-off is carried forward for relief over the next 5-year period. 

Set-off of group losses is allowed only with respect to the profits arising in the corresponding year of assessment. Companies should be members of the same group for the whole year of assessment.

Allowance for foreign tax

In case foreign tax was paid on income subject to income tax, the actual amount paid can be given as a credit against the resulting income tax liability on this income irrespective of whether a double tax treaty with the respective foreign country exists.

Arm’s length principles

The arm’s length provision applies to transactions between connected persons and requires that, for tax purposes, such transactions are entered into on normal commercial terms and conditions. From 1 January 2015, where the Commissioner of Taxation intervenes and challenges a transaction by increasing the income of the said transaction, carried out between two Cyprus tax resident persons, because the transaction was not carried out at arm’s length, a deem deduction will also be provided to the other person being equal to the increase of the income or benefit.

From 1/7/2017 a transfer pricing study may need to be prepared and submitted to the Cyprus Tax Authorities relating to back to back intra-group financing arrangements. For the sake of simplification, a back to back intra-group financing arrangement will be deemed to comply with the arm’s length principle, if the company receives a minimum after tax return of 2% on the assets generating the interest income. Even in such a case the Cyprus Tax Authorities may still request the submission of a transfer pricing study.

Notional Interest Deduction (NID) 

Corporate entities (including permanent establishments of foreign companies) are entitled to NID on equity. The NID equals the product of the reference interest rate and the new equity held and used by a company in the carrying on of its business activities.

The NID is considered as interest expense and is subject to the same limitation rules as interest expense and certain anti-avoidance provisions. The NID granted on new equity cannot exceed 80% of the taxable profit before allowing for NID. In the event of losses, the NID will not be available. Effectively, this means that the NID cannot create or increase a tax loss. Taxpayers can elect not to claim the NID or claim part of it for each tax year.

  • REFERENCE INTEREST RATE  :The yield of the 10-year government bond issued by the country in which the new equity is invested increased by 3%. The reference interest rate cannot be lower than the yield of the 10-year government bond issued by the Republic of Cyprus increased by 3%. The bond yield is the yield applicable as of 31 December of the tax year preceding the tax year to which it relates.
  • NEW EQUITY  :Any equity introduced into the business on or after 1 January 2015 in the form of issued share capital and share premium (provided it is fully paid). New equity does not include amounts that have been capitalized as equity and which have resulted from revaluation of movable or immovable property.

 

3. SPECIAL CONTRIBUTION FOR DEFENCE  

 

Source of Income

Cyprus tax resident but non-domiciled individuals

Cyprus tax resident and domiciled individuals

Cyprus tax resident companies

Dividend income from Cyprus tax resident companies

0%

17%

0% Dividends received by a Cyprus tax resident company from another Cyprus tax resident company after the lapse of 4 years from the end of the year in which the profits which were distributed as dividends arose are subject to 17%.

Dividend income from non-Cyprus tax resident companies

0%

17%

0% 

 

The 0% does not apply and the dividend will be subject to 17% special contribution for defence if: (a) more than 50% of the activities of the foreign company paying the dividend lead to investment income; and (b) the foreign tax burden on the income of the foreign company paying the dividend is substantially lower than the tax burden of the Cyprus tax resident company. The Tax Department has clarified that “significantly lower” means an effective tax rate of less than 6,25% on the distributed profits

Interest income arising from the ordinary activities or closely connected with the ordinary activities of the business

0% Subject to personal tax

0% Subject to personal tax

0% Subject to corporation tax

Other interest income

0%

A person whose total annual income, including interest, does not exceed €12.000 who receives interest which has been subject to special contribution for defence, has the right to a refund of 27% (effective special contribution for defence payable of 3%)

30%

75% of rental income

0%

3%  

Rental income is also subject to personal income tax

3%  

Rental income is also subject to corporation tax

 

 

Deemed distribution 

A company resident in Cyprus has to pay 17% special contribution to the Defence Fund on a deemed distribution of 70% of the accounting profits after tax and before set-off of losses brought forward from previous years, after taking into consideration any dividends paid. The deemed distribution takes place two years after the end of the year of assessment. 

Deemed distribution does not apply to profits that are directly or indirectly attributable to shareholders that are non-resident for the tax purposes of Cyprus or to individuals not considered to be domiciled in Cyprus.

 

Non – Domiciliation

 As from 16 July 2015 individuals are subject to special contribution for defence if they are both Cyprus tax resident and Cyprus domiciled. According to the domicile concept under the tax legislation, every person has at any given time either: 

(i) the domicile received by him/her at birth (‘domicile of origin’), or 

(ii) the domicile (not being the same as the domicile of origin) acquired or retained by him/her by his/her own act (‘domicile of choice’).

Under (i) above, the domicile of origin of a legitimate child is that of the father’s, or in the case of an illegitimate child, that of the mother’s. 

Under (ii) above, a person may acquire a domicile of choice by establishing his/her home at any place in Cyprus with the intention of permanent or indefinite residence. 

For tax purposes however, a non-domiciled individual will be deemed as domiciled in Cyprus if he/she has been a Cypriot tax resident for at least 17 out of the last 20 years prior to the relevant tax year (deemed domicile rule). An individual who has a domicile of origin in Cyprus, may still qualify as non-domiciled subject to certain conditions, namely to have not been a Cyprus tax resident for a consecutive period of 20 years.

Capital Reduction

 In case of a reduction of share capital any amounts paid to the individual shareholders in excess of the amount of the share capital that was actually paid by the individual shareholders will be treated as a deemed dividend subject to special contribution for defence provided that the ultimate shareholders or Cyprus domiciled 

The buy back or redemption of units or other ownership interests in an opened-ended or closed-ended collective investment schemes is not considered a capital reduction and is not subject to special contribution for defence. 

Disposal of assets to shareholder at less than market value 

When a company disposes an asset to its individual shareholder or to a relative up to second degree or his spouse for a value which is less than its market value, the difference between the sales and the market value will be deemed to have been distributed as a dividend to the shareholder. This provision, does not apply for assets originally gifted to the company by an individual shareholder or a relative of his up to second degree or his spouse. 

 

Company dissolution 

In case of liquidation of the company, the total of the profits of the last five years before the liquidation which have not been distributed or they have not been deemed to have been distributed shall be deemed on liquidation to be distributed and the shareholders shall be deemed to receive such dividends. Any such profits to be distributed or deemed to be distributed upon liquidation should be subject to special contribution for defence provided that the ultimate direct/indirect shareholders of the company are individuals who are Cyprus tax-resident and Cyprus domiciled.

This provision does not apply in the case of dissolution under a reorganisation scheme. It is emphasized that where assets are distributed to a company’s shareholders upon the company’s liquidation, which have a market value that exceeds the cost of their acquisition by the company, the deemed distribution provisions will apply. The amount of the dividend that is deemed to be distributed to the shareholders will be equal to the difference between the market value of the assets and the costs of their acquisition by the company. The deemed dividend distribution of profits that becomes realized upon the company’s dissolution or liquidation should not exceed the amount or the value of the net assets distributed to the shareholders. In case the shareholders of a Cyprus tax resident company that is liquidated are not tax residents of Cyprus or are tax residents of Cyprus but non-domiciled, the liquidation distributions are not taxable in Cyprus.

 

4.  CAPITAL GAINS TAX  

Capital gains tax is imposed on gains from the disposal of real estate situated in Cyprus including gains from the disposal of shares in companies, which own directly or indirectly real estate situated in 

 The indirect criterion applies only in case the value of the real estate represents more than 50% of the value of the assets of the company whose shares are being sold. 

The taxable gain is the result of the difference between sale proceeds and the original cost of property plus improvements cost. The total cost of property should be adjusted to include increase from the date of acquisition that took place not earlier that 1/1/1980, to the date of disposal. Increase can be estimated through the Cyprus consumer price index.

Individuals are entitled to exemptions from the Capital Gains Tax. The exceptions are only entitled once.

  • The first exception is the amount of €17.086 if the gains are from disposal of any property.
  • The second exception is the amount of €85.430 if the gains are from disposal of primary residence. The exception applies if the residence was owned and used as his/her primary residence for a period at least 5 years.
  • The third exception is related to agricultural land sold by Farmer and amounted to €25.629.

 

Exempt Disposals

  • Donations to approve charitable organisations and the Government;
  • Gifts or donations among relatives. The relation must be up to 3rd degree. From parents to children ( no tax ), between spouse ( 0.1% on the FMV), between 3 degree relatives  ( 0.1% on the FMV), to trustee €50;
  • Exchange of sale of land according with Agricultural law;
  • Exchange of properties. The gain made on this exchange is used to acquire another property. That gain is deducted from the cost of new property and its non-taxable;
  • Gifts to family companies. This is exempt only if the shareholders of the company are and continue to be members of the donor’s family for at least five years;
  • Gifts by family companies to their shareholders provided the property was acquired by the company by way of gift in the first place. In addition, if the shareholder disposes of the company’s property within the next three years from the gift date, the exemption will not be valid;
  • Expropriations.

 

4.1 Property transfer fees

 

If the property transfers have VAT paid then Property Transfer Fee is Zero.

If the property has no VAT then will be paid 50% of the Accumulated Fee.

 

Value of property (€)

Transfer fee (%)

Accumulated Fee(€)

Up to 85,000

3

2,550

85,000-170,000

5

6,800

Over 170,000

8

 

 

5. General Healthcare System(GHS)

The GHS Fund revenues will come from contributions, co-payments, personal contributions 1, donations and legacies, income from assets of the HIO and any other income accrued from the activities of the HIO

 

Contributions

The main GHS source of financing is contributions.  The payment of the contributions for the first phase will start on 1 March 2019 and for the full implementation on 1 March 2020.

 

The Contributors’ Categories are:

  • Employees
  • Employers
  • State
  • Self-employed
  • Pensioners
  • Income-earners
  • Government Officials
  • Persons responsible for the payment of remuneration to Government Officials 

 

For every individual, the total maximum annual amount on which contributions will be paid is € 180,000.

 

In case that the individual is not a tax resident of Cyprus, he/she will pay contributions only for the income, earnings and pensions that derive from the Republic of Cyprus, excluding dividends and interest. 

 

 

The contribution rates for each category of contributors as they have been set by the General Healthcare System (Amending) Law of 2017 are the following:

 

Contributors Categories

First Phase (1/3/2019-28/2/2020)

Final Phase (As of 1/3/2020)

Employees

1,70%

2,65%

Employers

1,85%

2,90%

State

1,65%

4,70%

Self-employed

2,55%

4,00%

Pensioners

1,70%

2,65%

Individuals Income earners (i.e. rent, interest, dividends) *

1,70%

2,65%

Government Officials

1,70%

2,65%

Persons responsible for the payment of remuneration to Government Officials

1,85%

2,90%

 

6. Value Added Tax (VAT)

Value Added Tax is an indirect tax which is imposed on goods and services at each stage of production, starting from raw materials to final product. VAT is levied on the value additions at different stages of production. Vat applies to a supply of goods or services, to intra – E.U. acquisitions of goods from fiscal warehousing arrangements and to importation of goods.

 

Taxable business charge VAT on their taxable supplies (output VAT) and are charged VAT on goods or services received (input VAT).

 

If input tax is more than the output tax then a repayment is due from the government. On the other hand if output tax is more than input tax then a payment has to be made to the government.

 

A business has obligation to be registered to VAT if:

  • Has a taxable supplies in the last 12 months exceeds €15.600
  • Has acquisitions in Cyprus more than €10.250
  • Provide services to a VAT registered person within the EU (nil registration threshold)
  • Offers zero rated supplies of goods or services
  • Acquires company on a going concern basis
  • A foreign taxable person makes distance sales with registration threshold €35,000
     

Businesses that do not exceed the above thresholds don’t have the obligation to be registered.

 

According to the trade activity of each business, VAT Department determine the periods that VAT returns must be submitted. Each period is quarterly, and the taxpayers have 40 days from the day that the quarter ends to submit the VAT returns and also proceed with the payment if there is a tax due.

 

Three VAT rates that are applied.

  1. Zero rate (0%)
  2. Reduced rate (5% and 9%)
  3. Standard rate (19%)
     

Difference between zero rated and exception

Businesses that make exempt supplies are not entitled to recover VAT with which they have been charged on their purchases, expenses or imports (VAT input).

 

Irrecoverable input VAT

Input VAT cannot be recovered in the following cases:

  • Sale of exempt supplies
  • Purchase, import or hire saloon vehicles
  • Director’s housing expenses
  • Entertainment and hospitality expenses. That is not valid in the case of directors and employees.