Cyprus: Tax Reforms in Cyprus

Last Updated: 12 July 2002
Article by Andreas Neocleous

Most Read Contributor in Cyprus, December 2017


As a well-established international business centre and a leading candidate for membership of the European Union (EU), Cyprus has come under considerable scrutiny in recent years, particularly in relation to its tax system.

One of its first significant responses was to commit itself in 2000 to the Organization for Economic Cooperation and Development to eliminate harmful tax practices by the end of 2005, and to embrace international standards of transparency, exchange of information and tax competition.

Cyprus, as an aspiring member of the EU, must harmonize its laws and practices with the acquis communautaire. In the fiscal field, it must conform to the EU Code of Conduct and the rules on business taxation, which means a fundamental reform of its tax regime.

New system of taxation

To comply with these requirements, the House of Representatives enacted a series of new tax laws on 1 July 2002, adopting an innovative approach. The main feature is the integration of corporation and withholding taxes with income tax on distributed profits.

This integration contains a uniform corporation tax rate of 10%, payable by local and international business companies alike starting from 1 January 2003. Active international business companies already operating from the island may retain the 4.25% rate until 2005 if their income in 2001 came entirely from sources outside Cyprus and continues to do so for the following four years (‘grandfather clause’). If they opt to retain the 4.25% rate until 2005, they cannot carry forward any tax losses up to 2000 beyond 2005.

Dividends paid to Cypriot tax residents will be subject to a 15% withholding tax, based on a deemed distribution of 70% of the 90% of after-tax profit left after payment of the 10% corporation tax. Dividends paid to foreign corporations and foreign individuals will be exempt from withholding tax.

Thus, the tax integration is achieved through the combination of the 10% corporate tax rate and the 15% withholding tax rate which, at a total of 19.45%, compares favourably with the highest income tax rate of 25% which was applicable to local companies before the tax reforms.

Interest income will be subject to a final 10% withholding tax, payable as a defence levy, but all interest earned by individuals, and 50% of foreign interest earned by companies, will be exempt from income tax.

Taxable income

The old remittance-based concept has been changed to a system of taxation of worldwide income for residents in Cyprus and of Cyprus-source income for non-residents. An individual will be considered to be resident in Cyprus if he stays for more than 183 days in the island during a particular calendar year. For companies the UK rule has been followed which states that a company is resident where its management and control is to be found. As a result of this approach the British offshore model (UK non-resident companies) will come into existence and will replace so called "ring-fenced" vehicles.

Taxation of personal income

Income Band (CYP)


From 1.1.02

From 1.1.03

From 1.1.04






6,001 - 9,000




nil to 10,000

9,001 - 12,000




10,001 - 15,000 @ 20%

12,001 - 15,000




15,001 - 20,000 @ 25%

15,001 upwards




20,001 upwards @ 30%

Personal allowances and deductions are abolished, except the reliefs allowed for life insurance premiums and contributions to pension funds and the Social Security and Welfare Funds.

Taxation of international businesses

The EU Code of Conduct makes it clear that tax advantages can no longer be ring-fenced from the domestic market, and therefore the preferential tax rate of 4.25% has been eliminated. The new system provides a change from the credit method to the exemption method, which will allow international businesses to retain their current advantage of not having to withhold tax on dividends and interest paid to the shareholders as well as to exempt income from permanent establishments abroad. International business companies will be entitled to trade within Cyprus and do business locally with the opportunity to offset losses from abroad against income from Cyprus.

Expatriate employees

Expatriate employees of international business entities have enjoyed the privilege of having their emoluments (salary and allowances, e.g. housing, cost of living, school fees) taxed at a reduced rate or not at all, but these concessions will not be renewed when they expire.

Under the new provisions, expatriate employees will pay income tax at the same rates as Cypriot citizens, they will be required to contribute to the Social Security Fund and their duty-free facilities will be withdrawn from April 2003. Non-resident individuals taking up employment in Cyprus will be entitled to a tax allowance of 20% of their remuneration, with a limit of CYP 5,000 per annum for the first three years, to compensate them for the additional costs of their establishment on the island.

Value added tax (VAT)

The current rate of 10% rose to 13% on 1 July 2002 and will rise again to 15% on 1 January 2003.

New horizons

Worldwide income taxation of foreign-controlled companies will no longer depend on where they are registered but on where they are managed and controlled.

Companies registered in Cyprus but managed and controlled from abroad will only be taxed in Cyprus on their Cyprus-source income. They will enjoy exemption from tax of foreign dividends and interest and income from any permanent establishment abroad as well as all foreign tax credits and offsets of losses incurred abroad. They will not be entitled to benefits under the double taxation treaties, but will not be subject to the exchange of information rules under such treaties.

The new rules will extend the EU Merger Directive to any reorganization involving a Cypriot tax-resident company, with favourable tax treatment to facilitate transfer of assets and tax losses, providing exemption from capital gains tax, income tax, VAT and stamp duty. (Basically, the new law adopts UK legislation on reorganization.)

All the above benefits will make Cyprus an ideal place to locate a holding company with the ability firstly to take dividends out of the operating company free of withholding tax or at a lower rate of withholding tax, either by virtue of the extensive double taxation treaty network which Cyprus has or under the EU Parent/Subsidiary Directive, secondly to enjoy the tax exemption of dividends and capital gains from local tax and thirdly to take dividends out of the holding company without giving rise to any tax charge in the holding company’s jurisdiction, which is generally the most difficult step.


All in all Cyprus is improving its position as an effective and reputable international business centre. It is the first country to be in full compliance with the OECD criteria and EU Code of Conduct and at the same time to offer real and better opportunities for tax-effective international structures and arrangements to the international entrepreneurial community.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions