Cyprus Tax Incentives

One of the lowest Corporate Tax rates in EU

Cyprus has one of the lowest corporate tax rates in the European Union. Companies are taxed with a rate of 12,5% on their profits while enjoying a number of generous tax exemptions.

Generous Participation Exemption Regime

Cyprus offers one of the most attractive participation exemption regimes in respect to dividends. There is no withholding tax on dividends paid from one Cyprus company to another while dividends received from abroad are tax exempt (conditions apply).

Inter-company dividends:

Dividends paid from one to another Cyprus company are exempt from all taxes.

Dividends received from abroad:

Dividends received from abroad are exempt from tax unless:

  • more than 50% of the paying company’s activities result directly or indirectly in investment income (non-trading income)

and

  • the foreign tax burden is significantly lower than the tax burden in Cyprus (i.e. an effective tax rate of less than 6.25% / 50% of the Cyprus CIT).

Foreign PE profits are tax exempt

Profits from a foreign permanent establishment are totally exempt from tax in Cyprus.

Gains from sale of securities are tax exempt

The term Securities include, among others:

  • Shares
  • Bonds
  • Debentures
  • Options
  • Futures
  • Swaps
  • Mutual Funds
  • International Collective Investment Schemes (ICIS)
  • (UCITS), etc

No CGT or other taxes from the sale of immovable property outside Cyprus

There is no Capital Gains Tax from the disposal of an immovable property situated outside the Republic of Cyprus.

Attractive IP regime with 80% tax exemptions

Under the current IP regime, companies enjoy 80% tax exemption on royalty income and gains from the sale of IP rights. Therefore, only 20% of the profits of an IP company are subject to the 12,5% corporate tax, in other words the effective tax is only 2,5%. Furthermore, there is no withholding tax on payment of royalties out of Cyprus if the holder is not a Cyprus resident and the royalty is used outside of Cyprus.

In line with the latest international development and OECD action plan on BEPS, the Income Tax Law has been amended on 14 October 2016. As per the amendments the current IP Regime will phase out by 30 June 2021. The new IP regime introduces the idea of qualifying profits eligible for the 80% tax exemption which are calculated based on the “nexus approach” and relate to IP eligible for the new regime (qualifying assets).

Qualifying Assets include amongst others patents, copyrighted software programs and other intangible assets but exclude trademarks and other copyrights.

The “nexus approach” is based on R&D expenditure incurred to develop the qualifying assets

Favourable tax treatment of losses

Tax losses are carried forward and set off against profits of the next five years.

Group relief is allowed provided the claimant companies are tax resident and members of the same group for the whole tax year. New group relief incentives were introduced with the Income Tax Law amendments in December 2015. 

Tax relief on foreign tax paid

Relief is given for taxes paid abroad, irrespective of the existence of a double tax treaty or not.

No WHT on dividends, interest and royalties paid to non-residents

There is no withholding tax on dividends, interest and royalties paid to non-Cyprus tax residents.

Notional interest deduction (NID) on new equity

NID was introduced with the Income Tax Law amendments in July 2015. NID is granted in the form of tax allowable deduction on the new equity introduced after 1 January 2015. The NID is calculated by multiplying the “new qualifying equity” by the “reference rate”. The tax deduction cannot exceed 80% of the company’s taxable profits.

New qualifying equity for the purpose of NID includes paid up share capital or share premium and can be contributed in cash or in kind (provided the amount of new equity does not exceed the market value of the asset contributed).

The reference rate is equal to the 10-year government bond yield of the country in which the qualifying capital is invested plus 3% premium, with the minimum being the 10-year Cyprus Government bond yield plus 3%.

As a result, the effective tax rate can be significantly reduced below the corporate rate of 12,5% to as low as 2,5%. This enhances Cyprus attractiveness as an efficient tax jurisdiction with the promotion of capital investments in the country.

Competitive personal income tax rates and first employment exemptions to foreigners

An individual who is tax resident in the Republic of Cyprus is taxed on income accruing or arising from sources both within and outside the Republic. Tax rates range from 20% to 35% depending on the level of taxable income with a tax free amount of €19.500 and certain exemptions.

Exemptions for first time employment of foreigners:

  • 50% deduction is provided for remuneration from any employment of an individual in Cyprus who was not resident of the Republic before the commencement of employment, provided the annual remuneration exceeds 100.000 (applies for 10 years starting from 1st January following the year of employment for employments commencing from 1st January 2012).
  • 20% deduction is provided on remuneration or €8.550 (whichever is the lower) from any employment of an individual in Cyprus who was not resident of the Republic before the commencement of employment (applies for 5 years starting from 1st January following the year of employment for employments commencing during or after 2012. The exemption expires in 2020).

Non-Domicile status to individuals with full exemption of SDC

This was again introduced in July 2015. Non-Dom status can now be given to individuals, who may be tax residents in Cyprus, thus enjoying full exemption from the Special Defense Contribution (SDC) on dividends, interest and rental income. It should be noted that interest and dividends received by an individual are not taxed under the Income Tax Law irrespective of whether such income is derived from sources within or outside Cyprus.

In accordance with the Wills and Succession Law, an individual has either a domicile of origin (received at his birth) or a domicile of choice (acquired by his own act). An individual who has domicile of origin in Cyprus is considered as domiciled in Cyprus, unless:

  • the person was not a Cyprus tax resident for at least 20 consecutive years before the introduction of the law (on 16th July 2015), or
  • The person has obtained and maintains a domicile of choice outside Cyprus in accordance with the Wills and Succession Law, provided that he/she has not been a tax resident of Cyprus for a period of 20 consecutive years preceding the tax year.

Irrespective of the above, an individual who has been a Cyprus tax resident for at least 17 out of the last 20 years prior to the tax year will be considered to be domiciled in Cyprus, even though such person has no domicile of origin in Cyprus.

The aim of the amendment of the law is to attract high net worth individuals and investors to reside in Cyprus and benefit from the tax exemption on the holding of investments in dividend and/or interest earning assets both in Cyprus and worldwide.

Extensive network of DTT

Cyprus has signed double tax treaties with more than 60 countries and is in the process of negotiating the agreements with some other countries.  The layout of the Cyprus taxation treaties is in accordance with the requirements and standards of the OECD (The Organization for the Economic Cooperation and Development) model tax treaty.

Full access to European Union tax Directives

The accession of the Republic of Cyprus as a full member to the European Union was on 1 May 2004 while on 1 January 2008, Cyprus joined the European Monetary Unit (EMU) with a robust economic performance.

Following the accession to the European Union, the Cyprus law, which is based on English Common Law, was amended to meet European Union requirements.

The legal and regulatory framework is fully compliant with the European Union, the Financial Action Task Force on Money Laundering (FATF), the Organization for Economic Co-operation and Development (OECD) and the Financial Stability Forum.