Cyprus Tax Regime Highlights
Tax Residency
A company which is tax resident in the Republic is taxed on income accruing or arising from sources both within and outside the Republic.
A company which is not tax resident in the Republic is taxed on income accruing or arising only from sources within the Republic.
Cyprus has a corporate income tax rate of 12.5%.
Tax resident company in the Republic, is considered if it is managed and controlled from the Republic.
Profits from sale of securities
The whole profit from the disposal of shares, bonds, and debentures is exempt from corporation tax.
Dividend income
Dividend income is in general exempt from tax. Dividends received by a Cyprus tax resident company from other Cyprus tax resident companies are exempt, subject to certain anti -avoidance provisions.
Dividend income from non-Cyprus tax residents:
Dividends are exempt provided that the company paying the dividend either engages directly or indirectly in more than 50% of activities that give rise to non-investment income or the tax burden on the dividend paying company’s income is not lower than 6.25%.
From 1 January 2016 this exemption does not apply to dividends which are deductible for tax purposes by the paying company. These dividends will be taxed at the Corporation Tax rate.
Interest Income
Any interest not arising from the ordinary activities or closely related to the ordinary activities of the company is exempted from corporation tax, but subject to Special Defence Contribution.
Profits from foreign permanent establishment
Profits of a permanent establishment maintained abroad are generally exempt from tax in Cyprus.
Foreign exchange differences
Gains relating to foreign exchange differences are exempt from corporation tax, with the exemption of foreign exchange differences arising from trading in foreign currencies.
Notional interest deduction (NID) on corporate equity
Equity introduced to a Cyprus tax resident company post 31 December 2014 (‘new equity’) in the form of paid-up share capital or share premium may be eligible for an annual Notional Interest Deduction (“NID”) for tax purposes.
New equity may be contributed in cash or in assets in kind. The NID is a tax-allowable deduction (Calculated as: New equity x NID interest rate) against the company’s taxable profits, however, cannot exceed 80% of the taxable profit generated by the activities financed by the new equity (as calculated prior to the NID).
The NID interest rate used in the calculation is equal to the yield of the 10-year government bond (as at 31 December of the prior year) of the country in which the funds are employed in, plus a 5% premium.
Income from intellectual property (IP)
The new Cyprus IP box applies from 1 July 2016. The IP tax regime covers a wide range of intangibles.
Corporations are allowed a deductible notional expense calculated as 80% of the qualifying profits from a qualifying Intellectual Property.
Therefore, only 20% of the net profits derived by a Cyprus company from the exploitation or disposal of its intellectual property are subject to tax at the corporate income tax rate of 12.5%.
The net profit is calculated after deducting all direct expenses associated with the production of income or profit, including 20% of the acquisition cost of the intellectual property in each of the first five years of ownership.
Tonnage Tax
The Merchant Shipping Legislation provides exemption from all direct taxes.
Qualifying shipowners, charterers and shipmanagers, from the operation of qualifying ships in qualifying activities are allowed to be taxed under the Tonnage Tax (TT) regime.
Merchant Shipping Legislation provides for the payment of TT on the net tonnage of the vessels and is regulated completely by the Department of Merchant Shipping rather than the Tax Authorities.
Allows also mixed activities (shipping subject to TT and other activities subject to corporation tax) within a company/group.
Exemption is also given in relation to the salaries of officers and crew aboard a Cyprus ship.
The application of the tonnage tax system is compulsory for owners of Cyprus flag ships and optional for owners of non-Cyprus flag ships, charterers and shipmanagers.
Tax residency for individuals
An individual is considered to be resident for tax purposes in Cyprus if he/she is physically present in Cyprus for a period or periods exceeding in aggregate 183 days during the calendar year.
“60-day rule”
On 14 July 2017 the Cyprus Parliament voted for a Cyprus tax law amendment adding a second test on determining the tax residency of individuals. This is effective as from 1 January 2017.
An individual will be considered as a tax resident of Cyprus if the individual satisfies either the current “183-day rule” or the new “60-day rule” for the tax year.
The “60-day rule” applies to individuals who in the relevant tax year:
- do not reside in any other single state for a period exceeding 183 days in aggregate, and
- are not tax residents in any other state, and
- reside in Cyprus for at least 60 days, and
- carry out business in Cyprus and/ or employed in Cyprus and/or hold an office (Director) of a company tax resident in Cyprus.
Also, they must maintain a permanent residential property in Cyprus, rented or owned by the individual.
Introduction of non- Dom Status
On 16th July 2015, among other tax law amendments, the Cyprus Government introduced the “Domicile” concept through an amendment to the Special Contribution for Defence (SDC) Law of 2002.
The new “non-Dom” rules provide that individuals who are tax residents but not domiciled in Cyprus, as per the requirements set out in the relevant legislation, would be exempted from payment of the SDC tax on dividends, interest and rental income. This exemption will apply to income even if derived from sources within Cyprus.
Advantages:
- Non-Dom earning dividend income, from foreign as well as local investments will not be subject to SDC in the amount of 17%.
In addition, dividend income is unconditionally exempt from Income Tax.
- Non-Dom earning interest income, from foreign as well as local sources, will not be subject to SDC in the amount of 30%. Passive interest income is also exempt from Income Tax.
- Rental income: Whether from Cyprus or foreign sources, Cyprus tax resident individuals who have non-Dom status are now only subject to income tax on rental income.
New income tax exemptions for employment income
20% Exemption
As from 26 July 2022, 20% of the remuneration of employees (up to a maximum amount of exemption of €8.550 per annum), whose first employment in Cyprus commenced from 26 July 2022 onwards, is exempt from income tax for a period of seven years.
Provided the employees, immediately before the commencement of their employment in Cyprus:
- were not residents of Cyprus for a period of at least three consecutive tax years, and
- were employed outside of Cyprus by a non-resident employer.
The exemption will be first granted in the tax year following the tax year of commencement of employment (does not require the individual to become a Cyprus tax resident, nor the employer to be a Cyprus tax resident employer).
50% Exemption
As from 1 January 2022, 50% of the remuneration of employees, whose first employment in Cyprus began from 1 January 2022 onwards, is exempt from income tax for a period of 17 years (starting from the month of employment in Cyprus), provided that:
- remuneration per year should exceed €55.000, and
- the employees were not residents of the Republic for a period of at least 10 consecutive years immediately before the commencement of their employment in Cyprus,
- first employment in the Republic starts from 1 January 2022 onwards.